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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 0-20554
DYNACQ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0375477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10304 INTERSTATE 10 EAST, SUITE 369, HOUSTON, TEXAS 77029
(Address of principal executive offices) Zip Code
Registrants telephone number, including area code (713)673-6432
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirement for the past 90 days.
Yes [X] No [_]
Indicate by checkmark whether registrant is an accelerated filer Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable dates.
Title of Each Class Outstanding at March 31, 2003
Common Stock, $0.001 par value 14,887,752 shares
Transitional Small Business Disclosure Format (check one) Yes [_] No [X]
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, AUGUST 31,
2003 2002
--------------- ----------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,931,715 $ 7,583,756
Accounts receivables, net of allowances for contractual adjustments and
uncollectible accounts of approximately $72,958,000 and $58,010,000 at
February 28, 2003 and August 31, 2002, respectively 26,248,934 24,340,971
Supplies 1,415,408 893,727
Prepaid expenses 451,989 262,958
Deferred tax asset 149,295 149,295
Income taxes receivable 1,233,757 373,575
--------------- ----------------
Total current assets 34,431,098 33,604,282
Property and equipment, net 30,982,893 16,715,425
Goodwill 483,944 483,944
Other assets 312,729 274,970
--------------- ----------------
Total assets $ 66,210,664 $ 51,078,621
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,832,054 $ 2,327,410
Accrued liabilities 5,748,816 744,530
Current maturities of long-term debt - 39,075
--------------- ----------------
Total current liabilities 7,580,870 3,111,015
Negative goodwill, net - 851,859
Deferred income taxes payable 483,219 483,219
--------------- ----------------
Total noncurrent liabilities 483,219 1,335,078
Commitments and contingencies - -
Minority interests 4,238,257 2,064,155
Stockholders' equity
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
none issued or outstanding - -
Preferred stock dividend distributable 1,488 -
Common stock, $0.001 par value, 300,000,000 shares authorized,
16,571,616 and 16,515,166 shares issued at February 28, 2003 and
August 31, 2002, respectively 16,571 16,515
Additional paid in capital 12,213,070 9,778,701
Retained earnings 44,622,989 37,884,622
Treasury stock, 1,685,984 shares at cost (1,959,412) (1,959,412)
Deferred compensation (986,388) (1,152,053)
--------------- ----------------
Total stockholders' equity 53,908,318 44,568,373
--------------- ----------------
Total liabilities and stockholders' equity $ 66,210,664 $ 51,078,621
=============== ================
See accompanying notes
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, SIX MONTHS ENDED FEBRUARY 28,
2003 2002 2003 2002
----------- ----------- ------------ -----------
Net patient service revenue $21,127,507 $14,964,580 $ 39,061,433 $28,712,539
Costs and expenses:
Compensation and benefits 3,268,376 1,862,685 5,942,771 3,823,591
Medical services and supplies 3,244,483 2,990,611 6,403,848 5,296,310
Other operating expenses 5,973,465 3,881,921 10,165,413 7,415,286
Provision for uncollectible accounts 150,541 88,353 226,224 130,023
Depreciation & amortization 497,967 321,101 837,650 593,857
------------ ------------ ------------- ------------
Total costs and expenses 13,134,832 9,144,671 23,575,906 17,259,067
------------ ------------ ------------- ------------
Income from operations 7,992,675 5,819,909 15,485,527 11,453,472
Other income (expense):
Rent and other income 93,534 35,272 199,067 85,693
Interest income 25,541 36,441 58,611 92,592
Interest expense (94) (10,632) (940) (16,953)
------------ ------------ ------------- ------------
Total other income 118,981 61,081 256,738 161,332
------------ ------------ ------------- ------------
Income before income taxes, minority interests, and
cumulative effect of a change in accounting principle 8,111,656 5,880,990 15,742,265 11,614,804
Provision for income taxes 2,845,566 1,832,329 5,547,002 3,657,896
Minority interests in earnings 1,084,595 506,634 1,828,102 1,037,266
------------ ------------ ------------- ------------
Income before cumulative effect of a change in
accounting principle 4,181,495 3,542,027 8,367,161 6,919,642
------------ ------------ ------------- ------------
Cumulative effect of a change in accounting principle,
net of tax - - 528,153 -
------------ ------------ ------------- ------------
Net income $ 4,181,495 $ 3,542,027 $ 8,895,314 $ 6,919,642
============ ============ ============= ============
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.28 $ 0.24 $ 0.56 $ 0.47
Cumulative effect of a change in accounting
principle, net of tax - - 0.04 -
------------ ------------ ------------- ------------
Net income $ 0.28 $ 0.24 $ 0.60 $ 0.47
============ ============ ============= ============
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.27 $ 0.24 $ 0.54 $ 0.47
Cumulative effect of a change in accounting
principle, net of tax - - 0.03 -
------------ ------------ ------------- ------------
Net income $ 0.27 $ 0.24 $ 0.57 $ 0.47
============ ============ ============= ============
Weighted average common shares - Basic 14,871,621 14,781,959 14,853,439 14,781,959
Weighted average common shares - Diluted 15,634,609 14,811,651 15,598,822 14,811,651
See accompanying notes
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED FEBRUARY 28,
2003 2002
------------- -------------
Net Income $ 8,895,314 $6,919,642
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 837,650 593,857
Cumulative effect of a change in accounting principle-write-off negative
goodwill, net of tax (528,153) -
Provision for uncollectible accounts 226,224 130,023
Minority interests 1,828,102 1,037,266
