<HTML> <HEAD> </HEAD> <BODY TEXT="#000000" LINK="#0000ff" VLINK="#800080" BGCOLOR="#c0c0c0" ALINK="#ff0000"> <B><P ALIGN="CENTER">UNITED STATES<BR> SECURITIES AND EXCHANGE COMMISSION<BR> Washington, D.C. 20549</P> <P ALIGN="CENTER">FORM 10-Q</P> </B><P> </P> <P>(Mark One)</P> <U><P ALIGN="JUSTIFY"> <B>X</B> </U> QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE<BR> SECURITIES EXCHANGE ACT OF 1934</P> <P ALIGN="RIGHT">For the quarterly period ended <U>March 31, 2000</P> <P ALIGN="JUSTIFY"> </U> TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE<BR> EXCHANGE ACT</P> <P ALIGN="JUSTIFY">For the transition period from<U> </U> to <U> </P> </U><P ALIGN="JUSTIFY">Commission file number <U> 1-11151 </P> <B><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC.</B><BR> </U>(Name of registrant as specified in its charter)</P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="62%" VALIGN="TOP"> <P ALIGN="CENTER"><U> Nevada </U><BR> (State or other jurisdiction of<BR> incorporation or organization)</TD> <TD WIDTH="38%" VALIGN="TOP"> <U><P ALIGN="CENTER"> 76-0364866 </U><BR> (I.R.S. Employer<BR> Identification No.)</TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <U><P ALIGN="CENTER">3040 Post Oak Blvd., Suite 222, Houston, Texas<BR> </U>(Address of principal executive offices)</TD> <TD WIDTH="38%" VALIGN="TOP"> <U><P ALIGN="CENTER"> 77056 </U><BR> (Zip Code)</TD> </TR> </TABLE> <P ALIGN="JUSTIFY">Registrant's telephone number, including area code: <U>(713) 297-7000</P> </U><P ALIGN="JUSTIFY"> Indicate by check mark whether the registrant (1) has filed all reports required to be filed<BR> by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter<BR> period that the registrant was required to file such reports), and (2) has been subject to such<BR> filing requirements for the past 90 days.</P> <P ALIGN="JUSTIFY">Yes <U> <B>X</B> </U> No <U> </U> </P> <P ALIGN="JUSTIFY"> Indicate the number of shares outstanding of each of the registrant's classes of common<BR> stock, as of the latest practicable date: <U> 3,285,609 (as of May 12, 2000) </P> </U><P> </P> <STRONG><P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">PART I</STRONG> <STRONG>- FINANCIAL INFORMATION</P> </STRONG><P> </P> <STRONG><P>Item 1. Financial Statements.</P> </STRONG><P> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">INDEX TO CONSOLIDATED FINANCIAL STATEMENTS</P></STRONG> <P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="89%" VALIGN="TOP"> <P>Consolidated Balance Sheets as of March 31, 2000<BR> and December 31, 1999</TD> <TD WIDTH="11%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 3</TD> </TR> <TR><TD WIDTH="89%" VALIGN="TOP"> <P>Consolidated Statements of Operations for the three months ended<BR> March 31, 2000 and 1999</TD> <TD WIDTH="11%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 5</TD> </TR> <TR><TD WIDTH="89%" VALIGN="TOP"> <P>Consolidated Statements of Cash Flows for the three months ended<BR> March 31, 2000 and 1999</TD> <TD WIDTH="11%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 6</TD> </TR> <TR><TD WIDTH="89%" VALIGN="TOP"> <P>Notes to Consolidated Financial Statements</TD> <TD WIDTH="11%" VALIGN="TOP"> <P ALIGN="RIGHT">8</TD> </TR> </TABLE> </CENTER></P> <P ALIGN="CENTER"> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <P> </P> <STRONG><P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">CONSOLIDATED BALANCE SHEETS<BR> (in thousands)</P></STRONG> <P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="61%" VALIGN="TOP" HEIGHT=66> <P> </TD> <TD WIDTH="20%" VALIGN="TOP" HEIGHT=66> <P ALIGN="CENTER">March 31,<BR> <U> 2000 </U><BR> (unaudited)</TD> <TD WIDTH="20%" VALIGN="TOP" HEIGHT=66> <P ALIGN="CENTER">December 31,<BR> <U> 1999 </U></TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <B><P>ASSETS</B></TD> <TD WIDTH="20%" VALIGN="TOP"> <P> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <P>Current assets:<BR> Cash and cash equivalents<BR> Patient accounts receivable, less allowance<BR> for doubtful accounts of $2,194 and<BR> $2,014, respectively<BR> Accounts receivable - other<BR> Other current assets<BR> Total current assets</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> $ 4,397 <BR> <BR> <BR> 10,251 <BR> 493 <BR> <U> 543</U> <BR> 15,684 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> $ 4,030 <BR> <BR> <BR> 9,605 <BR> 384 <BR> <U> 630</U> <BR> 14,649 </TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <P>Fixed assets:<BR> Furniture and equipment<BR> Leasehold improvements<BR> <BR> <BR> Less accumulated depreciation and amortization</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 10,894 <BR> <U> 5,607</U> <BR> 16,501 <BR> <BR> <U> 9,803</U> <BR> 6,698 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 10,625 <BR> <U> 5,306</U> <BR> 15,931 <BR> <BR> <U> 9,446</U> <BR> 6,485 </TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <P>Goodwill, net of amortization of $245<BR> and $230, respectively<BR> Other assets, net of amortization of $436<BR> and $431, respectively</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 950 <BR> <BR> <U> 1,397</U> </P> <U><P ALIGN="RIGHT">$24,729</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 948 <BR> <BR> <U> 1,264</U> </P> <U><P ALIGN="RIGHT">$23,346</U> </TD> </TR> </TABLE> </CENTER></P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">See notes to consolidated financial statements.