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 November 30, 2001
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 January 4, 2002
Common Stock, $0.001 par value 14,681,236 shares
Transitional Small Business Disclosure Format (check one)
Yes ______ No X
Page 1 of 10
PART I. - FINANCIAL INFORMATION
ITEM I. - FINANCIAL STATEMENTS
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
ASSETS
NOVEMBER 30 AUGUST 31
2001 2001
------------ ------------
CURRENT ASSETS:
Cash and Cash equivalents $ 6,618,941 $ 5,031,614
Accounts receivable, net $ 17,881,417 $ 18,993,648
Inventories $ 521,298 $ 511,248
Prepaid expenses $ 84,879 $ 109,993
Due from related parties $ 2,175,000 $ 1,585,000
Deferred tax assets $ 71,000 $ 71,000
------------ ------------
Total Current Assets $ 27,352,535 $ 26,302,503
FIXED ASSETS, NET $ 13,927,161 $ 10,497,730
OTHER ASSETS, NET $ 121,362 $ 130,890
------------ ------------
TOTAL ASSETS $ 41,401,058 $ 36,931,123
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 544,690 $ 798,787
Accrued Liabilities $ 1,423,015 $ 725,412
Current Maturities of Long-Term Debt $ 192,678 $ 228,697
Income Taxes Payable $ 3,456,300 $ 3,246,620
------------ ------------
TOTAL CURRENT LIABILITIES $ 5,616,683 $ 4,999,516
LONG-TERM DEBT, NET OF CURRENT MATURITIES $ 519,075 $ 519,075
DEFERRED INCOME TAXES PAYABLE $ 29,000 $ 29,000
NEGATIVE GOODWILL, NET $ 332,581 $ 332,581
MINORITY INTERESTS IN SUBSIDIARIES $ 4,036,400 $ 3,505,769
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 Par Value, 5,000,000 Shares Authorized,
None Issued or Outstanding $ - $ -
Common Stock, $0.001 Par Value, 300,000,000 Shares Authorized,
16,266,331 Shares Issued $ 16,266 $ 16,266
Additional Paid In Capital $ 6,690,042 $ 6,690,042
Retained Earnings $ 25,823,059 $ 22,445,443
Treasury Stock: 1,605,984 shares at cost $ (1,272,006) $ (1,190,507)
Deferred compensation $ (390,042) $ (416,062)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 30,867,319 $ 27,545,182
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,401,058 $ 36,931,123
============ ============
Page 2 of 10
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
NOVEMBER 30
---------------------------------
2001 2000
------------ ------------
NET REVENUES (net of contractual adjustments) $ 13,854,531 $ 8,904,528
LESS EXPENSES:
Contract payments to physicians $ 507,764 $ 379,666
Compensation and benefits $ 1,960,906 $ 1,076,754
Medical supplies $ 3,079,445 $ 1,316,894
Other general and administrative expenses $ 1,928,957 $ 1,452,740
Depreciation and amortization $ 272,756 $ 195,520
Rent and occupancy $ 322,898 $ 175,034
Provision for uncollectible accounts $ 41,670 $ 17,438
Interest $ 6,321 $ 17,061
------------ ------------
Total Expenses $ 8,120,717 $ 4,631,107
------------ ------------
NET INCOME FROM OPERATIONS $ 5,733,814 $ 4,273,421
LESS PROVISION FOR INCOME TAXES $ 1,825,567 $ 1,345,328
------------ ------------
NET INCOME BEFORE MINORITY INTERESTS $ 3,908,247 $ 2,928,093
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARIES $ (530,632) $ (555,974)
------------ ------------
NET INCOME $ 3,377,615 $ 2,372,119
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.23 $ 0.17
DILUTED EARNINGS PER COMMON SHARE $ 0.23 $ 0.17
WEIGHTED AVERAGE COMMON SHARES-BASIC 14,681,236 13,730,128
WEIGHTED AVERAGE COMMON SHARES-DILUTED 14,690,462 14,318,700
(1) (2)
(1) AS ADJUSTED FOR 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.