Deferred compensation amortization 165,665 52,040
Changes in operating assets and liabilities:
Accounts receivable (2,134,187) (266,320)
Income tax receivable (1,183,888) -
Supplies (521,681) (2,304)
Prepaid expenses (189,031) 75,341
Other assets (37,759) (151,487)
Accounts payable (495,356) (348,312)
Accrued liabilities 5,004,286 551,162
Income taxes payable - (2,257,990)
------------- -------------
Net cash provided by operating activities 11,867,186 6,332,918
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment, net (15,105,118) (4,077,868)
Due from related parties - 1,585,000
------------- -------------
Net cash used by investing activities (15,105,118) (2,492,868)
------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt (39,075) (62,793)
Proceeds from exercise of stock options 278,966 806,710
Acquisition of treasury stock, net - (768,905)
Purchase of minority interests - (240,000)
Contributions from minority stockholders 946,000 -
Distributions to minority stockholders (600,000) (2,285,000)
------------- -------------
Net cash provided (used) by financing activities 585,891 (2,549,988)
------------- -------------
Net (decrease) increase in cash and cash equivalents (2,652,041) 1,290,062
Cash and cash equivalents at beginning of period 7,583,756 5,031,614
------------- -------------
Cash and cash equivalents at end of period $ 4,931,715 $6,321,676
============= =============
See accompanying notes
DYNACQ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2003
(UNAUDITED)
Notes to Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited financial statements have been prepared by Dynacq
International, Inc., a Nevada Corporation (referred to as the "Company"),
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by such rules
and regulations, and management believes that the disclosures are adequate to
make the information presented not misleading. These financial statements
include all of the adjustments, which, in the opinion of management, are
necessary for a fair presentation of financial position and results of
operations. All such adjustments are of a normal and recurring nature. These
unaudited financial statements should be read in conjunction with the audited
financial statements at August 31, 2002. Operating results for the three and six
months ended February 28, 2003 are not necessarily indicative of the results
that may be expected for the year ending August 31, 2003.
General
The Company provides surgical healthcare services and related ancillary services
through surgical hospital facilities and surgery centers. While historically the
Company has offered a range of healthcare services, including ambulatory
infusion and physician practice management, the focus over the last five years
has been on surgical services. During the last fiscal year and continuing into
this Fiscal 2003, management has focused on the growth of inpatient surgical
services and identification of additional surgical hospital sites, as it
believes such operations to be a more profitable and efficient use of resources.
As of February 28, 2003, the Company operated two locations in the Houston
metropolitan area, a medical center with inpatient facilities located in
Pasadena, Texas and an outpatient surgery center located in Houston, Texas. In
January 2003, the Company opened its new surgical specialty hospital in Baton
Rouge, Louisiana. The Company continues to evaluate lease and purchase options
of additional surgical hospitals.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain accounts in the prior year Form 10-Q have been reclassified to conform
to the presentation in the current year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations and SFAS
142, Goodwill and Other Intangible Assets, which is effective for fiscal years
beginning after December 15, 2001. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but are reviewed at least
annually for impairment. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company
adopted SFAS 142, effective September 1, 2002. In conjunction with the adoption
of this statement, the
Company has written-off the unamortized balance in negative goodwill during the
six months ended February 28, 2003 and recognized it as a cumulative effect of a
change in accounting principle (See note below). The Company also has
discontinued the amortization of goodwill. The Company will test goodwill for
impairment during Fiscal 2003, using the two-step process prescribed in SFAS
142. The first step is a screen for potential impairment while the second step
measures the amount of impairment, if any. The Company does not believe the
effect of these tests will have a material impact on the earnings and financial
position of the Company.
In October 2001, the FASB issued SFAS 144, Impairment of Long-Lived Assets. SFAS
144 supersedes SFAS 121, Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets To Be Disposed Of. SFAS 144 retains the requirements of
SFAS 121 to (a) recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and the
fair value of the asset. SFAS 144 removes goodwill from its scope. SFAS 144 is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted the statement effective September 1, 2002
and the adoption of this statement had no material impact on the financial
position or results of operations of the Company.
On December 31, 2002, FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation. SFAS 148 requires accounting policy disclosures to
provide the method of stock option accounting for each year presented in the
financial statements and for each year until all years presented in the
financial statements recognize the fair value of stock-based compensation. Also,
SFAS 148 provides two additional transition methods that eliminate the ramp-up
effect resulting from applying the expense recognition provisions of SFAS 123.