</P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">CONSOLIDATED BALANCE SHEETS<BR> (in thousands, except share amounts)</P></STRONG> <P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="61%" VALIGN="TOP" HEIGHT=24> <P> </TD> <TD WIDTH="19%" VALIGN="TOP" COLSPAN=2 HEIGHT=24> <P ALIGN="CENTER">March 31,<BR> <U> 2000 </U><BR> (unaudited)</TD> <TD WIDTH="20%" VALIGN="TOP" HEIGHT=24> <P ALIGN="CENTER">December 31,<BR> <U> 1999 </U></TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP" COLSPAN=2> <B><P>LIABILITIES AND SHAREHOLDERS' EQUITY</B></TD> <TD WIDTH="18%" VALIGN="TOP"> <P> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <P>Current liabilities:<BR> Accounts payable - trade<BR> Accrued expenses<BR> Estimated third-party payor (Medicare) settlements<BR> Notes payable<BR> Total current liabilities</TD> <TD WIDTH="19%" VALIGN="TOP" COLSPAN=2> <P ALIGN="RIGHT"><BR> $ 305 <BR> 1,803 <BR> 397 <BR> <U> 34</U> <BR> 2,539 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> $ 349 <BR> 1,329 <BR> 439 <BR> <U> 39</U> <BR> 2,156 </TD> </TR> <TR><TD WIDTH="61%" VALIGN="TOP"> <P>Notes payable - long-term portion<BR> Convertible subordinated notes payable<BR> Minority interests in subsidiary limited partnerships<BR> Commitments<BR> Shareholders' equity:<BR> Preferred stock, $.01 par value, 500,000<BR> shares authorized, -0- shares outstanding<BR> Common stock, $.01 par value, 10,000,000<BR> shares authorized, 3,636,509 shares issued<BR> at March 31, 2000 and December 31, 1999<BR> Additional paid-in capital<BR> Accumulated earnings<BR> Treasury stock at cost, 350,900 shares held at<BR> March 31, 2000 and December 31, 1999<BR> Total shareholders' equity</TD> <TD WIDTH="19%" VALIGN="TOP" COLSPAN=2> <P ALIGN="RIGHT">34 <BR> 8,050 <BR> 2,715 <BR> - - <BR> <BR> <BR> - - <BR> <BR> <BR> 36 <BR> 11,831 <BR> 2,985 <BR> <BR> <U> (3,461</U>) <BR> <U> 11,391</U> </P> <U><P ALIGN="RIGHT">$24,729</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">37 <BR> 8,050 <BR> 2,383 <BR> - - <BR> <BR> <BR> - - <BR> <BR> <BR> 36 <BR> 11,831 <BR> 2,314 <BR> <BR> <U> (3,461</U>) <BR> <U> 10,720</U> </P> <U><P ALIGN="RIGHT">$23,346</U> </TD> </TR> </TABLE> </CENTER></P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">See notes to consolidated financial statements.</P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">CONSOLIDATED STATEMENTS OF OPERATIONS<BR> (in thousands, except per share data)</P></STRONG> <P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="60%" VALIGN="TOP" HEIGHT=48> <P></TD> <TD WIDTH="40%" VALIGN="TOP" COLSPAN=2 HEIGHT=48> <P ALIGN="CENTER">Three Months Ended<BR> <U> March 31, </U></TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP" HEIGHT=25><P></P></TD> <TD WIDTH="20%" VALIGN="TOP" HEIGHT=25> <U><P ALIGN="CENTER"> 2000 </U></TD> <TD WIDTH="20%" VALIGN="TOP" HEIGHT=25> <U><P ALIGN="CENTER"> 1999 </U></TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP" HEIGHT=24> <P> </TD> <TD WIDTH="40%" VALIGN="TOP" COLSPAN=2 HEIGHT=24> <P ALIGN="CENTER">(unaudited)</TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Net patient revenues<BR> Net management contract revenues<BR> Other revenues<BR> Net revenues</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">$14,228 <BR> 185 <BR> <U> 33</U> <BR> 14,446 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">$11,338 <BR> 123 <BR> <U> 63</U> <BR> 11,524 </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Clinic operating costs:<BR> Salaries and related costs<BR> Rent, clinic supplies and other<BR> Provision for doubtful accounts<BR> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 6,344 <BR> 3,589 <BR> <U> 385</U> <BR> 10,318 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 5,507 <BR> 2,896 <BR> <U> 244</U> <BR> 8,647 </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Corporate office costs:<BR> General and administrative<BR> Recruitment and development<BR> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 1,386 <BR> <U> 634</U> <BR> <U> 2,020</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> 1,107 <BR> <U> 292</U> <BR> <U> 1,399</U> </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Operating income before non-operating expenses</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">2,108 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">1,478 </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Interest expense</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">181 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">179 </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Minority interests in subsidiary limited partnerships</TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 813</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 530</U> </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Income before income taxes</TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">1,114 </TD> <TD WIDTH="20%" VALIGN="TOP"> <P ALIGN="RIGHT">769 </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Provision for income taxes</TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 443</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 308</U> </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Net income</TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 671</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 461</U> </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Basic earnings per common share</TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ .20</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ .13</U> </TD> </TR> <TR><TD WIDTH="60%" VALIGN="TOP"> <P>Diluted earnings per common share</TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ .19</U> </TD> <TD WIDTH="20%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ .13</U> </TD> </TR> </TABLE> </CENTER></P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">See notes to consolidated financial statements.