NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(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(s) 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 nine months ended September 30, 2012, the Company acquired 10 clinics
as follows:
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|
|
|
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|
|
|
|
|
|
Acquisition
|
|
Date
|
|
|
% Interest
Acquired
|
|
|
Number of
Clinics
|
|
|
|
|
January 2012 Acquisition
|
|
|
January 3
|
|
|
|
100
|
%
|
|
|
1
|
|
March 2012 Acquisition
|
|
|
March 31
|
|
|
|
65
|
%
|
|
|
1
|
|
May 2012 Acquisition
|
|
|
May 22
|
|
|
|
70
|
%
|
|
|
7
|
|
August 2012 Acquisition
|
|
|
August 1
|
|
|
|
65
|
%
|
|
|
1
|
|
As of September 30, 2012, the Company operated 423 clinics in 42 states.
The results of operations of the acquired clinics have been included in the Companys consolidated financial statements since the dates 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, 2011.
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 and nine months ended September 30, 2012 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, 2011.
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 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 unit 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 (ie., 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 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 2012, Centers for Medicare & Medicaid Services (CMS) or Congress has taken action to prevent the implementation of SGR formula
reductions. The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2011 provided a 2.2% increase to MPFS payment rates, retroactive from June 1, 2011 through November 30, 2011, suspending a 21.3% reduction
that briefly became effective on June 1, 2011. The Medicare and Medicaid Extenders Act of 2011 (MMEA) prevented a 25.5% reduction in the MPFS payment rates that would have taken effect on January 1, 2011. The Temporary Payroll
Tax Cut Continuation Act of 2011 (TPTC) delayed application of the SGR for two additional months, through February 29, 2012. The Middle Class Tax Relief and Job Creation Act of 2012 (MCTRA) included a measure freezing
payment rates at their current level through December 31, 2012.
On November 1, 2012, CMS released the 2013 Medicare Physician Fee
Schedule final rule. Under the 2013 Medicare Physician Fee Schedule, CMS has estimated a 26.5% reduction in the outpatient physical therapy payment rates beginning on January 1, 2013, unless Congress again takes legislative action to prevent the SGR
formula reductions from going into effect. This reduction would be in addition to any automatic spending reductions being enacted as a result of the Budget Control Act of 2011, which would cut Medicare spending by 2%. If the 26.5% SGR reduction and
the 2% cut in Medicare spending are averted by Congress, the projected impact of other changes in the rule on outpatient physical therapy service payments in aggregate is expected to be a 4.0% increase in 2013, primarily due to the continued phase
in of new practice expense survey data derived from the Physician Practice Information Survey (PPIS). In 2013, when the use of the PPIS data is fully phased in, the impact is expected to be a 6.0% increase for outpatient physical therapy
payments. In the final 2012 Medicare Physician Fee Schedule rule, CMS indicated that over the next year it will continue to review whether specific Current Procedural Terminology (CPT) codes billed under the fee schedule are overvalued
or undervalued, including certain specific CPT codes used by physical therapists.
In the 2013 Medicare Physician Fee Schedule rule, CMS
indicated that it will implement a claims-based data collection process 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 proposes to return claims as unpaid 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. Effective January 1, 2012, the annual Limit on outpatient therapy
services is $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. These Therapy Caps are applicable to outpatient therapy services provided in all settings, except for services provided in
departments of hospitals. However, pursuant to the MCTRA, beginning no later than October 1, 2012 and expiring on December 31, 2012, these Limits will temporarily apply to therapy services performed in hospital outpatient departments.
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. Unless
Congress extends the exceptions process, the therapy caps will apply to all outpatient therapy services beginning January 1, 2013, 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 will be subject to a manual
medical review. The MCTRA designates that this medical review will be similar to the process used following Deficit Reduction Act implementation in 2006. The $3,700 threshold will be applied to the combined physical therapy/speech language pathology
cap; a separate $3,700 threshold will be applied to the occupational therapy cap.
9
CMS adopted a multiple procedure payment reduction (MPPR) for therapy services in the final update to the
MPFS for calendar year 2011. Under MPPR, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (RVU) for the therapy procedure with the highest Practive Expense RVU, then reduces the payment for the
practice expense component of the RVU for additional procedures. The reduction for these subsequent procedures varies based on the setting, with a 20% reduction for services in an office or other non-institutional setting and 25% in institutional
settings. The reduction applies to most therapy services furnished during the same day for the same patient, whether or not the therapy services are furnished in separate sessions. The MPPR was continued in calendar year 2012 and for 2013.
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 September 30, 2012. 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 franchisee 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.
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, historically the difference between net revenues and corresponding
cash collections has 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 September 30, 2012.
10
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 and nine months
ended September 30, 2012.
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.
