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, 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 January 08, 2003
Common Stock, $0.001 par value 14,875,332 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
NOVEMBER 30, AUGUST 31,
2002 2002
------------ -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $10,917,367 $ 7,583,756
Accounts receivables, net of allowances for contractual adjustments and
uncollectible accounts of approximately $67,888,000 and $58,010,000 at
November 30, and August 31, 2002, respectively 23,373,970 24,340,971
Inventories 998,812 893,727
Prepaid expenses 265,172 262,958
Deferred tax asset 149,295 149,295
Income taxes receivable 373,575 373,575
----------- -----------
Total current assets 36,078,191 33,604,282
Property and equipment, net 19,399,939 16,715,425
Goodwill, net 483,944 483,944
Other assets 474,960 274,970
----------- -----------
Total assets $56,437,034 $51,078,621
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 854,824 $ 2,327,410
Accrued liabilities 2,341,225 744,530
Income taxes payable 831,132 -
Current maturities of long-term debt 9,901 39,075
----------- -----------
Total current liabilities 4,037,082 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 2,507,662 2,064,155
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,
16,524,416 and 16,515,166 shares issued at November 30, and
August 31, 2002, respectively 16,525 16,515
Additional paid in capital 9,822,738 9,778,701
Retained earnings 42,598,441 37,884,622
Treasury stock, 1,685,984 shares at cost (1,959,412) (1,959,412)
Deferred compensation (1,069,221) (1,152,053)
----------- -----------
Total stockholders' equity 49,409,071 44,568,373
----------- -----------
Total liabilities and stockholders' equity $56,437,034 $51,078,621
=========== ===========
See accompanying notes
2
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
2002 2001
------------ ------------
Net patient service revenue $ 17,933,926 $ 13,763,110
Costs and expenses:
Compensation and benefits 2,674,395 1,960,906
Medical supplies 3,739,794 3,079,445
Other operating expenses 3,611,519 2,759,619
Provision for uncollectible accounts 75,683 41,670
Depreciation & amortization 339,683 272,756
------------ -------------
Total costs and expenses 10,441,074 8,114,396
------------ -------------
Income from operations 7,492,852 5,648,714
Other income (expense):
Rent and other income 105,533 35,271
Interest income 33,070 56,150
Interest expense (846) (6,321)
------------ -------------
Total other income 137,757 85,100
------------ -------------
Income before income taxes, minority interests, and
cumulative effect of a change in accounting principle 7,630,609 5,733,814
Provision for income taxes 2,701,436 1,825,567
Minority interests in earnings 743,507 530,632
------------ -------------
Income before cumulative effect of a change in
accounting principle 4,185,666 3,377,615
------------ -------------
Cumulative effect of a change in accounting principle, net of tax 528,153 -
------------ -------------
Net income $ 4,713,819 $ 3,377,615
============ =============
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.28 $ 0.23
Cumulative effect of a change in accounting principle, net of tax 0.04 -
------------ -------------
Net income $ 0.32 $ 0.23
============ =============
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 0.27 $ 0.23
Cumulative effect of a change in accounting principle, net of tax 0.03 -
------------ -------------
Net income $ 0.30 $ 0.23
============ =============
Weighted average common shares - Basic 14,835,465 14,681,236
Weighted average common shares - Diluted 15,563,702 14,690,462
See accompanying notes
3
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
2002 2001
----------- -----------
Net Income $ 4,713,819 $ 3,377,615
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 339,683 272,756
Cumulative effect of a change in accounting principle-write-off
negative goodwill, net of tax (528,153) -
Provision for uncollectible accounts 75,683 -
Minority interests 743,507 530,632
Deferred compensation amortization 82,832 26,020
Changes in operating assets and liabilities:
Accounts receivable 891,318 1,112,231
Other receivables - (590,000)
Inventories (105,085) (10,050)
Prepaid expenses (2,214) -
Other assets (199,990) (26,491)
Accounts payable (1,472,586) (254,097)
Accrued liabilities 1,596,695 722,717
Income taxes payable 507,426 209,680
----------- -----------
Net cash provided by operating activities 6,642,935 5,371,013
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net (3,024,197) (3,702,187)
----------- -----------
Net cash used by investing activities (3,024,197) (3,702,187)
----------- -----------
Cash flows from financing activities:
Principal payments on long -term debt (29,174) -
Proceeds from exercise of stock options 44,047 -
Acquisition of treasury stock, net - (81,499)
Distributions to minority stockholders (300,000) -
----------- -----------
Net cash used by financing activities (285,127) (81,499)
----------- -----------
Net increase in cash and cash equivalents 3,333,611 1,587,327
Cash and cash equivalents at beginning of period 7,583,756 5,031,614
----------- -----------
Cash and cash equivalents at end of period $10,917,367 $ 6,618,941
=========== ===========
See accompanying notes
4
DYNACQ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2002
(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 quarter ended
November 30, 2002 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 four quarters, 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 November 30, 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 and expected to be operational in January of 2003. 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
5
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 quarter ended November 30, 2002 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
also test goodwill for impairment during Fiscal 2003, using the two-step process
prescribed in SFAS No. 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 No. 144, Impairment of Long-Lived Assets,
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets To Be Disposed Of. SFAS No. 144
retains the requirements of SFAS No. 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 No. 144
removes goodwill from its scope. SFAS No. 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.