Page 3 of 10
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30
(UNAUDITED)
--------------------------------------
2001 2000
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 3,377,615 $ 2,372,119
ADD: ITEMS NOT REQUIRING CASH:
Depreciation $ 272,756 $ 195,520
Minority $ 530,632 $ 555,974
Interests
Deferred compensation amortization 26,020 -
Adjustments to reconcile net income
to net cash provided by operating activities:
(Increase) Decrease in Accounts Receivable $ 1,112,231 $ (1,740,098)
(Increase) Decrease in Inventory $ (10,050) $ 19,749
(Increase) Decrease in Other Current Assets $ (36,019) $ (92,065)
(Increase)Decrease in Due From Related Party $ (590,000) $ -
Increase (Decrease) in Accounts Payable $ (254,097) $ (652,959)
Increase (Decrease) in Accrued Liabilities $ 722,717 $ 198,228
Increase (Decrease) in Income Taxes Payable $ 209,680 $ 1,232,540
------------ ------------
Net Cash Provided by Operating Activities $ 5,361,485 $ 2,089,008
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets $ (3,702,187) $ (50,341)
Decrease (Increase) of Other Assets $ 9,528 $ (125,640)
------------ ------------
Net Cash Used by Investing Activities $ (3,692,659) $ (175,981)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Retirements of Long -Term Debt, Net $ - $ 20,507
Proceeds from Exercise of Stock Options $ - $ 29,104
Acquisition of Treasury Stock, Net $ (81,499) $ (48,960)
------------ ------------
Net Cash used by Financing Activities $ (81,499) $ 651
------------ ------------
Net Increase in Cash and Cash Equivalents $ 1,587,327 $ 1,913,678
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 5,031,614 $ 4,301,523
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,618,941 $ 6,215,201
============ ============
Page 4 of 10
DYNACQ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
(UNAUDITED)
NOTE 1. - 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
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 three months period ended
November 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending August 31, 2002.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2001
TO THE THREE MONTHS ENDED NOVEMBER 30, 2000
Consolidated net revenues after subtracting contractual adjustments with payers
from gross revenues for the three months ended November 30, 2001 increased
$4,950,003 or 56% from that for the corresponding previous quarter ended
November 30, 2000. Notwithstanding this significant increase in consolidated
net revenues, there were a number of significant increases and decreases in the
component net revenue categories. For instance, net revenue attributable to
Doctors Practice Management, Inc. ("DPMI") decreased by $168,755 or 26% from the
corresponding previous quarter, primarily derived from decreased management fee
of physicians under management. Net revenue attributable to Vista operations
decreased by $308,416 or 7% from the corresponding previous quarter due to
decreased in patient referral. Net revenue attributable to the Hospital
significantly increased by $5,490,127 or 160% from the corresponding previous
quarter. Net revenue attributable to infusion therapy decreased $35,163 or 17%
from the corresponding previous quarter due to lower patient load. Interest
Income decreased $27,641 or 33% primarily due to lower interest rate earned on
deposit accounts.
Consolidated operating expenses for the three months ended November 30, 2001
increased $3,489,610 or 75% from that for the corresponding previous quarter
ended November 30, 2000 primarily due to increase in activities of the
Hospital. The significant increases and decreases in the component expense
categories of the consolidated operating expenses are explained as follows:
(1) The increase in contract payments to physicians increased $128,098 or 34%
was primarily attributable to the Hospital due to increased in activities.
(2) The increase in compensation and benefits of $884,152 or 82% was primarily
attributable to the Hospital and DPMI operations due to the increase in
their activities.
(3) The increase in medical supplies expense of $1,762,551 or 134% was
primarily attributable to the Hospital operations due to the increase in
their activities
(4) The increase in other general and administrative expenses of $476,217 or
33% was primarily attributable to the Hospital operations due to the
increase in their activities
Page 5 of 10
(5) The increase in rent and occupancy expense of $147,864 or 84% was primarily
due to increase in activities of the Hospital and the addition of Vista
West outpatient surgery center.
Net Income increased $1,005,496 or 42% from $2,372,119 in the corresponding
quarter of the previous fiscal year to $3,377,615 in the current quarter.
Basic Earnings per common share increased $0.06 per share or 35% from $0.17 per
share in the corresponding quarter of the previous fiscal year to $0.23 per
share in the current quarter.