</P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">CONSOLIDATED STATEMENTS OF CASH FLOWS<BR> (in thousands</STRONG>)</P> <P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=48> <P></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2 HEIGHT=48> <P ALIGN="CENTER">Three Months Ended<BR> <U> March 31, </U></TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=30><P></P></TD> <TD WIDTH="19%" VALIGN="TOP" HEIGHT=30> <U><P ALIGN="CENTER"> 2000 </U></TD> <TD WIDTH="19%" VALIGN="TOP" HEIGHT=30> <U><P ALIGN="CENTER"> 1999 </U></TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=24><P></P></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2 HEIGHT=24> <P ALIGN="CENTER">(unaudited)</TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <B><P>Operating activities</B></TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Net income<BR> Adjustments to reconcile net income to net cash<BR> provided by operating activities:<BR> Depreciation and amortization<BR> Minority interests in earnings of subsidiary<BR> limited partnerships<BR> Provision for bad debts<BR> Loss on disposal of fixed assets</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">$ 671 <BR> <BR> <BR> 554 <BR> <BR> 813 <BR> 385 <BR> 49 </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">$ 461 <BR> <BR> <BR> 516 <BR> <BR> 530 <BR> 244 <BR> 6 </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Changes in operating assets and liabilities:<BR> Increase in patient accounts receivable<BR> Increase in accounts receivable - other<BR> Decrease (increase) in other assets<BR> Increase (decrease) in accounts payable<BR> and accrued expenses<BR> Decrease in estimated third-party payor<BR> (Medicare) settlements</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> (1,031) <BR> (109) <BR> (51) <BR> <BR> 430 <BR> <BR> <U> (42</U>) </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> (603) <BR> (133) <BR> 68 <BR> <BR> (494) <BR> <BR> <U> (38</U>) </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Net cash provided by operating activities</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">1,669 </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">557 </TD> </TR> </TABLE> </CENTER></P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">See notes to consolidated financial statements.</P> <P> </P> <STRONG><P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">CONSOLIDATED STATEMENTS OF CASH FLOWS<BR> (in thousands)</P></STRONG> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=48> <P></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2 HEIGHT=48> <P ALIGN="CENTER">Three Months Ended<BR> <U> March 31, </U></TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=30><P></P></TD> <TD WIDTH="19%" VALIGN="TOP" HEIGHT=30> <U><P ALIGN="CENTER"> 2000 </U></TD> <TD WIDTH="19%" VALIGN="TOP" HEIGHT=30> <U><P ALIGN="CENTER"> 1999 </U></TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP" HEIGHT=24><P></P></TD> <TD WIDTH="38%" VALIGN="TOP" COLSPAN=2 HEIGHT=24> <P ALIGN="CENTER">(unaudited)</TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <B><P>Investing activities</B></TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Purchase of fixed assets<BR> Purchase of intangibles<BR> Proceeds on sale of fixed assets<BR> Net cash used in investing activities</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">(803) <BR> (17) <BR> <U> 7</U> <BR> (813) </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">(394) <BR> - - <BR> <U> 23</U> <BR> (371) </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <B><P>Financing activities</B></TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Payment of notes payable<BR> Proceeds from (withdrawals of) investment<BR> of minority investors in subsidiary limited<BR> partnerships<BR> Proceeds from exercise of stock options<BR> Distributions to minority investors in subsidiary<BR> limited partnerships<BR> Net cash used in financing activities</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">(8) <BR> <BR> <BR> 36 <BR> - - <BR> <BR> <U> (517</U>) <BR> <U> (489</U>) </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">(8) <BR> <BR> <BR> (1) <BR> 67 <BR> <BR> <U> (296</U>) <BR> <U> (238</U>) </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Net increase (decrease) in cash and cash equivalents</TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">367 </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT">(52) </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Cash and cash equivalents - beginning of period</TD> <TD WIDTH="19%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 4,030</U> </TD> <TD WIDTH="19%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> 6,328</U> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Cash and cash equivalents - end of period</TD> <TD WIDTH="19%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 4,397</U> </TD> <TD WIDTH="19%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 6,276</U> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <B><P>Supplemental disclosures of cash flow information</B></TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> <TD WIDTH="19%" VALIGN="TOP"> <P> </TD> </TR> <TR><TD WIDTH="62%" VALIGN="TOP"> <P>Cash paid during the period for:<BR> Income taxes<BR> Interest</TD> <TD WIDTH="19%" VALIGN="TOP"> <U><P ALIGN="RIGHT"><BR> $ 635</U> <BR> <U>$ 162</U> </TD> <TD WIDTH="19%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> <U>$ 288</U> <BR> <U>$ 161</U> </TD> </TR> </TABLE> <P> </P> <P ALIGN="CENTER">See notes to consolidated financial statements.