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 1st 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 in the quarter ended November 30, 2002.
The changes in the carrying amount of goodwill, which only affected the
Company's Outpatient Surgical Center segment as of November 30, 2002, are as
follows:
Negative
Goodwill Goodwill
--------- --------
Balance at August 31, 2002 $483,944 $851,859
Write-off of negative goodwill 0 851,859
-------- --------
$483,944 $ 0
======== ========
Net income and earnings per share for the three months ended November 30, 2002
and 2001 adjusted for goodwill amortization is as follows:
Three Months Ended
November 30,
2002 2001
-------- --------
Reported net income before cumulative effect
of a change in accounting principle related
to cessation of goodwill amortization $4,185,666 $3,377,615
Add back: Goodwill amortization 0 8,833
Less: Tax effect of goodwill amortization 0 (3,357)
---------- ----------
Adjusted net income $4,185,666 $3,383,091
========== ==========
6
Basic earnings per share:
Reported net income before cumulative effect
of a change in accounting principle related
to cessation of goodwill amortization $ 0.28 $ 0.23
Add back Goodwill amortization 0 0
Less: Tax effect of goodwill amortization 0 0
---------- ----------
Adjusted net income $ 0.28 $ 0.23
========== ==========
Diluted earnings per share:
Reported net income before cumulative effect
of a change in accounting principle related
to cessation of goodwill amortization $ 0.27 $ 0.23
Add back: Goodwill amortization 0 0
Less: Tax effect of goodwill amortization 0 0
---------- ----------
Adjusted net income $ 0.27 $ 0.23
========== ==========
Asset Acquisition from Vista Diagnostic Center
During the quarter ended November 30, 2002, 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 at Pasadena, Texas. 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 $846,704 for the next 20 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 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 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.
Segment and Related Information
The Company has three reportable segments: surgical hospital, outpatient
surgical centers, and corporate and management services. The surgical hospital
segment is comprised of a 37-bed hospital that provides a wide range of medical
services including major surgical cases, which require hospitalization. The
outpatient surgical centers segment provides outpatient surgical facilities,
contracted X-ray diagnosti cservices 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.
7
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 quarter ended November 30, 2002, 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 a result, the Company transferred the operations of
Vista Healthcare, Inc, its outpatient surgical facility in Pasadena, Texas
(Outpatient Surgical Center segment) to that of Vista Hospital (Surgical
Hospital segment). As a result of this transfer, inventory valued at cost of
$137,000 was transferred from the outpatient surgical center segment to the
surgical hospital segment. The transfer did not have any impact on the
consolidated balance sheet or income statement. The summarized financial
information provided below for Fiscal 2002 and 2001 has been shown on a proforma
basis to reflect the changes related to the transfer.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months ended November 30, 2002 and
2001, respectively:
Outpatient Corporate and
Surgical Surgical Management
Hospital Centers Services Total
----------- --------------- ---------------- ---------
2002
Revenues-external $16,981,204 $ 953,031 $ 105,224 $18,039,459
Intersegment revenues 290,000 188,802 3,283,532 3,762,334
Segment assets 21,447,258 9,626,698 25,363,078 56,437,034
Segment profit 5,570,657 90,401 (203,732) 5,457,326
2001
Revenues-external $11,863,163 $1,267,988 $ 667,230 $13,798,381
Intersegment revenues 0 0 4,340,906 4,340,906
Segment assets 12,447,636 9,128,300 19,825,122 41,401,058
Segment profit 2,684,283 433,176 790,788 3,908,247
The following table provides a reconciliation of the reportable segments'
revenues and profit to the consolidated totals for three months ended November
30, 2002 and 2001:
2002 2001
-------- -------
Revenues:
- --------
Total revenues for reportable segments $18,039,459 $13,798,381
Interest Income 33,070 56,150
----------- -----------
Consolidated total revenues $18,072,529 $13,854,531
=========== ===========
Profit:
- -------
Total profit for reportable segments $ 5,457,326 $ 3,908,247
Elimination of minority interests (743,507) (530,632)
----------- -----------
Consolidated net income $ 4,713,819 $ 3,377,615
=========== ===========
8
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 anticipates
moving to dismiss that consolidated amended complaint. These actions are at an
early stage, and no discovery has taken place at this time. 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. The state
district court has stayed the case until February 17, 2003 pending the Special
Litigation Committee's investigation. On November 12, 2002, the federal district
court presiding over the shareholder derivative action filed there stayed that
action pending conclusion of the shareholder class action lawsuit.