Use of Estimates
In preparing the Company's 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 September 30, 2012.
Restricted Stock
Restricted stock issued to employees and directors is subject to certain conditions, including continued employment or continued service on the board, respectively. The transfer restrictions for shares
granted 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.
11
Recent Accounting Pronouncements
In July 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-07, Health Care Entities (Topic 954): Presentation
and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07). ASU 2011-07 requires certain health care entities to change the presentation
in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue that is not subject to an assessment as to the patients ability to pay from an operating expense to a deduction from patient
service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. ASU 2011-07 also requires
disclosure of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The Company has evaluated ASU 2011-07 and concluded that it
is not required to change its presentation and disclosure. Substantially all of the Companys patient revenue is subject to an assessment as to the patients ability to pay at the time the related service is provided.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU
2011-08), which modifies the impairment test for goodwill intangibles. ASU 2011-08 provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall
financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step
quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. These changes are effective for any
goodwill impairment test performed on January 1, 2012 or later, although early adoption was permitted. These changes should not affect the outcome of the impairment analysis of a reporting unit. The Company performs a review of the
Companys goodwill in the third quarter of each fiscal year. The adoption of ASU 2011-08 in 2012 did not have an impact on the Company as it performed its goodwill impairment test using a quantitative approach.
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
4,563
|
|
|
$
|
4,099
|
|
|
$
|
13,890
|
|
|
$
|
12,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted-average shares
|
|
|
11,827
|
|
|
|
11,886
|
|
|
|
11,778
|
|
|
|
11,824
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
101
|
|
|
|
125
|
|
|
|
114
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted-average shares
|
|
|
11,928
|
|
|
|
12,011
|
|
|
|
11,892
|
|
|
|
12,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
|
$
|
1.18
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.38
|
|
|
$
|
0.34
|
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All options to purchase shares were included in the diluted earnings per share calculation for the three months and nine months ended
September 30, 2012 and 2011 as the average market price of the common shares 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. ACQUISITION OF BUSINESSES
The purchase price for 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 accrued interest, in May 2013 and 2014. During the first nine months of 2012, the Company acquired three clinics in separate transactions. On January 3, 2012, through a subsidiary, the Company acquired
a 100% interest in a clinic for $1.0 million in cash and a note payable of $100,000, effective March 31, 2012, the Company acquired a 65% interest in another clinic for $90,000 and, effective August 1, 2012, the Company acquired a 65%
interest in another clinic for $321,000.
The purchase prices have been preliminarily allocated as follows (in thousands):
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
7,402
|
|
Seller notes
|
|
|
350
|
|
|
|
|
|
|
Total consideration
|
|
$
|
7,752
|
|
|
|
|
|
|
Estimated fair value of net tangible assets acquired:
|
|
|
|
|
Total current assets
|
|
$
|
363
|
|
Total non-current assets
|
|
|
423
|
|
Total liabilities
|
|
|
(290
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
$
|
496
|
|
Referral relationships
|
|
|
57
|
|
Non compete
|
|
|
25
|
|
Goodwill
|
|
|
10,066
|
|
Fair value of noncontrolling interest
|
|
|
(2,892
|
)
|
|
|
|
|
|
|
|
$
|
7,752
|
|
|
|
|
|
|
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
nine months ended September 30, 2012, 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 September 30, 2012 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 July 25, 2011, the Company acquired a 51% interest in a 20 clinic multi-partner physical therapy group for
$8.2 million in cash and a seller note of $200,000 payable in two principal installments of $100,000 each plus any accrued interest, in July 2012 and July 2013 (July 2011 Acquisition). During the nine months ended September 30,
2012, the Company finalized the purchase price allocation related to the July 2011 Acquisition.
13
The purchase price was allocated as follows:
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
7,930
|
|
Seller notes
|
|
|
200
|
|
|
|
|
|
|
Total consideration
|
|
$
|
8,130
|
|
|
|
|
|
|
Estimated fair value of net tangible assets acquired:
|
|
|
|
|
Total current assets
|
|
$
|
1,341
|
|
Total non-current assets
|
|
|
902
|
|
Total liabilities
|
|
|
(581
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
$
|
1,662
|
|
Tradename
|
|
|
1,900
|
|
Referral relationships
|
|
|
1,100
|
|
Non compete
|
|
|
300
|
|
Goodwill
|
|
|
11,263
|
|
Fair value of noncontrolling interest
|
|
|
(8,095
|
)
|
|
|
|
|
|
|
|
$
|
8,130
|
|
|
|
|
|
|
For the July 2011 Acquisition, the purchase price was allocated to the fair value of the assets acquired including tradename, non
compete agreements and referral relationships, and to the liabilities assumed based on estimates of the fair values at the acquisition date, with the amount exceeding the fair value being recorded as goodwill. The values assigned to the referral
relationships and non compete agreements are being amortized to expense equally over the respective estimated life of 13 years and six years, respectively. The values assigned to goodwill and tradenames are tested annually for impairment.