Diluted Earnings per common share increased $0.06 per share or 35% from $0.17
per share in the corresponding quarter of the previous fiscal year to $0.23 per
share in the current quarter.
FINANCIAL CONDITION
COMPARISON OF THE BALANCE SHEET AT THREE MONTHS ENDED NOVEMBER 30, 2001 TO THE
AUDITED BALANCE SHEET AT FISCAL YEAR ENDED AUGUST 31, 2001.
Consolidated cash and cash equivalents for the three months ended November 30,
2001 increased $1,587,327 or 31% from that of the previous audited balance sheet
ending August 31, 2001 was due to $5,361,485 provided by operating activities,
$3,692,659 used by investing activities and $81,499 used by financing
activities. For the three months ended November 31, 2001, Consolidated accounts
receivable decreased $1,112,231 or 6%, Consolidated due from related parties
increased $590,000 or 37%, Consolidated fixed assets increased $3,429,431 or 33%
primarily due to purchase of a hospital in Baton Rouge in Louisiana.
Consolidated accounts payable decreased $254,097 or 32% and Consolidated accrued
liabilities increased $697,603 or 96% from that of the previous audited balance
sheet ended August 31, 2001.
Liquidity and Capital Resources
Working Capital of $21,735,852 at November 30, 2001 increased $432,865 or 2%
from working capital at August 31, 2001 primarily due to increases in cash and
cash equivalents and accrued liabilities offset by increases in due from related
parties and decreases in both accounts payable and current maturities of long-
term debt. At November 30, 2001, the Company maintained a liquid position
evidenced by a current ratio of 4.87 to 1 and total debt to equity of 0.34 to 1.
Management believes that available cash funds and funds generated from
operations will be sufficient for the Company to finance working capital
requirements for the foreseeable future and to meet its payment obligations on
its long-term indebtedness.
The Company is actively targeting opportunities to expand in both the hospital
and the outpatient surgical clinic markets by acquisition of existing facilities
or the construction of new facilities. The Company believes it has the ability
to borrow 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.
The Company expects the operations of the Hospital to have a material effect on
the Company's consolidated operating results. While the company believes the
operating results of the Hospital will be successful in the long-term, it can
provide no such assurance at this time to its shareholders. Expected operating
results from the Hospital could be negatively impacted by unforeseen problems
including staffing and equipment, low patient utilization, licensing or
regulatory changes or other problems, which could have a material adverse effect
on the Company's liquidity and capital resources. The skill and experience of
the Hospital's management team and competition will play critical roles.
Page 6 of 10
Segment and related information
The Company adopted Statement of Financial Accounting Standards No.131 in fiscal
year ended August 31, 1999. The Company has five reportable segments: clinic and
outpatient surgical center, emergency and inpatient surgical center, property
and equipment holding, which was added in fiscal 2000, physician practice and
infusion therapy. The clinic and outpatient surgical center segment includes two
facilities with six surgery suites provide outpatient surgical procedures,
contracted x-ray diagnostic services and laboratory testing. The emergency and
inpatient surgical center segment is comprised of a thirty seven bed and four
surgery suites hospital which provides a wide range of medical services
including major surgical cases which require hospitalization. The property and
equipment holding segment has acquired all of the fixed assets of the clinic and
outpatient surgical center segment and the emergency and inpatient surgical
center segment. The physician practice management segment provides office space
and fee-based management services to physicians. The infusion therapy segment's
business principally involves the administration of physician-prescribed
nutrients, antibiotics or other medicines to cancer patients in their homes.