</P> <P> </P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</P> <P ALIGN="CENTER">March 31, 2000</P> </STRONG><P> </P> <STRONG><P>1. Basis of Presentation and Significant Accounting Policies</P> </STRONG><P ALIGN="JUSTIFY">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. As of March 31, 2000, the Company, through its wholly-owned subsidiaries, owned a 1% general partnership interest, with the exception of one clinic in which the Company owned a 6% general partnership interest, and limited partnership interests ranging from 49% to 99% in the clinics it operates (88% of the clinics were at 64% as of March 31, 2000). For the majority of the clinics, the managing therapist of each such clinic, along with other therapists at the clinic in several of the partnerships, own the remaining limited partnership interests in the clinic. The minority interests in the equity and earnings of the subsidiary clinic limited partnerships are presented separately in the consolidated financial statements.</P> <P ALIGN="JUSTIFY">The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q. Accordingly, the statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.</P> <P ALIGN="JUSTIFY">In the opinion of management, the accompanying unaudited financial statements contain all necessary adjustments (consisting only of normal recurring adjustments) to present fairly the Company's financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Company's accounting policies, refer to the audited financial statements included in the Company's Form 10-K for the year ended December 31, 1999.</P> <P ALIGN="JUSTIFY">Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results expected for the entire year.</P> <STRONG><P>Use of Estimates</P> </STRONG><P ALIGN="JUSTIFY">Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.</P> <STRONG><P>Reclassifications</P> </STRONG><P ALIGN="JUSTIFY">Certain amounts presented in the accompanying financial statements for the three months ended March 31, 1999 have been reclassified to conform with the presentation used for the three months ended March 31, 2000. These reclassifications had no effect on net income.</P> <STRONG><P> </P> <P> </P> <P>2. Earnings per Share</P> </STRONG><P ALIGN="JUSTIFY">The following table sets forth the computation of basic and diluted earnings per share:</P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="57%" VALIGN="TOP" HEIGHT=48> <P></TD> <TD WIDTH="44%" VALIGN="TOP" COLSPAN=2 HEIGHT=48> <P ALIGN="CENTER">Three Months Ended<BR> <U> March 31, </U></TD> </TR> <TR><TD WIDTH="57%" VALIGN="TOP"> <P> </TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="CENTER"> 2000 </U></TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="CENTER"> 1999 </U></TD> </TR> <TR><TD WIDTH="57%" VALIGN="TOP"> <P>Numerator:</P> <P> Net income</P> <P> Numerator for basic earnings per share<BR> Effect of dilutive securities:<BR> Interest on convertible subordinated<BR> notes payable<BR> Numerator for diluted earnings per share -<BR> income available to common stockholders<BR> after assumed conversions</TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> </P> <P ALIGN="RIGHT">$ 671,000</U> </P> <P ALIGN="RIGHT">$ 671,000 <BR> <BR> <BR> <U> 119,000</U> <BR> <BR> <BR> <U>$ 790,000</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT"> </P> <P ALIGN="RIGHT">$ 461,000</U> </P> <P ALIGN="RIGHT">$ 461,000 <BR> <BR> <BR> <U> -</U> <BR> <BR> <BR> <U>$ 461,000</U> </TD> </TR> <TR><TD WIDTH="57%" VALIGN="TOP"> <P>Denominator:</P> <P> Denominator for basic earnings per share --<BR> weighted-average shares<BR> Effect of dilutive securities:<BR> Stock options<BR> Convertible subordinated notes payable<BR> Dilutive potential common shares<BR> Denominator for diluted earnings per share --<BR> adjusted weighted-average shares and<BR> assumed conversions</TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"> </P> <P ALIGN="RIGHT"><BR> 3,286,000 <BR> <BR> 63,000 <BR> <U> 772,000</U> <BR> <U> 835,000</U> <BR> <BR> <BR> <U>4,121,000</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"> </P> <P ALIGN="RIGHT"><BR> 3,614,000 <BR> <BR> 38,000 <BR> <U> -</U> <BR> <U> 38,000</U> <BR> <BR> <BR> <U>3,652,000</U> </TD> </TR> <TR><TD WIDTH="57%" VALIGN="TOP"> <P>Basic earnings per share</TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 0.20</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 0.13</U> </TD> </TR> <TR><TD WIDTH="57%" VALIGN="TOP"> <P>Diluted earnings per share</TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 0.19</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$ 0.13</U> </TD> </TR> </TABLE> <P ALIGN="JUSTIFY">During the three months ended March 31, 2000 and 1999, the Company had outstanding the following notes payable: 8% Convertible Subordinated Notes due June 30, 2003, for an aggregate principal amount of $3,050,000; 8% Convertible Subordinated Notes, Series B, due June 30, 2004, for an aggregate principal amount of $2,000,000; and 8% Convertible Subordinated Notes, Series C, due June 30, 2004, for an aggregate principal amount of $3,000,000 (collectively the "Notes"). The Notes were not included in the computation of diluted earnings per share for the three months ended March 31, 1999 because the effect on the computation was anti-dilutive.