The transition provisions and annual statement disclosure requirements of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
statement disclosure requirements are effective for the first interim statement
beginning after December 15, 2002. The transition and disclosures requirements
of SFAS 148 will be adopted by the Company in the third quarter ending May 31,
2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS 5, Accounting for Contingencies, relating
to the guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. The disclosure provisions of FIN 45 are effective for
financial statements of periods that end after December 15, 2002. However, the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. The Company has no guarantees of indebtedness that would be affected by
FIN 45.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. A variable interest entity is
a corporation, partnership, trust, or any other legal structures used for
business purposes that either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate, or
other property. A variable interest entity may be essentially passive or it may
engage in research and development or other activities on behalf of another
company. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company's adoption of FIN 46 is
not anticipated to have a material impact on its results of operations and
financial position.
Goodwill and Negative Goodwill
Prior to implementation of SFAS 142, net assets acquired in excess of costs
incurred (negative goodwill) from the Vista acquisition and subsequent related
purchases of minority interests were amortized over a period of 14 years. Costs
incurred in excess of net assets acquired (goodwill) from the Surgi+Group and
Piney Point acquisitions were amortized on the straight-line basis over a period
of 15 years. Upon adoption of the SFAS 142 during the first quarter of 2003, the
Company has written-off the unamortized balance in negative goodwill of
$851,859, less income tax as a cumulative effect of a change in accounting
principle.
The changes in the carrying amount of goodwill, which only affected the
Company's Outpatient Surgical Center segment as of February 28, 2003, are as
follows:
Negative
Goodwill Goodwill
-------- --------
Balance at August 31, 2002 $483,944 $851,859
Write-off of negative goodwill - 851,859
-------- --------
$483,944 $ -
======== ========
Net income and earnings per share for the three and six months ended February
28, 2003 and 2002 adjusted for goodwill amortization is as follows:
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Reported net income before cumulative
effect of a change in accounting principle
related to cessation of goodwill amortization $4,181,495 $3,542,027 $8,367,161 $6,919,642
Add back: Goodwill amortization - 8,833 - 17,667
Less: Tax effect of goodwill amortization - (3,357) - (6,714)
---------- ---------- ---------- ----------
Adjusted net income $4,181,495 $3,547,503 $8,367,161 $6,930,595
========== ========== ========== ==========
Basic earnings per share:
Reported net income before cumulative
effect of a change in accounting principle
related to cessation of goodwill amortization $ 0.28 $ 0.24 $ 0.56 $ 0.47
Add back: Goodwill amortization - - - -
Less: Tax effect of goodwill amortization - - - -
---------- ---------- ---------- ----------
Adjusted net income $ 0.28 $ 0.24 $ 0.56 $ 0.47
========== ========== ========== ==========
Diluted earnings per share:
Reported net income before cumulative
effect of a change in accounting principle
related to cessation of goodwill amortization $ 0.27 $ 0.24 $ 0.54 $ 0.47
Add back: Goodwill amortization - - - -
Less: Tax effect of goodwill amortization - - - -
---------- ---------- ---------- ----------
Adjusted net income $ 0.27 $ 0.24 $ 0.54 $ 0.47
========== ========== ========== ==========
Earnings Per Share
The reconciliation of the numerator and denominator used for the computation of
basic and diluted earnings per share is as follows:
Three Months Ended Six Months Ended
February 28, February 28,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Income Before cumulative effect of a
change in accounting principle $ 4,181,495 $ 3,542,027 $ 8,367,161 $ 6,919,642
Cumulative effect of a change in
accounting principle - - 528,153 -
----------- ----------- ----------- -----------
Net Income $ 4,181,495 $ 3,542,027 $ 8,895,314 $ 6,919,642
=========== =========== =========== ===========
Weighted-average common shares - diluted:
Weighted-average common shares - basic 14,871,621 14,781,959 14,853,439 14,781,959
Add: Effect of dilutive securities:
Employee stock options and stock grants 762,988 29,692 745,383 29,692
----------- ----------- ----------- -----------
Weighted-average common shares - diluted 15,634,609 14,811,651 15,598,822 14,811,651
=========== =========== =========== ===========
Basic earnings per common share
Income before cumulative effect of a
change in accounting principle $ 0.28 $ 0.24 $ 0.56 $ 0.47
Cumulative effect of a change in
accounting principle - - 0.04 -
----------- ----------- ----------- -----------
Net Income $ 0.28 $ 0.24 $ 0.60 $ 0.47
=========== =========== =========== ===========
Diluted earnings per common share
Income before cumulative effect of a
change in accounting principle $ 0.27 $ 0.24 $ 0.54 $ 0.47
Cumulative effect of a change in
accounting principle - - 0.03 -
----------- ----------- ----------- -----------
Net Income $ 0.27 $ 0.24 $ 0.57 $ 0.47
=========== =========== =========== ===========
Asset Acquisition from Vista Diagnostic Center
During the six months ended February 28, 2003, the Company acquired assets
valued at approximately $471,000 from Vista Diagnostic Center ("VDC"), an
unrelated company which provided laboratory and x-ray services at Vista
Healthcare, Inc, the outpatient surgical facility and Vista Hospital, both
located at Pasadena, Texas. Vista Hospital did not acquire any interest in VDC,
nor did VDC ever have an interest in Vista Hospital. The assets included
primarily medical and diagnostic equipment as well as furniture and fixtures.
