Back to GetFilings.com
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 May 31, 2002
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 .
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 June 15, 2002
Common Stock, $0.001 par value 14,831,100 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
(Unaudited) (Audited)
ASSETS
MAY 31 AUGUST 31
2001 2001
------------ ------------
CURRENT ASSETS:
Cash and Cash equivalents $ 6,662,033 $ 5,031,614
Receivables (Net of Allowance for $ 21,314,332 $ 18,993,648
Doubtful Accounts)
Inventory $ 471,767 $ 511,248
Prepaid expenses $ 215,298 $ 109,993
Due from related parties $ 1,585,000
Deferred tax assets $ 71,000 $ 71,000
------------ ------------
Total Current Assets $ 28,734,430 $ 26,302,503
FIXED ASSETS, NET $ 14,881,017 $ 10,497,730
OTHER ASSETS, NET $ 240,505 $ 130,890
------------ ------------
TOTAL ASSETS $ 43,855,952 $ 36,931,123
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 1,109,962 $ 798,787
Accrued Liabilities $ 1,072,590 $ 725,412
Current Maturities of Long-Term Debt $ 67,426 $ 228,697
Income Taxes Payable $ 3,246,620
------------ -------------
TOTAL CURRENT LIABILITIES $ 2,249,978 $ 4,999,516
LONG-TERM DEBT, NET OF CURRENT MATURITIES $ 519,075
DEFERRED INCOME TAXES PAYABLE $ 29,000 $ 29,000
NEGATIVE GOODWILL, NET $ 282,581 $ 332,581
MINORITY INTERESTS IN SUBSIDIARIES $ 2,382,724 $ 3,505,769
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 Par Value, 5,000,000 Shares Authorized,
None Issued or Outstanding Commom Stock, $0.001 Par Value,
300,000,000 Shares Authorized, after 8 to 1 and 4 to 1 Reverse Stock Splits &
100% Stock Dividends on 1/10/2000 and 3/12/2001,
16,488,195 Shares Issued and 14,823,100 Shares Outstanding $ 16,488 $ 16,266
Additional Paid In Capital $ 7,700,344 $ 6,690,042
Retained Earnings $ 33,492,251 $ 22,445,443
Treasury Stock: 1,665,095 shares at cost $ (1,959,412) $ (1,190,507)
Deferred compensation $ (338,002) $ (416,062)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 38,911,669 $ 27,545,182
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,855,952 $ 36,931,123
============ ============
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
5/31/2002 5/31/2001 5/31/2002 5/31/2001
------------ ------------ ------------ ------------
NET REVENUES (net of contractual adjustments) $ 19,621,751 $ 12,778,986 $ 48,512,575 $ 31,470,925
LESS EXPENSES:
Wages and benefits $ 2,299,201 $ 1,673,649 $ 6,122,792 $ 3,907,529
Medical supplies $ 4,792,399 $ 3,182,469 $ 11,504,442 $ 6,555,235
General and administrative $ 3,857,604 $ 1,456,746 $ 8,192,191 $ 4,173,705
Professional fees $ 427,150 $ 636,496 $ 1,322,209 $ 1,537,490
Rent, lease and occupancy $ 681,869 $ 383,482 $ 1,451,776 $ 892,130
Bad debt expense $ 175,551 $ 59,796 $ 305,574 $ 94,546
Depreciation & amortization $ 355,827 $ 232,545 $ 949,684 $ 632,994
Interest $ 9,853 $ 15,012 $ 26,806 $ 47,285
------------ ------------ ------------ ------------
Total Expenses $ 12,599,454 $ 7,640,195 $ 29,875,474 $ 17,840,914
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES & MINORITY INTERESTS $ 7,022,297 $ 5,138,791 $ 18,637,101 $ 13,630,011
PROVISION FOR INCOME TAXES $ 2,230,442 $ 1,422,640 $ 5,888,338 $ 3,950,238
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTERESTS $ 4,791,855 $ 3,716,151 $ 12,748,763 $ 9,679,773
MINORITY INTERESTS $ (664,690) $ (933,534) $ (1,701,956) $ (2,108,818)
------------ ------------ ------------ ------------
NET INCOME $ 4,127,165 $ 2,782,617 $ 11,046,807 $ 7,570,955
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.20 $ 0.75 $ 0.53
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.19 $ 0.73 $ 0.53
WEIGHTED AVERAGE COMMON SHARES-BASIC 14,797,989 14,256,832 14,797,989 14,256,832
WEIGHTED AVERAGE COMMON SHARES-DILUTED 15,057,681 14,406,918 15,057,681 14,406,918
(1) (2) (1) (2)
(1) AS ADJUSTED 100% STOCK DIVIDEND EFFECTIVE 3/12/2001.