</P> <STRONG><P> </P> <P> </P> <P>3. Income Taxes</P> </STRONG><P ALIGN="JUSTIFY">Significant components of the provision for income taxes for the three months ended March 31, were as follows: </P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="56%" VALIGN="TOP" HEIGHT=27> <P></TD> <TD WIDTH="22%" VALIGN="TOP" HEIGHT=27> <U><P ALIGN="CENTER"> 2000 </U></TD> <TD WIDTH="22%" VALIGN="TOP" HEIGHT=27> <U><P ALIGN="CENTER"> 1999 </U></TD> </TR> <TR><TD WIDTH="56%" VALIGN="TOP"> <P>Current:<BR> Federal<BR> State<BR> Total current</TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> $524,000 <BR> <U> 86,000</U> <BR> <U> 610,000</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> $246,000 <BR> <U> 62,000</U> <BR> <U> 308,000</U> </TD> </TR> <TR><TD WIDTH="56%" VALIGN="TOP"> <P>Deferred:<BR> Federal<BR> State<BR> Total deferred</TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> (167,000) <BR> <U> -</U> <BR> <U> (167,000</U>) </TD> <TD WIDTH="22%" VALIGN="TOP"> <P ALIGN="RIGHT"><BR> - - <BR> <U> -</U> <BR> <U> -</U> </TD> </TR> <TR><TD WIDTH="56%" VALIGN="TOP"> <P>Total income tax provision</TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$443,000</U> </TD> <TD WIDTH="22%" VALIGN="TOP"> <U><P ALIGN="RIGHT">$308,000</U> </TD> </TR> </TABLE> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="JUSTIFY">Item 2. Management's Discussion and Analysis of Financial Condition and Results<BR> of Operations.</P> <P ALIGN="JUSTIFY">Overview<BR> </STRONG>The Company operates outpatient physical and occupational therapy clinics which provide post-operative care and treatment for a variety of orthopedic-related disorders and sports-related injuries. At March 31, 2000, the Company operated 119 outpatient physical and occupational therapy clinics in 29 states. The average age of the 119 clinics in operation at March 31, 2000 was 3.72 years. Since inception of the Company, 125 clinics have been developed and six clinics have been acquired by the Company. To date, the Company has closed seven facilities due to adverse clinic performance, consolidated the operations of three of its clinics with other existing clinics to more efficiently serve various geographic markets and sold certain fixed assets at two of the Company's clinics and then closed such facilities. Of the seven facilities closed to date, one occurred in March 1999 and one in January 2000. No loss was recorded relating to either of these closures. These two clinics combined accounted for net patient revenues and clinic operating costs for the three months ended March 31, 2000 of $-0- and $12,000, respectively, and for the three months ended March 31, 1999 of $44,000 and $98,000, respectively.</P> <P ALIGN="JUSTIFY">The Company had begun steps to enter the surgery center business in 1999. In March 2000, the Company discontinued such efforts to enter the surgery center business. See "Factors Affecting Future Results - Discontinuance of the Surgery Center Initiative."</P> <STRONG><P>Results of Operations</P> <P ALIGN="JUSTIFY">Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31, 1999</P> <P>Net Patient Revenues</P> </STRONG><P ALIGN="JUSTIFY">Net patient revenues increased to $14,228,000 for the three months ended March 31, 2000 ("2000 First Quarter") from $11,338,000 for the three months ended March 31, 1999 ("1999 First Quarter"), an increase of $2,890,000, or 25%. Net patient revenues from the 22 clinics developed since the 1999 First Quarter (the "New Clinics") accounted for 42% of the increase, or $1,202,000. The remaining increase of $1,688,000 in net patient revenues comes from those 97 clinics opened before the 1999 First Quarter (the "Old Clinics"). Of the $1,688,000 increase in net patient revenues from the Old Clinics, $1,500,000 was due to a 13% increase in the number of patient visits, while $188,000 was due to a 1.5% increase in the average net revenue per visit.</P> <P ALIGN="JUSTIFY">Net patient revenues are based on established billing rates less allowances and discounts for patients covered by worker's compensation programs and other contractual programs. Payments received under these programs are based on predetermined rates and are generally less than the established billing rates of the clinics. Net patient revenues reflect reserves, which are evaluated quarterly by management, for contractual and other adjustments relating to patient discounts from certain payors. Beginning in 1999, the Balanced Budget Act of 1997 ("BBA") provides that reimbursement for outpatient therapy services provided to Medicare beneficiaries is pursuant to a fee schedule published by the Department of Health and Human Services ("HHS"), and the total amount that may be paid by Medicare in any one year for outpatient physical (including speech-language pathology) or occupational therapy to any one patient is limited to $1,500, except for services provided in hospitals. On November 29, 1999, President Clinton signed into law the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") which, among other provisions, placed a two-year moratorium on the $1,500 reimbursement limit for therapy services provided in 2000 and 2001.