The consideration paid for this purchase was equal to the fair value of the
assets at the purchase date, and as such no goodwill was recorded by the Company
related to this transaction. In connection with the asset acquisition, the
Company also assumed certain operating leases related to medical equipment and
is committed to long-term lease obligations of $719,703 for the next 17 months
and $229,500 for an additional
31 months. The Company has begun using the newly acquired assets to provide
laboratory and x-ray services at the Vista Hospital facility and has
discontinued the services of VDC.
Determination of Net Patient Service Revenue and Contractual Adjustments
Net patient service revenue is reported at the estimated net realizable amounts
from patients, third-party payors, and others for services rendered. Allowances
for contractual discounts on services or adjustments for non-covered costs and
expenses are estimated and recognized in the period in which the related
services are provided. Allowances for doubtful accounts are determined by
management based upon historical experience and an assessment of the
circumstances applicable to individual accounts.
Bad Debt Expense and Allowance for Doubtful Accounts
As with any healthcare provider, some accounts receivable will ultimately prove
uncollectible, primarily due to the inability of patients to satisfy their
financial obligations. Since substantially all admissions are pre-certified or
pre-authorized from third party payors, bad debt reserve is nominal.
Segment and Related Information
The Company has three reportable segments: surgical hospital, outpatient
surgical center, and corporate and management services. The surgical hospital
segment is comprised of two hospitals that provide a wide range of medical
services including major surgical cases, which require hospitalization. The
outpatient surgical center segment provides outpatient surgical facilities,
contracted x-ray diagnostic services and full service laboratory testing. The
corporate and management services segment holds all of the fixed assets of the
surgical hospital and the outpatient surgical center segments, provides office
space and fee-based management services to physicians, and encompasses all other
operations of the Company.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses.
The Company accounts for intersegment sales and expenses as if the sales or
transfers were to third parties, that is, at current market prices. All
intersegment eliminations have been made in the table below. The Company's
reportable segments are business units that offer different services. They are
managed separately because each business requires different technology and
marketing strategies.
During the six months ended February 28,2003, Vista Healthcare, Inc. ceased all
operations including the surrender of its lease at the Pasadena, Texas location.
Vista Hospital entered into a lease that included the space that Vista
Healthcare, Inc previously occupied and leased, and Vista Hospital purchased
inventory valued at cost of $137,000 from Vista Healthcare, Inc. Vista Hospital
received state approval to incorporate this newly leased space under its
hospital license. The transaction did not have any impact on the consolidated
balance sheet or income statement. The summarized financial information provided
below for the three and six months ended February 28, 2003 and 2002,
respectively has been shown on a proforma basis to reflect the changes related
to the transaction.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months ended February 28, 2003 and
2002, respectively:
Outpatient Corporate and
Surgical Surgical Management
Hospital Center Services Total
----------- ------------ --------------- ---------
2003
Revenues-external $20,392,614 $ 741,254 $ 87,173 $21,221,041
Intersegment revenues 1,650,000 846,485 3,360,820 5,857,305
Segment assets 25,656,635 6,554,006 41,311,035 73,521,676
Segment profit 6,810,248 34,387 (1,578,545) 5,266,090
2002
Revenues-external $14,391,906 $ 211,550 $ 396,396 $14,999,852
Intersegment revenues - - 3,946,136 3,946,136
Segment assets 22,381,643 1,792,805 18,487,578 42,662,026
Segment profit 3,778,917 365,172 (95,428) 4,048,661
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the six months ended February 28, 2003 and
2002, respectively:
Outpatient Corporate and
Surgical Surgical Management
Hospital Center Services Total
----------- ----------- ------------- -----------
2003
Revenues-external $37,373,818 $ 1,694,285 $ 192,397 $39,260,500
Intersegment revenues 1,940,000 1,035,287 6,644,352 9,619,639
Segment assets 25,656,635 6,554,006 41,311,035 73,521,676
Segment profit 12,380,905 124,788 (1,782,277) 10,723,416
2002
Revenues-external $26,588,170 $ 1,146,437 $ 1,063,625 $28,798,232
Intersegment revenues - - 8,287,042 8,287,042
Segment assets 22,381,643 1,792,805 18,487,578 42,662,026
Segment profit 6,631,138 339,380 986,390 7,956,908
The following table provides a reconciliation of the reportable segments'
revenues and profit to the consolidated totals for the three and six months
ended February 28, 2003 and 2002, respectively.