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.
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
9
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% of Vista Hospital, a surgical hospital;
. the ownership of 100% of Vista West, an outpatient surgical facility;
and
. a newly developed surgical hospital in Baton Rouge, Louisiana expected
to be opened in January 2003.
During the quarter ended November 30, 2002, 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. 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 quarter ended November 30, 2002, approximately 94% of the Company's
revenue resulted from its surgical hospital activities, 5% from its outpatient
surgical center, and 1% from other activities, which include corporate and
management services. For the quarter ended November 30, 2001, 86% of the
Company's revenue resulted from its surgical hospital activities, 9% from its
outpatient surgical center activities, and 5% from other activities, which
include corporate and management services.
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
10
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 November 30, 2002 to the Three Months Ended
November 30, 2001
Net patient service revenue for the three months ended November 30, 2002
increased $4,171,000 or 30% from that for the corresponding previous quarter
ended November 30, 2001. Revenues from the Company's surgical hospital
activities increased to $16,981,000 during the quarter ended November 30, 2002
from $11,863,000 during the quarter ended November 30, 2001, the result of an
increase in surgical cases from Fiscal 2001. During the quarter ended November
30, 2002 there was an increase of 72% in inpatient procedures and an increase of
23% inpatient days compared to that of the quarter ended November 30, 2001.
Revenues in the Company's outpatient surgical centers decreased to $953,000
during the quarter ended November 30, 2002 from $1,268,000 during the quarter
ended November 30, 2001, primarily due to the decrease in outpatient surgical
cases since the Company is focusing more on inpatient cases. Corporate and
management services revenue decreased to $105,000 during the quarter ended
November 30, 2002 from $667,000 during the quarter ended November 30, 2001
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 patient service revenues for the quarter ended November 30,
2002 is the result of the Company's primary focus on expanding its surgical
hospital operations. The Management's current strategy is to continue to focus
on this operating segment during Fiscal 2003.
For the quarter ended November 30, 2002, total costs and expenses increased by
$2,327,000 or 29% from the quarter ended November 30, 2001. The increase is
primarily due to significant increases in the surgical hospital activities. The
significant increases in the component expense categories of the operating
expenses are as follows:
. Compensation and benefits expense increased by $713,000 or 36% from
the quarter ended November 30, 2001. The increase is primarily due to
the significant increase in surgical activities compared to that of
the quarter ended November 30, 2001, which required increased hospital
staffing and an increase in the number of Company employees at the
corporate level.
. Medical supplies increased by $660,000 or 21% from the quarter ended
November 30, 2001. The increase is primarily due to the significant
increase in surgical activities compared to that of the quarter ended
November 30, 2001.
. Other operating expenses increased by $852,000 or 31% from the quarter
ended November 30, 2001. The increase is primarily due to the
significant increase in activities at the Company's facilities, as
well as an increase in general corporate activity compared to such
activities in the quarter ended November 30, 2001.