</P> <STRONG><P>Clinic Operating Costs</P> </STRONG><P ALIGN="JUSTIFY">Clinic operating costs as a percent of net patient revenues decreased to 73% for the 2000 First Quarter from 76% for the 1999 First Quarter, reflecting higher net patient revenues.</P> <STRONG><P>Clinic Operating Costs - Salaries and Related Costs</P> </STRONG><P ALIGN="JUSTIFY">Salaries and related costs increased to $6,344,000 for the 2000 First Quarter from $5,507,000 for the 1999 First Quarter, an increase of $837,000, or 15%. Approximately 69% of the increase, or $576,000, was due to the New Clinics. The remaining 31% increase, or $261,000, was due principally to increased staffing to meet the increase in patient visits for the Old Clinics. Salaries and related costs as a percent of net patient revenues decreased to 45% for the 2000 First Quarter from 49% for the 1999 First Quarter.</P> <STRONG><P>Clinic Operating Costs - Rent, Clinic Supplies and Other</P> </STRONG><P ALIGN="JUSTIFY">Rent, clinic supplies and other increased to $3,589,000 for the 2000 First Quarter from $2,896,000 for the 1999 First Quarter, an increase of $693,000, or 24%. Approximately 49% of the increase, or $342,000, was due to the New Clinics, while 51%, or $351,000, of the increase was due to the Old Clinics. The increase in rent, clinic supplies and other for the Old Clinics related primarily to a significant increase in group health insurance during the 2000 First Quarter. The Company self insures for group health benefits and periodically reviews and adjusts its health insurance reserves. Reserves were increased in the 2000 First Quarter based upon an increase in expected claims. Rent, clinic supplies and other as a percent of net patient revenues declined to 25% for the 2000 First Quarter from 26% for the 1999 First Quarter. </P> <STRONG><P>Clinic Operating Costs - Provision for Doubtful Accounts</P> </STRONG><P ALIGN="JUSTIFY">The provision for doubtful accounts increased to $385,000 for the 2000 First Quarter from $244,000 for the 1999 First Quarter, an increase of $141,000, or 58%. Approximately 18% of the increase, or $25,000, was due to the New Clinics. The remaining 82% increase, or $116,000, was due to the Old Clinics. The provision for doubtful accounts as a percent of net patient revenues increased to 2.7% for the 2000 First Quarter from 2.2% for the 1999 First Quarter.</P> <STRONG><P>Corporate Office Costs - General and Administrative</P> </STRONG><P ALIGN="JUSTIFY">General and administrative costs, consisting primarily of salaries and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel and legal and professional fees, increased to $1,386,000 for the 2000 First Quarter from $1,107,000 for the 1999 First Quarter, an increase of $279,000, or 25%. General and administrative costs increased primarily as a result of salaries and benefits related to additional personnel hired to support an increasing number of clinics. In addition, in the 2000 First Quarter, the Company recorded a $49,000 loss on the disposal of certain equipment. General and administrative costs as a percent of net patient revenues remained unchanged at 10% for the 2000 and 1999 First Quarters. </P> <STRONG><P>Corporate Office Costs - Recruitment and Development</P> </STRONG><P ALIGN="JUSTIFY">Recruitment and development costs primarily represent salaries and benefits of recruitment and development personnel, rent, travel, marketing and recruiting fees attributed directly to the Company's activities in the development and acquisition of new clinics and the development of its surgery center initiative. Recruitment and development personnel have no involvement with a facility following opening. All recruitment and development personnel are located at the corporate office in Houston, Texas. In March 2000, the Company decided to discontinue the surgery center initiative. Recruitment and development costs increased $342,000, or 117%, to $634,000 for the 2000 First Quarter from $292,000 for the 1999 First Quarter. Recruitment and development expenses related to the surgery center initiative accounted for 88%, or $301,000, of the increase between the 2000 and 1999 First Quarters. The majority of the $301,000 surgery center costs related to salaries of development personnel, including severance pay associated with the discontinuance of the surgery center initiative, consulting fees, legal fees and travel associated with potential acquisitions of surgery centers and identifying and investigating potential sites for the development of new surgery centers. Excluding the effects of the surgery center initiative, recruitment and development costs increased 14%, or $41,000, between the 2000 and 1999 First Quarters. Recruitment and development costs as a percent of net patient revenues increased to 4% for the 2000 First Quarter from 3% for the 1999 First Quarter.</P> <STRONG><P>Minority Interests in Earnings of Subsidiary Limited Partnerships</P> </STRONG><P ALIGN="JUSTIFY">Minority interests in earnings of subsidiary limited partnerships increased $283,000, or 54%, to $813,000 for the 2000 First Quarter from $530,000 for the 1999 First Quarter due to the increase in aggregate profitability of those clinics in which partners have achieved positive retained earnings and are accruing partnership income.