UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
Commission File Number 33-55254-03
DYNAMIC ASSOCIATES, INC.
(Exact name of Small Business Issuer as specified in its charter)
Nevada 87-0473323
(State or other jurisdiction of (IRS Employer
incorporation ) Identification No.)
6955 East Caballo Drive
Paradise Valley, Arizona 85253
(Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code (602) 483-8700
Indicate by a check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class March 31, 1999
- ------------------------------------ -----------------------------------
$.001 par value Class A Common Stock 18,386,429 shares
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
BASIS OF PRESENTATION
General
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB and, therefore, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, cash flows, and stockholders' equity in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and all such
adjustments are of a normal recurring nature. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
can be expected for the year ending December 31,1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is engaged in managing the operation of psychiatric/geriatric units
for various hospitals through Genesis and GCCA, wholly owned subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $40,416 in cash and cash equivalents. The
Company incurred an ordinary loss of $.07 per share after deducting $651,348 for
amortization of goodwill and depreciation. The cost of goodwill and debt cost
amortization is approximately $.04 per share. Cash flow generated from
operations was approximately $.03 per share.
Genesis, a Louisiana corporation, is a 100% owned subsidiary of the Company. It
provides elderly healthcare and gero-psychology services to small healthcare
facilities unable to provide these services in house. The Genesis treatment
program conforms to the guidelines of the JCAHO Accreditation Manual for
Hospitals and Medical Standards. The program is reimbursed at cost by Medicare
when established as a distinct part unit of a hospital which qualifies for an
exemption from the Medicare Prospective Payment System("PPS"). The PPS exemption
provides for a cost plus reimbursement system for the unit, which allows the
hospital to receive full reimbursement of the direct operating expenses, plus an
allocation to the unit of a substantial portion of the hospital's overall
overhead and capital costs. Genesis , together with GCCA, expects to generate a
profit.
RESULTS OF OPERATIONS
The financial statements present the activities of the Company, Genesis and
GCCA.
During the three months ended March 31, 1999, management fees of $95,958 were
paid compared to $45,000 for the same period in 1998. The Company's President
received or was accrued the amount of $63,958 and the Company's
Secretary/Treasurer received or was accrued the amount of $32,000.
Net ordinary loss for the three months ended March 31, 1999 was $1,811,553
compared to a loss of $2,727,268 for the same period in 1998. The net loss is
$.11 per share for the quarter. A charge for amortization of goodwill and
depreciation of $651,348 was incurred in the period which represents $.04 per
share. The Company generated from operations a positive cash flow of $.03 per
share. Net loss for the period is due largely to bad debts that arose due to
reducing amounts due from management fees in exchange for earlier payment by the
contracted units.
Management fee income was $2,484,166 for the three months ended March 31, 1999
compared to $3,722,506 for the same period in 1998. This is a 33% decrease from
1998.
General and administrative expenses for the three months ended March 31, 1999
were $1,854,082 compared to $3,112,905 for the same period in 1998.
Depreciation and amortization expenses for the three months ended March 31, 1999
were $15,028 and $636,320 respectively compared to $14,974 and $636,320 for the
same period in 1998.
Interest expense for the three months ended March 31, 1999 was $291,052 compared
to $472,115 for the same period in 1998. Interest expense is incurred to the
Convertible Note Holders of the Company. During the quarter ended March 31,
1999, the Company was able to lower the interest rate from 10.0% to 7.5% on most
of its debt.
During the quarter ended March 31, 1999, the Company recorded an extraordinary
gain in the amount of $7,955,381 from restructuring its convertible notes. The
extraordinary gain represented income of $.49 per share.
Impact of the Year 2000 Issue
The "Year 2000 Problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail or create
erroneous results. The extent of the potential impact of the Year 2000 Problem
is not yet known, and if not timely corrected, it could affect the global
economy. The Company believes that its computer programs are Y2K compliant and
does not expect to be adversely affected by the issue.
On March 30, 1999, the Company entered into a Capital Contribution Agreement
with ACS2, Inc. ("ACS") and Advanced Clinical Systems, Inc. ("Advanced") under
which the Company contributed its operating subsidiaries, Genesis Health
Management Company ("Genesis") and Geriatric Care Centers of America, Inc.
("GCCA"), and ACS contributed its subsidiary, Advanced, and the operating
subsidiaries of Advanced to a newly formed Nevada Limited Liability Company
known as Advanced-Dynamic, LLC ("LLC"). In consideration of which, each of the
Company and ACS received a fifty percent (50%) equity interest in the LLC. The
Capital Contribution Agreement and the contributions to the LLC were completed
contemporaneously on March 30, 1999 with the parties agreement to the LLC's
Operating Agreement. The LLC's Operating Agreement sets forth the agreement of
the Company and ACS with respect to the ownership and management of the LLC, the
Dynamic Subsidiaries and the Advanced Subsidiaries pending consummation of a
proposed merger of ACS into Dynamic Acquisition Corporation ("DAC"), a newly
formed, wholly owned subsidiary of Dynamic (the "Merger"). The LLC's Operating
Agreement also sets forth the agreement of the Company and ACS to dissolve the
LLC and return the subsidiaries to their respective companies in the event that
the Merger (more fully described below) is not consummated by December 15, 1999.