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
- --------
Total revenues for reportable segments $21,221,041 $14,999,852 $39,260,500 $28,798,232
Less: Rent and other income (93,534) (35,272) (199,067) (85,693)
----------- ----------- ----------- -----------
Consolidated net patient revenue $21,127,507 $14,964,580 $39,061,433 $28,712,539
=========== =========== =========== ===========
Profit:
- ------
Total profit for reportable segments $ 5,266,090 $ 4,048,661 $10,723,416 $ 7,956,908
Elimination of minority interests (1,084,595) (506,634) (1,828,102) (1,037,266)
----------- ----------- ----------- -----------
Consolidated net income $ 4,181,495 $ 3,542,027 $ 8,895,314 $ 6,919,642
=========== =========== =========== ===========
Assets:
- ------
Total assets for reportable segments $73,521,676 $42,662,026 $73,521,676 $42,662,026
Less: Intersegment assets (7,311,012) (2,327,084) (7,311,012) (2,327,084)
----------- ----------- ----------- -----------
Consolidated total assets $66,210,664 $40,334,942 $66,210,664 $40,334,942
=========== =========== =========== ===========
Contingencies
In January 2002, the Company and two of its officers were named as defendants in
a shareholder class action lawsuit in the United States District Court for the
Southern District of Texas alleging violations of federal securities laws and
regulations. The putative class covers those persons who purchased the Company's
shares between November 29, 1999 and January 16, 2002. The various complaints
that have been consolidated claim that the Company violated Sections 10(b) and
20(a) and Rule 10b-5 under the Securities Exchange Act of 1934 (the "Exchange
Act") by making materially false or misleading statements or omissions regarding
revenues and receivables and regarding whether our operations complied with
various federal regulations. The district court has consolidated these actions
and appointed a lead plaintiff in the matter. The lead plaintiff filed a
consolidated amended complaint on September 6, 2002. The Company and the
officers moved to dismiss the complaint on February 25, 2003. Plaintiffs have
not yet filed their response to that motion. Because no discovery can take place
unless and until the case survives the motion to dismiss, this action remains at
an early stage. The Company intends to defend these claims vigorously.
In March 2002, the Company accepted service of a shareholder derivative action
brought in the 295th District Court of Harris County, Texas brought on behalf of
the Company against its officers and directors, outside auditor, and investment
bank, and two analysts affiliated with that investment bank. The suit alleges
breach of fiduciary duty, aiding and abetting breach of fiduciary duty,
negligence and breach of contract. Plaintiff makes general allegations of the
defendants' alleged misconduct in "(i) causing or allowing the Company to
conduct its business in an unsafe, imprudent and unlawful manner; (ii) failing
to implement and maintain an adequate internal control system; and (iii)
exposing the Company to enormous losses," including allegations that various
press releases and/or public statements issued between January 1999 and January
2002 were misleading. Plaintiffs further allege sales by the Company's insiders
while in possession of material non-public information. The plaintiffs made no
demand on either the Company or its Board of Directors prior to filing suit. A
separate action was brought in United States District Court for the Southern
District of Texas making similar allegations in federal court against only
officers and directors of the Company. The plaintiff in this action also did not
make a demand to the Company prior to filing suit. Another derivative suit
making similar allegations was filed in 152nd District Court of Harris County,
Texas; however, at the plaintiff's request, the Court dismissed that action.
The Board of Directors has appointed a Special Litigation Committee to conduct
an investigation and make a determination as to how the Company should proceed
on the claims asserted in the state-court shareholder derivative case. On
February 24, 2003, the Special Litigation Committee adopted a resolution
directing the Company's counsel to seek dismissal of the state-court derivative
action. The Company has filed a motion to dismiss, but it has not yet been set
for hearing. The federal-court derivative lawsuit has been stayed pending
resolution of the shareholder class action suit described earlier. The
derivative matters, if they proceed, do not seek to recover any damages from the
Company, but may expose the company to bearing some unknown legal or indemnity
costs.
From time to time, the Company is involved in litigation incidental to its
business. In the Company's opinion, no litigation to which the Company is
currently a party is likely to have a material adverse effect on the Company's
results of operations, cash flows, or financial condition.
On January 21, 2003, the Company announced a stock dividend of one Dynacq share
of non-transferable Series A Preferred stock for every full block of 100 shares
of Dynacq common stock payable to shareholders of record at the close of
business on February 10, 2003. Holders of the non-transferable Series A
Preferred stock dividend can decide to have Dynacq redeem the Series A Preferred
stock at a price equal to the closing price per share of the Company's common
stock on January 21, 2003, which was $14.50, commencing 90 days after the record
date of February 10, 2003 and expiring 120 days after the record date of
February 10,
2003. Or, if the holder chooses instead to hold the Series A Preferred stock
dividend longer, it will automatically convert on a 1-to-1 basis to common stock
120 days after the record date of February 10, 2003. The Company's executive
officers and directors have all agreed to convert into common stock any
preferred shares they receive from this dividend, and will not exercise the cash
option. Due to the uncertainty related to calculating the number of shareholders
who will elect the cash option, and the related shares, the Company has recorded
the transaction as a stock dividend for the quarter ended February 28, 2003. If
owners of all the outstanding shares, excluding Company's executive officers and
directors elect the cash option, the company estimates a cash dividend payable
of approximately $786,000 to be paid between May 10, 2003 and June 10, 2003,
after which the preferred shares will be converted to the Company's common
stock.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information
Statements contained in this Quarterly Report on Form 10-Q, which are not
historical facts, are forward-looking statements. Without limiting the
generality of the preceding statement, all statements in this Form 10-Q
concerning or relating to estimated and projected earnings, margins, costs,
expenditures, cash flows, growth rates and financial results are forward-looking
statements. In addition, the Company, through its management, from time to time
makes forward-looking public statements concerning our expected future
operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting our best judgment based upon
current information, involve a number of risks and uncertainties and are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. There can be no assurance that other factors will not affect
the accuracy of such forward-looking statements or that our actual results will
not differ materially from the results anticipated in such forward-looking
statements. While it is impossible to identify all such factors, factors which
could cause actual results to differ materially from those estimated by us
include, but are not limited to, changes in the regulation of the healthcare
industry at either or both of the federal and state levels, changes or delays in
reimbursement for our services by third-party payors, competitive pressures in
the healthcare industry and our response thereto, our ability to obtain and
retain favorable arrangements with third-party payors, general conditions in the
economy and capital markets, and other factors which may be identified from time
to time in our Securities and Exchange Commission filings and other public
announcements.