(2) COMMON SHARES PRESENTED IN THE CORRESPONDING QUARTER OF THE PREVIOUS YEAR
IN COMPUTING THE EARNINGS PER SHARE ARE RESTATED AS IF THE 2 FOR 1 STOCK
SPLIT EFFECTED IN THE FORM OF A 100% STOCK DIVIDEND ON JANUARY 10, 2000 &
MARCH 12, 2001 HAD BEEN RETROACTIVELY APPLIED FOR COMPARISON PURPOSES.
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31
(UNAUDITED)
2002 2002
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
Net Income $ 11,046,807 $ 7,570,955
ADD: ITEMS NOT REQUIRING CASH:
Depreciation $ 949,684 $ 632,994
Minority Interests $ 1,701,956 $ 2,058,818
Deferred compensation amortization $ 78,060 $ -
Adjustments to reconcile net income
to net cash provided by operating activities:
(Increase) Decrease in Accounts Receivable $ (2,320,684) $ (7,121,827)
(Increase) Decrease in Inventory $ 39,481 $ (25,510)
(Increase) Decrease in Prepaid expenses $ (105,305)
Increase (Decrease) in Accounts Payable $ 311,175 $ (819,231)
Increase (Decrease) in Accrued Liabilities $ 347,178 $ 188,408
Increase (Decrease) in Income Taxes Payable $ (3,246,620) $ 618,451
------------ ------------
Net Cash Provided by Operating Activities $ 8,801,732 $ 3,103,058
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets $ (5,332,971) $ (1,214,370)
Due from related party $ 1,585,000
(Decrease) Increase of Other Assets $ (109,615) $ (1,150,072)
------------ ------------
Net Cash (Used) by Investing Activities $ (3,857,586) $ (2,364,442)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Retirements of Long -Term Debt, Net $ (680,346) $ (220,050)
Issuance of Common Stock $ 1,360,524 $ 1,100,229
Acquisition of Treasury Stock, Net $ (768,905) $ (48,961)
Reduction of Negative Goodwill $ (50,000)
Purchase of minority interests $ (590,000)
Distribution to Minority Interests $ (2,585,000)
------------ ------------
Net Cash Provided by Financing Activities $ (3,313,727) $ 831,218
------------ ------------
Net Increase in Cash and Cash Equivalents $ 1,630,419 $ 1,569,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 5,031,614 $ 4,301,523
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,662,033 $ 5,871,357
============ ============
DYNACQ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2002
(UNAUDITED)
Notes to Consolidated Financial Statements
Basis of presentation
The accompanying unaudited financial statements have been prepared by Dynacq
International, Inc. 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 (GAAP) 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, 2001. Operating results for the nine months
period ended May 31, 2002 are not necessarily indicative of the results that may
be expected for the year ending August 31, 2002.
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 four quarters,
management has focused on same store 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 May 31,
2002, the Company operated two locations in the Houston metropolitan area, a
medical center with inpatient and outpatient facilities located in Pasadena,
Texas and an outpatient surgery center located in Houston, Texas. In November of
2001, the Company purchased a hospital in Baton Rouge, Louisiana which is being
renovated as a surgical hospital expected to be operational in the winter of
2002. The Company continues to evaluate lease and purchase options of additional
surgical hospitals.
Use of estimates
The Company's unaudited quarterly consolidated financial statements are
prepared based on management's estimates, assumptions and judgments that are
believed to be reasonable under the circumstances for a fair presentation of
financial position and results of operations. Should the underlying estimates,
assumptions or judgments prove incorrect, the reported amounts could differ
materially in some cases with respect to particular items in the financial
statements.
Determination of net revenues, contractual adjustments
The Company's billings for services are predominately to third-party payors
and are subject to contractual adjustments. Consequently, our net revenues are
reported at estimated net realizable amounts from third-party payors. The
Company's provisions for contractual adjustments are based on management's
monthly review and analysis of historical collection rates.
2
Bad Debt Expense and Allowance for Doubtful Accounts
As with any healthcare provider, some of our accounts receivable will ultimately
prove uncollectible, primarily due to the inability of patients to satisfy their
financial obligations to us. Since substantially all of our admissions are
pre-certified or pre-authorized from third party payors, our bad debt reserve is
nominal.