</P> <STRONG><P>Income Before Income Taxes</P> </STRONG><P ALIGN="JUSTIFY">The Company's income before income taxes rose $345,000, or 45%, to $1,114,000 for the 2000 First Quarter from $769,000 for the 1999 First Quarter principally due to the $2,922,000 increase in net revenues, offset, in part, by the increase of $1,671,000 in clinic operating costs, the $621,000 increase in corporate office costs and the $283,000 increase in minority interests in earnings of subsidiary limited partnerships.</P> <STRONG><P>Provision for Income Taxes</P> </STRONG><P ALIGN="JUSTIFY">The provision for income taxes increased to $443,000 for the 2000 First Quarter from $308,000 for the 1999 First Quarter, an increase of $135,000, or 44%. During the 2000 and 1999 First Quarters, the Company accrued income taxes at an effective tax rate of 40%. These rates exceeded the U.S. statutory tax rate of 34% due primarily to state income taxes.</P> <STRONG><P>Liquidity and Capital Resources</P> </STRONG><P ALIGN="JUSTIFY">At March 31, 2000, the Company had $4,397,000 in cash and cash equivalents available to fund the working capital needs of its operating subsidiaries, future clinic developments, acquisitions and investments. Included in cash and cash equivalents at March 31, 2000 was $1,972,000 of short-term commercial paper and $1,166,000 in a money market fund invested in short-term debt instruments issued by an agency of the U.S. Government. </P> <P ALIGN="JUSTIFY">The increase in cash of $367,000 from December 31, 1999 to March 31, 2000 was due primarily to cash provided by operating activities of $1,669,000, offset, in part, by capital expenditures for physical therapy equipment and leasehold improvements in the amount of $803,000 and distributions of $517,000 to minority investors in subsidiary limited partnerships.</P> <P ALIGN="JUSTIFY">The Company's current ratio decreased to 6.18 to 1.00 at March 31, 2000 from 6.79 to 1.00 at December 31, 1999. The decrease in the current ratio was due primarily to an increase in accrued expenses, offset, in part, by an increase in net patient revenues, which, in turn, caused an increase in patient accounts receivable.</P> <P ALIGN="JUSTIFY">At March 31, 2000, the Company had a debt-to-equity ratio of 0.71 to 1.00 compared to 0.76 to 1.00 at December 31, 1999. The decrease in the debt-to-equity ratio from December 31, 1999 to 14March 31, 2000 resulted primarily from net income of $671,000 for the 2000 First Quarter.</P> <P ALIGN="JUSTIFY">In January 1997, the Company's Board of Directors authorized the use of available cash to repurchase up to 200,000 shares of Company common stock in the open market. The timing and the actual number of shares purchased will depend on market conditions. The repurchased shares will be held as treasury shares and be available for general corporate purposes. Through March 31, 2000, under this authorization, 4,900 shares have been repurchased at a cost of $47,000.</P> <P ALIGN="JUSTIFY">In April 1999, the Company's Board of Directors authorized the use of available cash to purchase up to 346,000 shares of its common stock at a price not greater than $10.00 nor less than $8.50 per share. The Company conducted the repurchases through a procedure commonly referred to as a "Dutch Auction," and completed the repurchase of 346,000 shares (9.6% of the then outstanding shares) in May 1999. The shares were repurchased at a price of $9.75 per share for a total aggregate cost of $3,414,000 (including expenses).</P> <P ALIGN="JUSTIFY">Management believes that existing funds, supplemented by cash flows from existing operations will be sufficient to meet its current operating needs and its development plans.</P> <STRONG><P>Recently Promulgated Accounting Standards</P> </STRONG><P ALIGN="JUSTIFY">In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement, as amended, is effective for fiscal years beginning after June 15, 2000. While the Company has not yet completed its evaluation of the impact of this statement, the Company does not believe the statement will have a significant impact on its results of operations.</P> <P ALIGN="JUSTIFY">In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company will be required to implement SAB 101 for the quarter ended June 30, 2000. The Company has not yet determined the impact, if any, that SAB 101 will have on its financial statements.</P> <STRONG><P>Year 2000</P> </STRONG><P ALIGN="JUSTIFY">Historically, most computer systems (including microprocessors embedded into field equipment and other machinery) utilized software that recognized a calendar year by its last two digits. Beginning in the year 2000, these systems require modification to distinguish twenty-first century dates from twentieth century dates ("Year 2000 issues"). To date, the Company has not experienced any significant problems due to Year 2000 issues. While no assurance can be given, the Company does not believe it will experience any significant Year 2000 issues in the future.