Overview
Historically, the Company has derived revenue from various business operations,
including, emergency and inpatient surgical operations, clinic and outpatient
surgical operations, and corporate and management services. Revenues derived
from the Company's surgical hospital and outpatient surgical facilities consist
primarily of facility and service fees. These fees do not include charges from
the patient's physicians, which are billed directly by the physician. Corporate
and management services involve the leasing of equipment and facilities,
providing fee-based management services for physicians and all other operations
of the hospital. The Company aligns its operations among three reportable
segments: surgical hospital, outpatient surgical centers, and corporate and
management services.
The Company's business strategy is to focus on the operation and development of
surgical specialty hospitals, which provide a variety of surgical services. The
Company's current operations include:
. the ownership of 90 percent of Vista Hospital, a surgical hospital;
. the ownership of 100 percent of Vista West, an outpatient surgical
facility; and
. the ownership of 83 percent of a newly developed surgical hospital in
Baton Rouge, Louisiana, opened in January 2003.
During the six months ended February 28, 2003, the Company received state
approval to consolidate the outpatient surgical facilities into the Vista
Hospital operating license, thereby increasing the number of rooms that can be
utilized by the Vista Hospital. As such, the Company expects that revenues from
its outpatient surgical services will decrease during the fiscal year ending
August 31, 2003, as compared with prior periods, as operating rooms previously
utilized for such procedures are now available to be utilized for inpatient
surgical procedures. In addition the Company opened its new surgical hospital in
Baton Rouge, Louisiana, on January 27, 2003. Accordingly, it is expected that
the surgical hospital business will generate a majority of the Company's revenue
during Fiscal 2003. The Company believes that this segment of operations
presents the best opportunity for growth.
For the three and six months ended February 28, 2003, approximately 96 percent
and 95 percent of the Company's revenue resulted from its surgical hospital
activities, 3 percent and 4 percent from its outpatient surgical center, and 1
percent and 1 percent from other activities, which include corporate and
management services, respectively. For the three and six months ended February
28, 2002, 96 percent and 92 percent of the Company's revenue resulted from its
surgical hospital activities, 1 percent and 4 percent from its outpatient
surgical center activities, and 3 percent and 4 percent from other activities,
which include corporate and management services, respectively.
The Company's new hospital in Baton Rouge, Louisiana was operational for about
five weeks of the quarter ended February 28, 2003 with operating revenues of
$584,000 versus $2,219,000 in start-up and operating expenses for the quarter.
The increase in operating expenses were primarily due to employee costs and
consultancy services incurred to facilitate the opening and subsequent
operations of the new hospital. This is also reflected in the increase in the
Company's wages and benefits and other operating expenses, which increased by 75
percent and 54 percent, respectively, in the quarter ended February 28, 2003
compared to that of February 28, 2002. As anticipated revenue flow begins to
exceed the expenses, the Company expects this hospital to positively impact
future earnings.
Critical Accounting Policies
There have been no changes to the critical accounting policies used in our
reporting of results of operations and financial position. For a discussion of
our critical accounting policies see Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Form 10-K for the fiscal
year ended August 31, 2002.
Results of Operations
Comparison of the Three Months Ended February 28, 2003 and 2002
Net revenue for the three months ended February 28, 2003 increased $6,163,000 or
41 percent from that of the corresponding previous three months ended February
28, 2002. Net revenues from the Company's surgical hospital activities increased
to $20,393,000 during the three months ended February 28, 2003 from $14,392,000
during the three months ended February 28, 2002, the result of an increase in
surgical cases from Fiscal 2002. During the three months ended February 28, 2003
there was an increase of 18 percent in inpatient procedures and an increase of 4
percent in patient days compared to that of the three months ended February 28,
2002. Net revenues in the Company's outpatient surgical center increased to
$741,000 during the three months ended February 28, 2003 from $212,000 during
the three months ended February 28, 2002, primarily due to the increase in
outpatient surgical cases. Corporate and management services revenue decreased
to $87,000 during the three months ended February 28, 2003 from $396,000 during
the three months ended February 28, 2002 primarily due to a decrease in
activities related to the ambulatory infusion therapy services and the decrease
in physician management practices. The overall increase in the net revenue for
the three months ended February 28, 2003 is the result of the
Company's primary focus on expanding its surgical hospital operations.