Minority Interests
In May 1998, the Company through its wholly-owned subsidiary DPMI organized
Vista Community Medical Center, L.L.C. to operate a hospital adjacent to its
outpatient surgical center in Pasadena, Texas. The Company funded over
$5,000,000 from its cash flow to complete the construction and equip the
hospital in May 1999 and DPMI and Halcyon collectively invested $1,200,000 in
Vista Community Medical Center, L.L.C. From its inception and through August 31,
2001, Vista Medical was owned 70% by DPMI and 30% by Halcyon L.L.C. In September
2001, pursuant to its contractual right, the Company purchased two-thirds of
Halcyon's interest for $240,000, reducing Halcyon's interest to 10%.
The Company has distributed $1,385,000 and $900,000 as profit distributions to
Halcyon for its 30% ownership interest in the Hospital operations for the period
from inception through August 31, 2001 and 10% ownership interest in the
Hospital operations for the nine months ended May 31, 2002, respectively. As of
August 31, 2001, the `Due from related parties' account in the Balance Sheet had
a balance of $1,585,000 which included $1,385,000 advance to Halcyon from
October, 1999 through August, 2001 and was treated as profit distributions to
Halcyon by reducing both the `Due from related parties' account and the
`minority interests liability' account for the same amount in this period. The
payment of buy back price of $240,000 and the advance of $900,000 to Halcyon in
the first nine months of the current fiscal year were booked as return of
capital and profit distributions to Halcyon by reducing both the `Due to related
parties' account and `minority interest liability' account for $1,140,000 in
this period. Halcyon will continue to receive its proportionate share of profit
distributions from the hospital and will reduce the Company's minority interests
liability owed to Halcyon.
In March 2001, the Company through its wholly-owned subsidiary DPMI organized
Vista Surgical Center West, L.L.C., hereinafter known as "Vista West" to operate
a outpatient surgical center in Houston, Texas. From its inception and through
April 2002, Vista West was owned 70% by DPMI and 30% by Piney Point Associates,
L.L.C. The Company has distributed $200,000 and $100,000 as profit distribution
to Piney Point Associates L.L.C. for its 30% ownership interest in Vista
Surgical Center West, L.L.C. operations for the period from inception through
August 31, 2001 and eight months ended April 30, 2002, respectively. In May
2002, pursuant to contractual right, the Company purchased all Piney Point
Associates's interest for $350,000.
Segment and related information
The Company has three reportable segments: surgical hospital, outpatient
surgical centers, and other. The surgical hospital segment is comprised of a
four surgical suites hospital and provide a wide range of ancillary medical
services located at 4301 Vista Road in Pasadena, Texas. The outpatient surgical
centers segment provides outpatient surgical facilities, which include two
centers; one located at 4301 Vista Road in Pasadena, Texas and the other one
located at 2500 Fondren in Houston, Texas, both of which have a total of six
surgical suites, contracted x-ray diagnostic services and laboratory testing.
The Other segment includes property and equipment, which holds of all the fixed
assets of the outpatient surgical centers segment and the surgical hospital
segment, physician practice management, and infusion therapy both of which no
longer constitute the core business of the Company.
The Company's reportable segments are business units that offer different
services. They are managed separately because each business requires different
technology, marketing strategies and performance evaluations.
3
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months ended May 31, 2002 and May 31,
2001, respectively:
Outpatient
Surgical Surgical
Hospital Centers Other Total
------------ -------------- ------------ -------------
2002
Revenues-external $ 15,843,875 $ 3,358,650 $ 355,771 $ 19,558,296
Intersegment revenues 0 0 4,527,622 4,527,622
Segment assets 20,847,513 7,643,053 20,637,068 49,127,634
Segment profit 4,812,966 (465,945) 621,386 4,968,407
2001
Revenues-external $ 7,123,336 $ 4,708,321 $ 858,898 $ 12,690,555
Intersegment revenues 0 0 4,082,482 4,082,482
Segment assets 12,260,093 14,309,956 29,489,546 56,059,595
Segment profit 2,768,167 1,078,764 608,603 4,455,534
Summmarized financial information concerning the Company's reportable segments
is shown in the following table for the nine months ended May 31, 2002 and May
31, 2001, respectively:
Outpatient
Surgical Surgical
Hospital Centers Other Total
------------- -------------- ------------ -----------
2002
Revenues-external $36,229,675 $10,814,696 $ 1,312,158 $48,356,529
Intersegment revenues 0 0 12,814,663 12,814,663
Segment assets 20,847,513 7,643,053 20,637,068 49,127,634
Segment profit 10,903,976 482,517 1,481,602 12,868,095
2001
Revenues-external 15,351,729 13,431,837 2,449,370 31,232,936
Intersegment revenues 0 0 12,538,077 12,538,077
Segment assets 12,260,093 14,309,956 29,489,546 56,059,595
Segment profit 6,564,315 2,781,547 2,008,333 11,354,195