On the same date (March 30, 1999), the Company, DAC, ACS and Advance also
entered into an agreement and plan of Merger (the "Merger Agreement"). This
Merger Agreement contemplated that upon approval by the holders of a majority of
the outstanding shares of common stock of the Company at the Annual Meeting of
shareholders to be held on June 16, 1999 (and the satisfaction or waiver of the
other conditions of the Merger and Contribution Agreements), a merger will take
place between DAC and ACS. Upon completion of the Merger, DAC will be the
surviving company and will remain a wholly-owned subsidiary of the Company. ACS
will cease to exist and the ACS shareholders will become shareholders of the
Company based on an exchange of shares that will provide existing ACS
shareholders with newly issued common stock representing approximately 55% of
the outstanding shares of the Company.
Thereafter, the Company will directly or indirectly, be the sole controlling
shareholder of all the Advanced and Dynamic Subsidiaries.
All of the terms and conditions upon which the Merger and associated agreements
are to be effected are set-forth in the Merger and other agreements attached to
the Form 8K filed with the Securities Exchange Commission by the Company on
April 14, 1999 and more particularly discussed in the Company's Preliminary
Proxy Statement (Form 14A) filed on May 18, 1999. Said documents are
incorporated by reference herein.
PART II - OTHER INFORMATION
Item 5. Other Information
Genesis Health Management Corporation (Genesis)
In December 1996, the Company purchased 100% of the outstanding common stock of
Genesis for $25,373,000. Of the purchase price, $15,050,000 was paid in cash or
notes and accounts payable and $10,323,000 was paid by issuing 3,100,000 shares
of the Common Stock of the Company at a value of $3.33 per share. The note
issued in connection with the acquisition of Genesis was paid in full on March
3, 1997. Genesis had been operating in Louisiana for 3 years prior to the
purchase by the Company. Genesis is in the business of managing and operating
psychiatric/geriatric units in various hospitals (both in-patient and
out-patient). At March 31, 1999, Genesis had 23 contracted units. Genesis has
contracts with hospitals in the states of Louisiana, Arkansas, Mississippi and
Tennessee.
Geriatric Care Centers of America, Inc. (GCCA)
On March 13, 1997, Geriatric Care Centers of America ("Geriatric"), a
corporation organized pursuant to the laws of the state of Tennessee, merged
with Geriatric Care Centers Acquisition Corporation, for $500,000 in cash and
150,000 shares of Common Stock of the Company. The surviving corporation is
Geriatric Care Centers of America, Inc. ("GCCA"), with its registered office at
1613 Jimmie Davis Highway, Bossier City, Louisiana, 71112. The Company owns 100%
of GCCA. GCCA is also in the business of managing and operating
psychiatric/geriatric units in hospitals. At March 31, 1999, GCCA had 2
operating units.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99-1 Financial Statements as of March 31, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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.
DYNAMIC ASSOCIATES, INC.
DATED: May 24, 1999 By:
Grace Sim, Secretary/Treasurer
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,416 $ 478,418
Accounts receivable (less allowance for doubtful accounts of
$2,552,100 in 1998 0 3,741,260
Loans receivable - related parties 52,500 52,500
Other receivables 0 86,662
Prepaid expense and other current assets 2,800 109,950
Deferred tax benefit 0 300,000
----------------- ------------------
TOTAL CURRENT ASSETS 95,716 4,768,790
PROPERTY, PLANT & EQUIPMENT 0 228,733
OTHER ASSETS
Deferred debt issue costs (less amortization of $233,476) 643,721 1,331,307
Investment - restricted stock 8,000 17,000
Goodwill (less amortization of $5,899,320) 18,958,455 19,594,775
Deposits 0 410
Investment in LLC 3,429,464 0
----------------- ------------------
23,039,640 20,943,492
----------------- ------------------
$ 23,135,356 $ 25,941,015
================= ==================
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable $ 106,759 $ 596,812
Accrued expenses 199,797 275,101
Current portion of long-term debt 0 3,978
Accrued interest payable 108,149 791,851
----------------- ------------------
TOTAL CURRENT LIABILITIES 414,705 1,667,742
Long-term debt 0 10,206
Convertible notes 8,676,500 17,001,500
----------------- ------------------
8,676,500 17,011,706
----------------- ------------------
TOTAL LIABILITIES 9,091,205 18,679,448
STOCKHOLDERS' EQUITY
Common Stock $.001 par value:
Authorized - 25,000,000 shares
Issued and outstanding 18,386,429 shares (14,223,929 in 1998) 18,386 14,224
Additional paid-in capital 19,146,474 18,512,330
Retained deficit (5,120,709) (11,264,987)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 14,044,151 7,261,567
----------------- ------------------
$ 23,135,356 $ 25,941,015
================= ==================
F - 1