Management's current strategy is to continue to focus on this operating segment
during Fiscal 2003.
For the three months ended February 28, 2003, total costs and expenses increased
by $3,990,000 or 44 percent from the three months ended February 28, 2002. The
increase is primarily due to significant increases in the surgical hospital
activities combined with the opening of the new hospital in Baton Rouge,
Louisiana.
The significant increases in the component expense categories of the operating
expenses for the three months ended February 28, 2003 are as follows:
. Compensation and benefits expense increased by $1,406,000 or 75
percent from the three months ended February 28, 2002. The increase is
primarily due to the significant increase in surgical activities and
the opening of the new hospital in Baton Rouge, Louisiana which
required increased hospital staffing and supporting employees both at
Baton Rouge and at the corporate level.
. Medical services and supplies increased by $254,000 or 8 percent from
the three months ended February 28, 2002, primarily due to the
increase in surgical activities compared to the three months ended
February 28, 2002.
. Other operating expenses increased by $2,092,000 or 54 percent from
the three months ended February 28, 2002. The increase is primarily
due to the significant increase in activities at the Company's
hospitals, including the new hospital in Baton Rouge, Louisiana, as
well as an increase in general corporate activity compared to such
activities in the three months ended February 28, 2002.
Comparison of the Six Months Ended February 28, 2003 and 2002
Net revenue for the six months ended February 28, 2003 increased $10,349,000 or
36 percent from that for the corresponding previous six months ended February
28, 2002. Net revenues from the Company's surgical hospital activities increased
to $37,374,000 during the six months ended February 28, 2003 from $26,588,000
during the six months ended February 28, 2002, the result of an increase in
surgical cases from Fiscal 2002. During the six months ended February 28, 2003
there was an increase of 40 percent in inpatient procedures and an increase of
13 percent in patient days compared to that of the six months ended February 28,
2002. Net revenues in the Company's outpatient surgical centers increased to
$1,694,000 during the six months ended February 28, 2003 from $1,146,000 during
the six months ended February 28, 2002, primarily due to the increase in
outpatient surgical cases. Corporate and management services revenue decreased
to $192,000 during the six months ended February 28, 2003 from $1,064,000 during
the six months ended February 28, 2002 primarily due to a decrease in activities
related to the ambulatory infusion therapy services and the decrease in
physician management practices.
For the six months ended February 28, 2003, total costs and expenses increased
by $6,317,000 or 37 percent from the six months ended February 28, 2002. The
increase is primarily due to significant increases in the surgical hospital
activities and combined with the opening of the new hospital in Baton Rouge,
Louisiana. The significant increases in the component expense categories of the
operating expenses are as follows:
. Compensation and benefits expense increased by $2,119,000 or 55
percent from the six months ended February 28, 2002. The increase is
primarily due to the significant increase in surgical activities which
required increased hospital staffing and supporting employees at the
corporate level.
. Medical services and supplies increased by $1,108,000 or 21 percent
from the six months ended February 28, 2002, primarily due to the
increase in surgical activities.
. Other operating expenses increased by $2,750,000 or 37 percent from
the six months ended February 28, 2002. The increase is primarily due
to the significant increase in activities at the Company's facilities
including Baton Rouge, Louisiana, as well as an increase in general
corporate activity.
Liquidity and Capital Resources
The Company maintained sufficient liquidity in Fiscal 2003 to meet its business
needs. As of February 28, 2003, its principal source of liquidity included
$4,932,000 in cash and cash equivalents, of which $4,832,000 is invested in
money market accounts. These instruments are short-term, highly liquid
instruments and, accordingly, their fair value approximates cost.
Cash flow from operating activities provided $11,867,000 and $6,333,000 in the
six months ended February 28, 2003 and 2002, respectively. The primary
contributor to the change in cash flow provided by operating activities is the
increase in accrued liabilities of $5,004,000 and $551,000, partially offset by
an increase in accounts receivable of $2,134,000 and $266,000, and an increase
in income taxes receivable of $1,184,000 and a decrease in income tax payable of
$2,258,000 for the six months ended February 28, 2003 and 2002, respectively.
The net income of $8,895,000 and $6,920,000 included non-cash charges for
depreciation and amortization of $838,000 and $594,000 and minority interest of
$1,828,000 and $1,037,000 for the six months ended February 28, 2003 and 2002,
respectively. The net income for the six months ended February 28, 2003 also
included a non-cash benefit of approximately $528,000, net of taxes related to
the write-off of the unamortized negative goodwill, which was recognized as a
cumulative effect of a change in accounting principle in the six months ended
February 28, 2003.
Cash of $15,105,000 and $2,493,000 was used in investing activities in the six
months ended February 28, 2003 and 2002, respectively. For the six months ended
February 28, 2003, the Company expended approximately $3,361,000 for the
construction of its newly developed surgical hospital in Baton Rouge, Louisiana
and $484,000 towards improvements at its hospital facility in Pasadena, Texas.