The following table provides a reconciliation of the reportable segments'
revenues and profit to the consolidated totals for three months and nine months
ended May 31, 2002 and May 31, 2001, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
5/31/2002 5/31/2001 5/31/2002 5/31/2001
------------ ----------- ------------ ------------
REVENUES
- --------
Total revenues for reportable segments 19,558,296 12,690,555 48,356,529 31,232,936
Interest income 83,808 113,575 220,789 316,804
Elimination of intersegment interest
income (20,353) (25,144) (64,743) (78,815)
----------- ----------- ----------- -----------
Consolidated total revenues 19,621,751 12,778,986 48,512,575 31,470,925
PROFIT:
- -------
Total profit for reportable segments $ 4,968,407 $ 4,455,534 $12,868,095 $11,354,195
Elimination of intersegment income (176,552) (739,383) (119,332) (1,674,422)
Elimination of minority interests (664,690) (933,534) (1,701,956) (2,108,818)
----------- ----------- ----------- -----------
Consolidated net income $ 4,127,165 $ 2,782,617 $11,046,807 $ 7,570,955
4
Contingencies
The Company and its wholly owned subsidiary, Doctors Practice Management,
Inc. sued Benchmark, an architectural corporation, general contractors,
engineers, and some sub-contractors in the 151/st/ Judicial District Court of
Harris County, Texas for fraud, negligence, breach of contract, loss of profits
and/or goodwill, and punitive damages arising out of certain construction
defects in connection with the completion and remodeling of Vista Community
Medical Center L.L.C. Doctors Practice Management Inc. has filed a nonsuit in
this case and is no longer involved. Dynacq International, Inc. is suing for
actual damages of $10,000,000.00 and punitive damages of another $10,000,000. On
April 26, 2000, defendant filed a counterclaim of $540,011 actual damages and
$2,000,000 in punitive and/or exemplary damages claiming fraud, satisfaction of
the lien, breach of contract, substantial performance, and punitive damages. The
Company believes the counterclaims particularly the fraud and punitive damages
claims, asserted in the above lawsuit are without merit, and expect to
vigorously defend against such claims. Because the lawsuit remains at an early
stage, the Company cannot currently predict the outcome of the lawsuit or the
magnitude of any potential loss if the Company's defense is unsuccessful.
A nurse at Vista Community Medical Center L.L.C. claimed she was injured on
the job and filed a suit in the 133rd Judicial District Court of Harris County,
Texas against Vista Community Medical Center L.L.C. The exact date of the injury
that was the subject of this case is disputed. There is substantial information
which indicates that at the time of Ms. Harrison's injury there was insurance
coverage, and Vista Community Medical Center L.L.C. was a subscriber under the
Texas Worker's Compensation Act. Therefore, Ms. Harrison's claims should be
directed to the Texas Worker's Compensation Commission, and should not result in
any material liability to Vista Community Medical Center L.L.C. Plaintiff have
failed to specify the exact amount of damages that she is seeking, however she
have alleged punitive damages.
Since January 2002, the Company and two of its officers were named as
defendants in several virtually identical lawsuits in the United States District
Court for the Southern District of Texas claiming, among other things, that the
defendants violated certain federal securities laws and regulations. Each
complaint seeks certification as a class action on behalf of virtually all
purchasers of the Company's stock from November 29, 1999 through January 16,
2002. The various Complaints that have been consolidated claim that the Company
violated Sections 10(b) and 20(a) and SEC Rule 10b-5 under the Securities
Exchange Act of 1934 by making materially false or misleading statements or
omissions regarding revenues and receivables and regarding whether the Company's
operations complied with various federal regulations. The district court has
consolidated these actions and appointed a lead plaintiff pursuant to the
Private Securities Litigation Reform Act of 1995, and the court has ordered the
lead plaintiff to file a Consolidated Amended Complaint no later than August 30,
2002. The Company anticipates moving to dismiss that Consolidated Amended
Complaint after it is filed. The Court has set a deadline for the Motion to
Dismiss of October 25, 2002. These actions are at an early stage. The complaints
seek damages, pre-judgment interest, costs and attorneys' fee. The Company
intends to defend against the claims vigorously. However, the Company could
incur substantial costs defending the lawsuit, has no insurance coverage
relating to these claims, and has undertaken to indemnify the individual
defendants for any losses they may suffer. The Company has not yet established a
reserve for legal costs. The lawsuits could also divert the time and attention
of the Company's management. The Company cannot predict the outcome of the
lawsuits at this time, and there can be no assurance that the litigation will
not have a material adverse impact on its financial condition or results of
operations.