The Company's reporting segments are business units that offer different
services. They are managed separately because each business requires different
technology, marketing strategies and performance evaluations.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months ended November 30
Physician Emergency and Clinic and Property and
Infusion Practice Inpatient Outpatient Equipment
Therapy Management Surgical Center Surgical Center Holding Totals
--------- ---------- --------------- --------------- ----------- ----------
2001
Revenues-external 173,705 478,525 8,922,507 4,208,644 15,000 13,798,381
Intersegment revenues - 4,033,406 - - 307,500 4,340,906
Interest revenue 2,281 21,467 27,523 27,426 253 78,950
Interest expense 29,121 - - - - 29,121
Depreciation and amort - 14,517 - 2,833 236,942 254,292
Income tax expense (58,566) 528,242 1,077,607 326,208 (47,924) 1,825,567
Segment assets 636,420 4,983,334 12,447,636 9,128,300 14,205,368 41,401,058
Expenditures-segment - 1,938 - - 3,689,916 3,691,854
Segment profit (113,686) 1,006,125 2,313,691 803,768 (101,651) 3,908,247
2000
Revenues-external 208,868 647,280 3,432,380 4,517,060 15,149 8,820,737
Intersegment revenues 285,000 3,784,988 - - 403,500 4,473,488
Interest revenue 44 45,775 11,890 31,607 4,423 93,739
Interest expense 34,206 - - 10,247 - 44,453
Depreciation and amort - 14,753 - - 180,767 195,520
Income tax expense 37,539 369,269 361,555 559,477 17,488 1,345,328
Segment assets 180,370 11,638,223 6,354,522 11,803,395 9,354,229 39,330,739
Expenditures-segment - 4,347 - - 45,994 50,341
Segment profit 69,715 685,786 1,114,179 1,039,028 32,477 2,941,185
Page 7 of 10
The following table provides a reconciliation of the reportable segments'
revenues, profit, assets, and other significant items to the consolidated totals
as of November 30 and for the three months ended November 30
2001 2000
REVENUES:
- ---------
Total revenues for reportable segments 13,798,381 8,820,737
Interest income 78,950 93,739
Elimination of interest income (22,800) (9,948)
---------- -----------
Consolidated total revenues 13,854,531 8,904,528
PROFIT:
- -------
Total profit for reportable segments 3,908,247 2,941,185
Elimination of intersegment income - (13,092)
Elimination of minority interests (530,632) (555,974)
---------- -----------
Consolidated net income 3,377,615 2,372,119
ASSETS:
- -------
Total assets for reportable segments 41,401,058 39,330,739
Elimination of intercompany accounts and other - (12,670,009)
---------- -----------
Consolidated total assets 41,401,058 26,660,730
OTHER SIGNIFICANT ITEMS:
- ------------------------
Interest expense 29,121 44,453
Elimination of intersegment expense (22,800) (27,392)
---------- -----------
Consolidated interest expense 6,321 17,061
The Company's revenues and long-lived assets are derived and domiciled from a
customer base solely in the United States.
Inflation. Inflation has not significantly impacted the Company's financial
position or operations.
Forward-Looking Information. Information in this Form 10-Q contains forward-
looking statements and information relating to the Company that are based on the
beliefs of the Company's management, as well as assumptions made by, and
information currently available to the Company's management. When used in this
Form 10-Q, words such as "anticipate", "believe", "estimate", "expect",
"intend", "will", "will be" and similar expressions, as they related to the
Company or the Company's management, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events, and are subject to certain risks, uncertainties, and assumptions
relating to the operations and results of operations of the Company, competitive
factors and pricing pressures, costs of products and services, general economic
conditions, and the acts of third parties, as well as other factors described in
this Form 10-Q, and, from time to time, in the Company's periodic earnings
releases and other reports filed with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
intended, or will be or the like.
Page 8 of 10
PART II.
ITEM 1. - LEGAL PROCEEDINGS
The Company and its wholly owned subsidiary, Doctors Practice
Management, Inc. sued Benchmark, an architectural corporation in the 151st
Judicial district Court of Harris County, Texas for damages of $1,000,000 caused
by Benchmark's delay in the completion of the hospital and additional costs
and/or expenses incurred by the Company as a result of being overcharged for
services and/or work that was done incorrectly by Benchmark. On April 26, 2000,
defendant filed a counterclaim of $540,011 actual damages and $2,000,000 in
punitive and/or exemplary damages. The Company believes the counterclaims
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.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
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
None
- --------------------------------------------------------------------------------
Page 9 of 10
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: January 14, 2002 BY: /s/ Philip Chan
------------------------------
Philip Chan
VP-Finance/Treasurer &
Chief Financial Officer
Page 10 of 10