Liquidity and Capital Resources
The Company maintained sufficient liquidity in Fiscal 2002 to meet its business
needs. As of November 30, 2002, its principal source of liquidity included
$10,917,000 in cash and cash equivalents, of which $8,864,000 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 $6,643,000 and $5,371,000 in the
three month period ended November 30, 2002 and 2001, respectively. The primary
contributor to the increase in cash flow provided by operating activities is the
decrease in accounts receivable of $891,000 and $1,112,000 and an increase in
income taxes payable of $507,000 and $210,000, in each case, for the quarter
ended November 30, 2002 and
11
2001, respectively. The net income of $4,714,000 and $3,378,000 included
non-cash charges for depreciation and amortization of $340,000 and $273,000 and
minority interest of $744,000 and $531,000 for the quarter ended November 30,
2002 and 2001, respectively. The net income for the quarter ended November 30,
2002 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
quarter ended November 30, 2002.
Cash of $3,024,000 and $3,702,000 was used in investing activities in the three
month period ended November 30, 2002 and 2001, respectively. For the quarter
ended November 30, 2002 the Company expended approximately $2,400,000 for the
construction of its newly developed surgical hospital in Baton Rouge, Louisiana.
The Company also used cash of approximately $850,000 for additional diagnostic
equipment and for improvements at the Vista Hospital facility in Pasadena.
The Company used $285,000 and $81,000 in financing activities in the three month
period ended November 30, 2002 and 2001, respectively. The Company used $29,000
in the quarter ended November 30, 2002 to repay the outstanding principal
balances related to long-term debt. As of November 30, 2002, the Company has no
outstanding balance related to its long-term debt. Other uses for cash flow from
financing activities in the quarter ended November 30, 2002 included
distributions to minority interest for $300,000. The company also received cash
of $44,000 from the exercise of stock options during the three month period
ended November 30, 2002.
The Company had working capital of $32,041,000 as of November 30, 2002, and
maintained a liquid position evidenced by a current ratio of approximately 9 to
1. In addition the Company had no outstanding balance related to long-term debt
at November 30, 2002. 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. Subsequent to the three month period ended
November 30, 2002, the Company has invested approximately $1,700,000 to purchase
land in North Houston and has signed other option agreements to purchase
additional land in Texas and Louisiana. 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 original amount available under the line of credit was for
$8,000,000. The line of credit is reduced monthly by an amount equal to 1/180th
of the original $8,000,000 loan amount, effective August 2001. The amount
available under the line of credit at November 30, 2002 is $7,333,000. The
interest rate on the line of credit is a variable rate of 2.3% plus the "Dealer
Commercial Paper" rate. The line of credit is secured by the land and buildings
in Pasadena, Texas and the contents therein. There were no borrowings
outstanding under the credit facility as of November 30, 2002. The Company
believes it has the ability to borrow additional funds if necessary to meet its
capital needs. However, there can be no assurance that the Company will have
sufficient funds available to meet all of its capital needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates as well as credit risk concentrations. All of the Company's
contracts are denominated in US$ and, therefore, the Company has no foreign
currency risk.
12
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 November
30, 2002. 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
Set forth below is certain information concerning all issuances of securities by
the Company during the fiscal quarter ended November 30, 2002, that were not
registered under the Securities Act.
On September 5, 2002, the Company issued 2,500 shares of common stock for an
aggregate consideration of $11,094, upon the exercise of an option, to an
accredited investor pursuant to the exemption provided by Section 4(2) of the
Securities Act.
On October 3, 2002, the Company issued twelve accredited investors three-year
warrants to purchase an aggregate of 61,149 shares of common stock at exercise
prices of $10.95 per share, pursuant to the exemption provided by Regulation D
of Section 4(2) of the Securities Act.
13
The above transactions did not involve any public offering, and each recipient
either received adequate information about the Company or had access to such
information, and the Company determined that each recipient had such knowledge
and experience in financial and business matters that they were able to evaluate
the merits and risks of an investment in the Company.
All sales of the Company's securities were made by officers of the Company who
received no commission or other remuneration for the solicitation of any person
in connection with the respective sales of securities described above. The
recipients of securities represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
ITEM 3. - DEFAULTS 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
(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.
14
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: January 14, 2003 BY: /s/ Philip Chan
-----------------------
Philip Chan
VP-Finance/Treasurer &
Chief Financial Officer
15
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: January 14, 2003
/s/ CHIU M. CHAN
- -------------------------------------
Chiu M. Chan, Chief Executive Officer
16
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: January 14, 2003
/s/ PHILIP S. CHAN
- ----------------------------------------
Philip S. Chan, Chief Financial Officer
17