In March 2002, the Company accepted service of the Brill v. Chan, et al.
shareholder derivative action in the 295/th/ District Court of Harris County,
Texas purportedly brought on behalf of the Company against its officers and
directors, outside auditor, an investment bank, and two analysts affiliated with
the 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 Defendants' alleged misconduct in "(i) causing or
allowing the Company to conduct its business in an unsafe, imprudent and
unlawful
5
manner; (ii) failing to implement and maintain an adequate internal control
system; and (iii) exposing Dynacq to enormous losses," including allegations
that various press releases and/or public statements issued between January 1999
and January 2002 were misleading. Plaintiff made no demand on either the Company
or its Board of Directors prior to filing suit. Another derivative suit making
similar allegations, Grubb v. Dynacq, was filed in the 152nd Judicial District
of Harris County, Texas state district court; however, the plaintiff has
subsequently asked the Court to approve his voluntary dismissal of that action.
These actions are at an early stage. Therefore, the Company cannot predict the
ultimate outcome of the lawsuits at this time, and there can be no assurance
that the litigation will not have a material adverse impact on its financial
condition or results of operations. The Company intends to engage outside
competent and independent person to investigate the allegations made in the
lawsuit(s), and take appropriate action upon conclusion of the investigation.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2002
TO THE THREE MONTHS ENDED MAY 31, 2001.
Net revenues for the three months ended May 31, 2002 increased $6,842,765 or 54%
from that for the corresponding previous quarter ended May 31, 2001, primarily
due to increased revenues from the Company's surgical hospital. Net revenue from
the surgical hospital in the current period increased $8,720,539 or 122 % due to
more surgical cases, while net revenue from the outpatient surgical centers
decreased $1,349,671 or 29% primarily due to shifting of the Company's priority
to hospital operations, and other net revenue comprising of home infusion
operations and physician practice management decreased $503,127 or 59% due to
decrease in patient load, and interest revenue decreased $24,976 or 28% due to
reduction in interest rate. Management believes that future revenues will
continue to be derived primarily from its surgical hospital as the Company
intends to allocate its resources to expanding this segment of the business and
de-emphasizing outpatient surgical centers and other non surgical operations.
Operating expenses for the three months ended May 31, 2002 increased $4,959,259
or 65 % from that for the corresponding quarter ended May 31, 2001 primarily due
to increased surgical hospital activities. Wages and benefits increased $625,552
or 37% during the current quarter ended May 31, 2002 from the corresponding
quarter ended May 31, 2001, and medical supplies increased $1,609,930 or 51% for
the identical period; such increases were primarily due to increased operations
of the surgical hospital. General and administrative expenses for the three
months ended May 31, 2002 increased $2,400,858 or 165% from the corresponding
quarter ended May 31, 2001 primarily due to increased activities of the surgical
hospital and the Company's increased management and expanded operations.
Professional fees for the three months ended May 31, 2002 decreased $209,346 or
33% from that of the corresponding quarter ended May 31, 2001, primarily due to
decreased payments to physicians under management. Rent and lease expense for
the three months ended May 31, 2002 increased $298,387 or 78% from that of the
corresponding quarter ended May 31, 2001, primarily due to increased surgical
hospital operations. Depreciation and amortization expenses for the three months
ended May 31, 2002 increased $123,282 or 53% from that of the corresponding
quarter ended May 31, 2001, primarily due to increased activities of the
surgical hospital.
Net income increased $1,344,548 or 48% from $2,782,617 in the corresponding
period of the previous fiscal year to $4,127,165 in the current period.
Basic earnings per common share increased $0.08 per share or 40% from $0.20 per
share in the corresponding period of the previous fiscal year to $0.28 per share
in the current period. Diluted earnings per common share increased $0.08 per
share or 42% from $0.19 in the corresponding period of the previous fiscal year
to $0.27 per share in the current period.
6
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2002
TO THE NINE MONTHS ENDED MAY 31, 2001.