Approximately, $5.8 million of the goodwill is tax deductible.
In April 2012, the Company sold 1% of its interest acquired in the July 2011
Acquisition to the limited partners. The Company now owns a 50% interest in the July 2011 Acquisition, consisting of 1% as a general partner interest and 49% as a limited partner interest. See Footnote 4 Acquisitions and Sales of
Non-Controlling Interests- for further details.
Unaudited proforma consolidated financial information for acquisitions occurring in 2012 and
the July 2011 Acquisition has not been included as the results were not material to current operations.
4. ACQUISITIONS AND SALES OF NON-CONTROLLING INTERESTS
In ten separate transactions during the nine months ended September 30, 2012, the Company purchased partnership interests in ten
partnerships. The interests in the partnerships purchased ranged from 10% to 35%. The aggregate of the purchase prices paid was $1,314,000, which included $164,000 of undistributed earnings. The remaining purchase price of $1,150,000, less future
tax benefits of $445,000, was recognized as an adjustment to additional paid-in capital. During the nine months ended September 30, 2012, the Company sold partnership interests in the range of .64% to 1% in three partnerships for an aggregate
price of $239,000. This amount less related undistributed earnings of $5,000 was credited to additional paid-in capital.
5. GOODWILL
The changes in the carrying amount of goodwill consisted of the following (in thousands):
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2012
|
|
Beginning balance
|
|
$
|
92,750
|
|
Goodwill acquired during the period
|
|
|
10,066
|
|
Goodwill allocated to specific assets for business acquired in 2011
|
|
|
(3,300
|
)
|
Goodwill adjustments for purchase price allocation of business acquired in 2011
|
|
|
200
|
|
|
|
|
|
|
Ending balance
|
|
$
|
99,716
|
|
|
|
|
|
|
14
6. NOTES PAYABLE AND REVOLVING CREDIT AGREEMENT
Notes payable as of September 30, 2012 and December 31, 2011 consisted of the following ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Revolving credit agreement
average effective interest rate of 3.7% inclusive of unused fee
|
|
$
|
16,100
|
|
|
$
|
23,500
|
|
Promissory note payable in annual installments of $100 plus accrued interest through December 31, 2012, interest accrues at
3.25% per annum
|
|
|
100
|
|
|
|
100
|
|
Promissory note payable in annual installments of $50 plus accrued interest through December 21, 2012, interest accrues at
4.00% per annum
|
|
|
50
|
|
|
|
50
|
|
Promissory note payable in annual installments of $184 plus accrued interest through June 30, 2013, interest accrues at
3.25% per annum
|
|
|
184
|
|
|
|
367
|
|
Promissory note payable in annual installments of $100 plus accrued interest through July 25, 2013, interest accrues at
3.25% per annum
|
|
|
100
|
|
|
|
200
|
|
Promissory note payable in annual installments of $50 plus accrued interest through January 3, 2014, interest accrues at
3.25% per annum
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,884
|
|
|
|
24,217
|
|
Less current portion
|
|
|
(609
|
)
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,275
|
|
|
$
|
23,784
|
|
|
|
|
|
|
|
|
|
|
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 (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%. On July 14, 2011, the
Credit Agreement was amended to increase the commitment from $50.0 million to $75.0 million. 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. 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
September 30, 2012, $16.1 million was outstanding on the revolving credit facility resulting in $58.9 million of availability. As of September 30, 2012, 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 May 2012 Acquisition, the Company entered into seller notes, that are payable in two aggregate principal installments of $125,000 each, plus accrued interest, in May 2013 and 2014. In January 2012, the Company, in conjunction
with the purchase of a clinic, entered into a note payable in the amount of $100,000 payable in two equal annual installments of $50,000 plus accrued and unpaid interest. Interest accrues at 3.25% per annum.
Aggregate annual payments of principal required pursuant to the revolving credit
facility and the above notes payable subsequent to September 30, 2012 are as follows:
|
|
|
|
|
During the twelve months ended September 30, 2013
|
|
$
|
609
|
|
During the twelve months ended September 30, 2014
|
|
|
175
|
|
During the twelve months ended September 30, 2015
|
|
|
16,100
|
|
|
|
|
|
|
.
|
|
$
|
16,884
|
|
|
|
|
|
|
15
7. COMMON STOCK
From September 2001 through December 31, 2008, the Board of Directors ("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 its bank 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 certain covenants, there are currently an additional estimated 340,501 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 and nine months ended September 30, 2012.