The Company expended $491,000 and $428,000 for leasehold improvements at the new
hospital in Baton Rouge and at its facilities in Texas, respectively. The
Company also used cash of approximately $5,476,000 and $993,000 for medical
equipment and furniture and fixtures at the Vista Hospital facility in Baton
Rouge and Pasadena, respectively. In addition, the Company expended cash of
$1,700,000 and $2,100,000 to purchase land in North Houston and in Slidell,
Louisiana, respectively.
Cash of $586,000 was provided and cash of $2,550,000 was used in financing
activities in the six months ended February 28, 2003 and 2002, respectively.
During the six months ended February 28, 2003, the Company received cash of
$279,000 from the exercise of stock options. The Company used $39,000 in the six
months ended February 28, 2003 to repay the outstanding principal balances
related to long-term debt. As of February 28, 2003, the Company has no
outstanding balance related to its long-term debt. Other increases in cash flow
from financing activities in the six months ended February 28, 2003 included
contributions from minority interest of $946,000, offset by distributions to
minority interest of $600,000.
The Company had working capital of $26,850,000 as of February 28, 2003, and
maintained a liquid position evidenced by a current ratio of approximately 4.5
to 1. The Company expects to continue to have positive cash flow from operations
for Fiscal 2003.
The Company is actively targeting opportunities to expand in the surgical
hospital market through the acquisition of existing facilities or the
construction of new facilities. During the six months ended February 28, 2003,
the Company has invested approximately $1,700,000 and $2,100,000 to purchase
land in North Houston and in Slidell, Louisiana, respectively, and has signed
other option agreement to purchase additional land in Texas. The Company used
its available cash funds to finance these transactions. The Company's management
believes that available cash funds and funds generated from operations will be
sufficient for the Company to finance working capital requirements for the
current fiscal year. The Company has a reducing revolving line of credit with a
financial institution. The line is reduced monthly by an amount equal to
1/180th of the original loan amount. The amount available under the line of
credit at February 28, 2003 is $6,660,000. The interest rate on the line of
credit is a variable rate of 2.3% plus the "Dealer Commercial Paper" rate. The
line of credit is secured by the land and buildings in Pasadena, Texas and the
contents therein. There were no borrowings outstanding under the credit facility
as of February 28, 2003. The Company believes it has the ability to borrow
additional funds if necessary to meet its capital needs. However, there can be
no assurance that the Company will have sufficient funds available to meet all
of its capital needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates as well as credit risk concentrations. All of the Company's
contracts are denominated in US$ and, therefore, the Company has no foreign
currency risk.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to the Company's reducing revolving credit facility.
There were no borrowings outstanding under the credit facility as of February
28, 2003. Borrowings under the credit facility bear interest at variable rates
based on the "dealer commercial paper" rate plus 2.3%. As no borrowings have
been made against the credit facility, an interest rate change would not have
any current impact on the Company's results of operations.
The Company's cash and cash equivalents are invested in money market accounts.
Accordingly, the Company is subject to changes in market interest rates.
However, the Company does not believe a change in these rates would have a
material adverse effect on the Company's operating results, financial condition,
and cash flows. There is an inherent roll over risk on these funds as they
accrue interest at current market rates. The extent of this risk is not
quantifiable or predictable due to the variability of future interest rates.
Credit Risks
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of trade receivables from various private insurers. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses, but does not require collateral from these parties.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses, and therefore
there were no corrective actions taken.
PART II. OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
See "Item 1. - Financial Statements - Contingencies." Except as modified in this
quarterly report, pursuant to Rule 12b-23, the Company incorporates by reference
the information set forth in "Item 3. Legal Proceedings" of its Form 10-K for
the fiscal year ended August 31, 2002.
ITEM 2. - CHANGES IN SECURITIES
None
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on February 12, 2003, in
which it:
(a) Re-elected its current directors; Chiu M. Chan, Philip S. Chan, Earl
R. Votaw, Stephen L. Huber, and Ping S. Chu. The foregoing slate of
directors received following votes:
For Against Withheld
---------- ------- --------
Chiu M. Chan 12,898,197 - 52,170
Philip S. Chan 12,898,147 - 52,220
Earl R. Votaw 12,927,108 - 23,259
Stephen L. Huber 12,917,608 - 32,759
Ping S. Chu 12,928,308 - 22,059
(b) Ratified the appointment of its auditors Ernst & Young, LLP by the
following vote: 12,931,132 votes for, 18,400 votes against, and 835
abstentions or broker non-votes.
ITEM 5. - OTHER INFORMATION
None
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNACQ INTERNATIONAL, INC.
DATE: April 14, 2003 BY: /S/ PHILIP S. CHAN
----------------------
Philip S. Chan
VP-Finance/Treasurer &
Chief Financial Officer
CERTIFICATIONS
I, Chiu M. Chan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynacq International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ CHIU M. CHAN
- -------------------------------------
Chiu M. Chan, Chief Executive Officer
I, Philip S. Chan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dynacq International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ PHILIP S. CHAN
- ---------------------------------------
Philip S. Chan, Chief Financial Officer