</P> <STRONG><P>Factors Affecting Future Results</P> <P>Clinic Development</P> </STRONG><P ALIGN="JUSTIFY">As of March 31, 2000, the Company had 119 clinics in operation, seven of which opened in the 2000 First Quarter. The Company's goal for 2000 is to open 26 new clinics, which includes three clinics originally scheduled to open in 1999, but which actually opened in 2000. The opening of these clinics is subject to, among other things, the Company's ability to identify suitable geographic locations and physical therapy clinic partners. The Company's operating results will be impacted by initial operating losses from the new clinics. During the initial period of operation, operating margins for newly opened clinics tend to be lower than more seasoned clinics due to the start-up costs of newly opened clinics (salaries and related costs of the physical therapist and other clinic personnel, rent and equipment and other supplies required to open the clinic) and the fact that patient revenues tend to be lower in the first year of a new clinic's operation and increase significantly over the subsequent two to three years. Based on historical performance of the Company's new clinics, the clinics opened since the 1999 First Quarter should favorably impact the Company's results of operations for 2000 and beyond.</P> <STRONG><P>Growth in Physical Therapy Management</P> </STRONG><P ALIGN="JUSTIFY">In July 1998, the Company entered into an agreement with an orthopedic group to manage a physical therapy facility in New England, bringing facilities managed for third parties, including physician groups, to seven. Management believes that with physician groups facing declining incomes, the income resulting from the ownership of in-house physical therapy facilities is becoming increasingly attractive to physicians. The Company believes it has adequate internally generated funds to support its planned growth in this area.</P> <STRONG><P>Discontinuance of the Surgery Center Initiative</P> </STRONG><P ALIGN="JUSTIFY">In March 2000, the Company decided to discontinue its surgery center initiative which originally began in 1999. Although the Company continues to believe that surgery centers and physical therapy clinics fit well together, its model surgery center was based upon substantial ownership by surgeon investors. To date, the Company has not been able to achieve targeted ownership by surgeon investors, and, rather than continue to expend resources on the surgery center business at this time, the Company decided to focus 100% on the growth of its therapy business. Costs incurred related to the surgery center initiative, including severance benefits for terminated employees, totaled $301,000 and $-0- for the 2000 First Quarter and 1999 First Quarter, respectively.</P> <STRONG><P>Forward-Looking Statements</P> </STRONG><P ALIGN="JUSTIFY">We make statements in this report that are considered to be forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements involve risks and uncertainties that could cause actual results to differ materially from those we project. When used in this report, the words "anticipate,""believe,""estimate,""intend" and "expect" and similar expressions are intended to identify such forward-looking statements. The forward-looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, among other things, general economic, business, and regulatory conditions, competition, federal and state regulations, availability, terms and use of capital and weather. Some or all of these factors are beyond the Company's control. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the SEC for more information on these factors. These forward-looking statements represent our estimates and assumptions only as of the date of this report.</P> <STRONG><P>Item 3. Quantitative and Qualitative Disclosure About Market Risk.</P> </STRONG><P ALIGN="JUSTIFY">As of March 31, 2000, the Company had outstanding $3,050,000 aggregate principal amount of 8% Convertible Subordinated Notes due June 30, 2003, $2,000,000 aggregate principal amount of 8% Convertible Subordinated Notes, Series B, due June 30, 2004 and $3,000,000 aggregate principal amount of 8% Convertible Subordinated Notes, Series C, due June 30, 2004 (collectively, the "Notes"). The Notes, which were issued in private placement transactions, bear interest at 8% per annum, payable quarterly, and are convertible at the option of the Note holders into common stock of the Company at any time during the life of the Notes. The conversion price ranges from $10.00 to $12.00 per share, subject to adjustment as provided in the Notes. The fair value of the Notes is not currently determinable due primarily to the convertibility provision of the Notes and the fact that the Notes are not readily marketable.</P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES</P> <P ALIGN="CENTER">PART II - OTHER INFORMATION</P> <P>Item 6. Exhibits and Reports on Form 8-K.</P> <P>(a) List of Exhibits</P> </STRONG><P> 27. Financial Data Schedule</P> <STRONG><P>(b) Reports on Form 8-K</P> </STRONG><P ALIGN="JUSTIFY"> No reports on Form 8-K were filed with the Securities and Exchange Commission during<BR> the quarter ended March 31, 2000. </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <P ALIGN="CENTER"> </P> <STRONG><P ALIGN="CENTER">SIGNATURES</P> </STRONG><P> </P> <P ALIGN="JUSTIFY">In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.</P> <TABLE CELLSPACING=0 BORDER=0 CELLPADDING=2 WIDTH=571> <TR><TD WIDTH="56%" VALIGN="TOP"> <P> </TD> <TD WIDTH="44%" VALIGN="TOP"> <B><P>U.S. PHYSICAL THERAPY, INC.</B></TD> </TR> <TR><TD WIDTH="56%" VALIGN="TOP" HEIGHT=60> <P> </P> <P>Date: <U>May 15, 2000</U></TD> <TD WIDTH="44%" VALIGN="TOP" HEIGHT=60> <P> </P> <P>By: <U>/s/ J. MICHAEL MULLIN</U></TD> </TR> <TR><TD WIDTH="56%" VALIGN="TOP" HEIGHT=36><P></P></TD> <TD WIDTH="44%" VALIGN="TOP" HEIGHT=36> <P ALIGN="CENTER">J. Michael Mullin<BR> Chief Financial Officer<BR> (duly authorized officer<BR> and principal financial<BR> officer)</TD> </TR> </TABLE> </BODY> </HTML>