Net revenues for the nine months ended May 31, 2002 increased $17,041,650 or 54%
from that for the corresponding period ended May 31, 2001 primarily due to
increased revenues from the Company's surgical hospital. Net revenue from the
surgical hospital increased $20,877,946 or 136% in the current period compared
to the corresponding period of the previous fiscal year due to more surgical
cases, while net revenues from the outpatient surgical centers decreased
$2,617,141 or 19% in the current period primarily due to the shifting of the
Company's priority to the hospital operations, and other net revenues, which
include both physician practice management and home infusion operations
decreased $1,137,212 or 46% primarily due to less patient load, and interest
revenue decreased $81,942 or 34% due to reduction in interest rate in the
current period.
Operating expenses for the nine months ended May 31, 2002 increased $12,034,560
or 67 % from that for the corresponding period ended May 31, 2001 primarily due
to increased surgical hospital activities. Wages and benefits increased
$2,215,263 or 57% during the nine months ended May 31, 2002 from the
corresponding period ended May 31, 2001 and medical supplies increased
$4,949,207or 76% for the identical period; such increases were primarily due to
increased operations of the surgical hospital. General and administrative
expenses for the nine months ended May 31, 2002 increased $4,018,486 or 96% from
the corresponding period ended May 31, 2001, primarily due to increased
activities of the surgical hospital and the Company's increased management and
expanded operations. Professional fees for the nine months ended May 31, 2002
decreased $215,281 or 14% from that of the corresponding previous nine months
ended May 31, 2001, primarily due to decreased payments to physicians under
management. Rent and lease expense for the nine months ended May 31, 2002
increased $559,646 or 63% from that of the corresponding period ended May 31,
2001, primarily due to increased surgical hospital operations. Depreciation and
amortization for the nine months ended May 31, 2002 increased $316,690 or 50%
from that of the corresponding period ended May 31, 2001, primarily due to
increase activities of the surgical hospital.
Net income increased $3,475,852 or 46% from $7,570,955 in the corresponding
period of the previous fiscal year to $11,046,807 in the current period.
Basic earnings per common share increased $0.22 per share or 42% from $0.53 per
share in the corresponding period of the previous fiscal year to $0.75 per share
in the current period. Diluted earnings per common share increased $0.20 per
share or 38% from $0.53 per share in the corresponding period of the previous
fiscal year to $0.73 per share in the current period.
Cash and cash equivalents for the nine months ended May 31, 2002 increased
$1,630,419 or 32% from that of the previous audited balance sheet ending August
31, 2001 due to $8,801,733 provided by operating activities, $3,857,586 used by
investing activities and $3,313,727 used by financing activities. Accounts
receivable net of allowance for doubtful accounts for the nine months ended May
31, 2002 increased $2,320,684 or 12% from that of the previous audited balance
sheet ended August 31, 2001. Accounts payable and accrued liabilities increased
$658,353 or 43% primarily due to state corporate franchise tax obligations.
Liquidity and Capital Resources
The Company maintains sufficient liquidity to meet its business needs. The
Company had working capital of $26,484,452 at May 31, 2002 which increased
$5,181,465 or 24% from working capital at August 31, 2001 primarily due to
increase in cash and cash equivalents and accounts receivable. At May 31, 2002,
the Company maintained a liquid position evidenced by a current ratio of 12.8 to
1 and total debt to equity ratio of 0.13 to 1. The Company expects to have
positive cash flow from operations for fiscal 2002.
7
The Company is actively targeting opportunities to expand the hospital
operations in both local and national markets by leasing, and/or acquiring of
existing facilities or the constructing of new facilities. In October, 2001, the
Company obtained a $7,400,000 revolving credit facility and borrowed $600,000.
The $600,000 note was paid off in March 2002 and replaced by a $600,000
revolving line of credit. Both line of credit facilities have a variable
interest rate of 2.3% plus the "dealer commercial paper" rate and are available
by the Company until October 2011. As of July 14, 2002, the Company has no
outstanding borrowings.
Exposures to Market Risk
We are exposed to market risk related to changes in interest rates. The impact
on earnings and value market risk-sensitive financial instruments (principally
marketable security investments) is subject to change as a result of movements
in market rate and prices. We do not hold or issue derivative instruments for
trading purposes and are not a party to any instruments with leverage features.
Dynacq has no foreign operations.
Our investments in marketable securities were $5,353,403 at May 31, 2002, which
represents less than 13 % of total assets at that date. These securities are
generally short-term, highly liquid instruments and, accordingly, their fair
value approximates cost. Earnings on investments in marketable securities are
not significant to our results of operations, and therefore any changes in
interest rates would have a minimal impact on future pre-tax earnings.
At May 31, 2002, we had no long-term debt. In March 2002, the Company paid off
this long-term debt and as of the date of this Form 10-Q the Company maintains
no long-term indebtedness.