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1999 1998
------------------ -----------------
Management fees $ 2,484,166 $ 3,722,506
------------------ -----------------
2,484,166 3,722,506
General & administrative expenses 1,854,082 3,112,905
Depreciation 15,028 14,974
Amortization of goodwill 636,320 636,320
Bad debts 1,186,637 250,000
------------------ -----------------
3,692,067 4,014,199
------------------ -----------------
NET OPERATING (LOSS) (1,207,901) (291,693)
OTHER INCOME (EXPENSE)
Interest income 0 9,653
Interest expense (291,052) (472,115)
Miscellaneous income 0 0
Bad debts - former subsidiaries 0 (2,169,806)
Disposition of subsidiaries 0 256,493
Unrealized (decrease) in investment (9,000) (14,800)
------------------ -----------------
(300,052) (2,390,575)
NET (LOSS) BEFORE INCOME TAXES (1,507,953) (2,682,268)
INCOME TAX EXPENSE 303,600 45,000
------------------ -----------------
NET (LOSS) BEFORE
EXTRAORDINARY ITEM (1,811,553) (2,727,268)
Extraordinary item - Gain on restructuring of debt (no
applicable income taxes) 7,955,831 0
------------------ -----------------
NET INCOME (LOSS) $ 6,144,278 $ (2,727,268)
================== =================
Net income (loss) per weighted average share:
Operations $ (.11) $ (.19)
Extraordinary item .49 .00
------------------ -----------------
NET INCOME (LOSS) $ .38 $ (.19)
================== =================
Weighted average number of common shares used to compute
net (loss) per weighted average share 16,305,179 14,068,373
================== =================
F - 2
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
Par Value $.001 Paid-In Retained
Shares Amount Capital Deficit
----------------- ------------------ ------------------ -----------------
>
Balances at 12/31/98 14,223,929 $ 14,224 $ 18,512,330 $ (11,264,987)
Issuance of common stock
to restructure debt 4,162,500 4,162 634,144
Net income for quarter 6,144,278
----------------- ------------------ ------------------ -----------------
Balances at 3/31/99 18,386,429 $ 18,386 $ 19,146,474 $ (5,120,709)
================= ================== ================== =================
F - 3
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1999 1998
------------------ -----------------
OPERATING ACTIVITIES
Net income (loss) $ 6,144,278 $ (2,727,268)
Adjustments to reconcile net income (loss) to cash used by
operating activities:
Depreciation and amortization 695,191 701,217
Non-cash debt restructuring (7,955,831) 0
Book value of spun-off subsidiaries 0 1,743,312
Bad debts 1,186,637 0
Unrealized change in investment 9,000 14,800
Deferred taxes 300,000 0
Changes in assets and liabilities:
Accounts receivable (746,435) (707,697)
Prepaid expenses and other (16,425) 5,983
Accounts payable and accrued expenses 167,067 (356,467)
Income taxes payable 0 (208,328)
------------------ -----------------
NET CASH USED BY OPERATING ACTIVITIES (216,518) (1,534,448)
INVESTING ACTIVITIES
Loan - other 0 (9,014)
Purchase of equipment 0 (4,980)
Deposits 0 (11,496)
------------------ -----------------
NET CASH USED BY INVESTING ACTIVITIES 0 (25,490)
FINANCING ACTIVITIES
Cash from (to) subsidiaries / LLC (220,522) (387,982)
Principal payments on debt (962) (7,093)
Proceeds from sale of common stock 0 250,000
------------------ -----------------
NET CASH (USED) BY
FINANCING ACTIVITIES (221,484) (145,075)
------------------ -----------------
DECREASE IN CASH AND CASH EQUIVALENTS (438,002) (1,705,013)
Cash and cash equivalents at beginning of period 478,418 2,616,174
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40,416 $ 911,161
================== =================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 18,029 $ 864,838
Cash paid for income taxes 0 253,768
During 1999, the Company issued 4,162,500 shares of its restricted common stock
and 8,325,000 warrants to purchase stock at $1.50 per share until December 31,
2000 to retire debt of $8,325,000 and accrued interest of $912,881.
During 1998, the Company purchased a vehicle in the amount of $16,943 by
incurring a loan in the same amount.
F - 4
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
SELECTED NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1: INVESTMENT IN LLC
On March 30, 1999, the Company contributed its subsidiaries Genesis and GCCA to
the Advanced Dynamic, LLC. The Company owns 50% of the LLC. The Company's
investment in the LLC consists of the following at March 31, 1999:
Cash $ 220,522
Accounts receivable (net of allowance of $291,647) 3,342,720
Other receivables 45,000
Prepaid expenses 123,575
Property, plant and equipment 210,242
------------------
Net Assets 3,942,059
Accounts payable 247,328
Accrued expenses 248,445
Income taxes payable 3,600
Note payable 13,222
------------------
Net Liabilities 512,595
------------------
Net Investment $ 3,429,464
==================
NOTE 2: SEGMENT INFORMATION
Pre-consolidation net income (loss) is as follows:
Dynamic $ 6,835,941
Genesis (747,139)
GCCA 55,476
---------------
$ 6,144,278
===============
F - 5