Segment and related information
The Company has three reportable segments: surgical hospital, outpatient
surgical centers, and other. The surgical hospital segment is comprised of a
four surgical suites hospital and provide a wide range of ancillary medical
services located at 4301 Vista Road in Pasadena, Texas. The outpatient surgical
centers segment provides outpatient surgical facilities, which include two
centers; one located at 4301 Vista Road in Pasadena, Texas and the other one
located at 2500 Fondren in Houston, Texas, both of which have a total of six
surgical suites, contracted x-ray diagnostic services and laboratory testing.
The Other segment includes property and equipment, which holds of all the fixed
assets of the outpatient surgical centers segment and the surgical hospital
segment, physician practice management, and infusion therapy both of which no
longer constitute the core business of the Company.
The Company's reportable segments are business units that offer different
services. They are managed separately because each business requires different
technology, marketing strategies and performance evaluations.
8
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months ended May 31, 2002 and May 31,
2001, respectively:
Outpatient
Surgical Surgical
Hospital Centers Other Total
------------ -------------- ------------ -------------
2002
Revenues-external $ 15,843,875 $ 3,358,650 $ 355,771 $ 19,558,296
Intersegment revenues 0 0 4,527,622 4,527,622
Segment assets 20,847,513 7,643,053 20,637,068 49,127,634
Segment profit 4,812,966 (465,945) 621,386 4,968,407
2001
Revenues-external $ 7,123,336 $ 4,708,321 $ 858,898 $ 12,690,555
Intersegment revenues 0 0 4,082,482 4,082,482
Segment assets 12,260,093 14,309,956 29,489,546 56,059,595
Segment profit 2,768,167 1,078,764 608,603 4,455,534
Summmarized financial information concerning the Company's reportable segments
is shown in the following table for the nine months ended May 31, 2002 and May
31, 2001, respectively:
Outpatient
Surgical Surgical
Hospital Centers Other Total
------------- -------------- ------------ -----------
2002
Revenues-external $36,229,675 $10,814,696 $ 1,312,158 $48,356,529
Intersegment revenues 0 0 12,814,663 12,814,663
Segment assets 20,847,513 7,643,053 20,637,068 49,127,634
Segment profit 10,903,976 482,517 1,481,602 12,868,095
2001
Revenues-external 15,351,729 13,431,837 2,449,370 31,232,936
Intersegment revenues 0 0 12,538,077 12,538,077
Segment assets 12,260,093 14,309,956 29,489,546 56,059,595
Segment profit 6,564,315 2,781,547 2,008,333 11,354,195
The following table provides a reconciliation of the reportable segments'
revenues and profit to the consolidated totals for three months and nine months
ended May 31, 2002 and May 31, 2001, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
5/31/2002 5/31/2001 5/31/2002 5/31/2001
------------ ----------- ------------ ------------
REVENUES
- --------
Total revenues for reportable segments 19,558,296 12,690,555 48,356,529 31,232,936
Interest income 83,808 113,575 220,789 316,804
Elimination of intersegment interest
income (20,353) (25,144) (64,743) (78,815)
----------- ----------- ----------- -----------
Consolidated total revenues 19,621,751 12,778,986 48,512,575 31,470,925
PROFIT:
- -------
Total profit for reportable segments $ 4,968,407 $ 4,455,534 $12,868,095 $11,354,195
Elimination of intersegment income (176,552) (739,383) (119,332) (1,674,422)
Elimination of minority interests (664,690) (933,534) (1,701,956) (2,108,818)
----------- ----------- ----------- -----------
Consolidated net income $ 4,127,165 $ 2,782,617 $11,046,807 $ 7,570,955
9
PART II.
ITEM 1. - LEGAL PROCEEDINGS
The Company and its wholly owned subsidiary, Doctors Practice
Management, Inc. sued Benchmark, an architectural corporation, general
contractors, engineers, and some sub-contractors in the 151/st/ Judicial
District Court of Harris County, Texas for fraud, negligence, breach of
contract, loss of profits and/or goodwill, and punitive damages arising out of
certain construction defects in connection with the completion and remodeling of
Vista Community Medical Center L.L.C. Doctors Practice Management Inc. has filed
a nonsuit in this case and is no longer involved. Dynacq International, Inc. is
suing for actual damages of $10,000,000.00 and punitive damages of another
$10,000,000. On April 26, 2000, defendant filed a counterclaim of $540,011
actual damages and $2,000,000 in punitive and/or exemplary damages claiming
fraud, satisfaction of the lien, breach of contract, substantial performance,
and punitive damages. The Company believes the counterclaims particularly the
fraud and punitive damages claims, asserted in the above lawsuit are without
merit, and expect to vigorously defend against such claims. Because the lawsuit
remains at an early stage, the Company cannot currently predict the outcome of
the lawsuit or the magnitude of any potential loss if the Company's defense is
unsuccessful.
A nurse at Vista Community Medical Center L.L.C. claimed she was
injured on the job and filed a suit in the 133rd Judicial District Court of
Harris County, Texas against Vista Community Medical Center L.L.C. The exact
date of the injury that was the subject of this case is disputed. There is
substantial information which indicates that at the time of Ms. Harrison's
injury there was insurance coverage, and Vista Community Medical Center L.L.C.
was a subscriber under the Texas Worker's Compensation Act. Therefore, Ms.
Harrison's claims should be directed to the Texas Worker's Compensation
Commission, and should not result in any material liability to Vista Community
Medical Center L.L.C. Plaintiff have failed to specify the exact amount of
damages that she is seeking, however she have alleged punitive damages.
Since January 2002, the Company and two of its officers were named as
defendants in several virtually identical lawsuits in the United States District
Court for the Southern District of Texas claiming, among other things, that the
defendants violated certain federal securities laws and regulations. Each
complaint seeks certification as a class action on behalf of virtually all
purchasers of the Company's stock from November 29, 1999 through January 16,
2002. The various Complaints that have been consolidated claim that the Company
violated Sections 10(b) and 20(a) and SEC Rule 10b-5 under the Securities
Exchange Act of 1934 by making materially false or misleading statements or
omissions regarding revenues and receivables and regarding whether the Company's
operations complied with various federal regulations. The district court has
consolidated these actions and appointed a lead plaintiff pursuant to the
Private Securities Litigation Reform Act of 1995, and the court has ordered the
lead plaintiff to file a Consolidated Amended Complaint no later than August 30,
2002. The Company anticipates moving to dismiss that Consolidated Amended
Complaint after it is filed. The Court has set a deadline for the Motion to
Dismiss of October 25, 2002. These actions are at an early stage. The complaints
seek damages, pre-judgment interest, costs and attorneys' fee. The Company
intends to defend against the claims vigorously. However, the Company could
incur substantial costs defending the lawsuit, has no insurance coverage
relating to these claims, and has undertaken to indemnify the individual
defendants for any losses they may suffer. The Company has not yet established a
reserve for legal costs. The lawsuits could also divert the time and attention
of the Company's management. The Company cannot predict the outcome of the
lawsuits at this time, and there can be no assurance that the litigation will
not have a material adverse impact on its financial condition or results of
operations.
In March 2002, the Company accepted service of the Brill v. Chan, et
al. shareholder derivative action in the 295/th/ District Court of Harris
County, Texas purportedly brought on behalf of the Company against its officers
and directors, outside auditor, an investment bank, and two analysts affiliated
with the 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 Defendants' alleged misconduct in "(i) causing or
allowing the Company to conduct its business in an unsafe, imprudent and
unlawful
10
manner; (ii) failing to implement and maintain an adequate internal control
system; and (iii) exposing Dynacq to enormous losses," including allegations
that various press releases and/or public statements issued between January 1999
and January 2002 were misleading. Plaintiff made no demand on either the Company
or its Board of Directors prior to filing suit. Another derivative suit making
similar allegations, Grubb v. Dynacq, was filed in the 152nd Judicial District
of Harris County, Texas state district court; however, the plaintiff has
subsequently asked the Court to approve his voluntary dismissal of that action.
These actions are at an early stage. Therefore, the Company cannot predict the
ultimate outcome of the lawsuits at this time, and there can be no assurance
that the litigation will not have a material adverse impact on its financial
condition or results of operations. The Company intends to engage outside
competent and independent person to investigate the allegations made in the
lawsuit(s), and take appropriate action upon conclusion of the investigation.
ITEM 2. - CHANGES IN SECURITIES
None
ITEM 3. - DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
None
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
On June 5, 2002 the Company filed Form 8-K with the Securities and
Exchange Commission to dismiss KenWood & Associates, PC and engaged Ernst &
Young LLP effective May 31, 2002 as the Company's independent public accountants
for the fiscal year 2002.
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, Dynacq, 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.
11
SIGNATURES
Pursuant to the requirements of the Securities and 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: July 15, 2002 BY: /s/ Philip Chan
Philip Chan
VP-Finance/Treasurer &
Chief Financial Officer