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 June 30, 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 June 30, 1999
- ------------------------------------- ---------------------------------
$.001 par value Class A Common Stock 18,386,429 shares
1
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 six
months ended June 30, 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
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"). Further, the Company, DAC, ACS and
Advanced 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.
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(SEC) 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. The proxy statement was
returned with comments from the SEC, requiring action by the Company. The Annual
Meeting of the shareholders originally planned for June 16, 1999 was delayed
until these comments have been cleared.
The business operations of the subsidiaries, Genesis and GCCA are being operated
through the LLC under the Contribution Agreement.
At the time of the filing of this document, ACS, Advanced and the Company have
preliminarily agreed to dissolve the LLC and not to proceed with the Merger. A
written agreement rescinding the Contribution, Merger and other agreements
connected therewith is currently being drafted and negotiated between the
parties.
During the second quarter, the Company learned that one of its Directors, Mr.
William H. Means had entered into a Plea Agreement on January 15, 1993 in which
he pled guilty to a two-count Bill of Information in United States District
Court, Western District of Louisiana, Shreveport Division, CR. No. 93-500001-01
to soliciting, demanding and accepting payments from certain individuals in
violation of Title 18, United States Code, Section 215(a)(2). [18 U.S.C.
ss215(a)(2)]. This information will appear in the Company's amended Form 10K to
be filed shortly with the Securities and Exchange Commission.
2
In June 1999, a settlement was reached between the Company and certain former
management and officers of its subsidiaries. On June 10, 1999, Director William
H. Means resigned from the Board of Directors of the Company, and Ms. Grace Sim
was appointed as a Director by the Board of Directors to fill the vacancy. Ms.
Sim has been Secretary/Treasurer of the Company since 1997.
The Company and its subsidiaries were recently named defendants in a qui tam
provision under the False Claims Act, 31 U.S.C. Sec 3730, brought on by former
employees of Genesis on behalf of the United States of America, which have been
unsealed and served. The actions allege, in general, that its subsidiaries
violated the False Claims Act, 31 U.S.C. (S) 3730 et seq., for improper claims
submitted to the government for reimbursement. At this time, the Federal
Government has decided not to participate in the claims.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $231,326 in cash and cash equivalents. The
Company incurred an operating loss of $.08 per share after deducting $1,302,694
for amortization of goodwill and depreciation. The cost of goodwill and debt
cost amortization is approximately $.08 per share. Cash flow generated from
operations was approximately $.00 per share.
RESULTS OF OPERATIONS
The financial statements present the activities of the Company, Genesis and
GCCA.
During the three months ended June 30, 1999, management fees of $0 were paid
compared to $68,399 for the same period in 1998. The Company's President
received or was accrued the amount of $0 and the Company's Secretary/Treasurer
received or was accrued the amount of $0. The officers agreed to take no
compensation for the quarter ended June 30, 1999.
Net ordinary loss for the three months ended June 30, 1999 was $372,301 compared
to a loss of $128,844 for the same period in 1998. The net loss is $.02 per
share for the quarter. A charge for amortization of goodwill and depreciation of
$651,346 was incurred in the period which represents $.04 per share. The Company
generated from operations a positive cash flow of $.02 per share. The increased
loss is, to a large extent, due to a reduction in management fee income from the
hospital units.
Management fee income was $2,029,246 for the three months ended June 30, 1999
compared to $4,041,724 for the same period in 1998. The revenues of Genesis and
GCCA are derived from the Medicare programs, which are highly regulated and
subject to frequent and substantial changes. In the last 2 years, there have
been fundamental changes in the Medicare programs, including the prospective
payment system ("PPS"), which Genesis and GCCA are dependent on for the billing
of its services. This has resulted in limitations on, and reduced levels of
payment and reimbursement for the hospitals.
General and administrative expenses for the three months ended June 30, 1999
were $1,568,440 compared to $2,473,156 for the same period in 1998. The Company
was able to reduce cost by restructuring the management staff of Genesis and
GCCA. The contracts of several executive management personnel were not renewed
at the end of 1998.
Depreciation and amortization expenses for the three months ended June 30, 1999
were $15,026 and $636,320, respectively. This was the same as in 1998 since
depreciation and amortization is calculated on a straight-line method over a
fixed number of years.
Interest expense for the three months ended June 30, 1999 was $192,772 compared
to $475,190 for the same period in 1998. Interest expense is incurred to the
Convertible Note Holders of the Company. The
3
decline in interest payments was largely due to the refinancing of the Company's
debt to these Note Holders at the end of 1998. This refinancing substantially
reduced the principal obligation of the Company as well as the interest rate due
thereon for most of its debt.
During the six months ended June 30, 1999, management fees of $75,769 were paid
compared to $146,266 for the same period in 1998. The Company's President
received or was accrued the amount of $45,375 and the Company's
Secretary/Treasurer received or was accrued the amount of $30,394. The Company's
President and Secretary/Treasurer agreed to forego any fees after March 30,
1999, when the Company contributed the subsidiaries to the LLC under the
Contribution Agreement.
Net ordinary loss for the six months ended June 30, 1999 was $2,183,854 compared
to a loss of $2,856,112 for the same period in 1998. The net loss is $.13 per
share for the six months. A charge for amortization of goodwill and depreciation
of $1,302,694 was incurred in the period which represents $.08 per share. The
Company generated from operations a positive cash flow of $.05 per share. Net
loss for the period was due largely to bad debt write offs arising out of the
Company's agreement to reduce its management fees in exchange for early payment
by the contracting units.
Management fee income was $4,513,412 for the six months ended June 30, 1999
compared to $7,764,230 for the same period in 1998. Since the Balanced Budget
Act of 1997, Genesis and GCCA have had to reduce its management fee contracts
with its hospital units.
General and administrative expenses for the six months ended June 30, 1999 were
$3,422,522 compared to $5,586,061 for the same period in 1998. The Company has
been successful in reducing its administrative expenses to accommodate its
reduced management fee income.
Depreciation and amortization expenses for the six months ended June 30, 1999
were $30,054 and $1,272,640 respectively compared to $30,668 and $1,272,640 for
the same period in 1998.
Interest expense for the six months ended June 30, 1999 was $483,824 compared to
$947,305 for the same period in 1998. Interest expense is incurred to the
Convertible Note Holders of the Company. The decline in interest payments was
largely due to the refinancing of the Company's debt to these Note Holders at
the end of 1998. This refinancing substantially reduced the principal obligation
of the Company as well as the interest rate due thereon for most of its debt.
During the six months ended June 30, 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 $.47 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, however, its revenue
source is directly related to certain hospitals and other government agencies
that may have computer systems with Year 2000 problems. The Health Care
Financing Administration (HCFA) announced in the Spring of 1998, that they would
begin preparing providers and suppliers for the requirement that they submit all
claims using 8-digit date fields. On January 13, 1999, HFCA notified Medicare
contractors that, beginning April 5, 1999, claims not submitted in the Y2K
format must be returned to providers as unprocessable. On February 1, 1999, the
Medicare contractors issued bulletins to all providers detailing this April 5,
1999, compliance deadline. Since the Company is dependent on each
4
individual hospital's submission of cost reports for claims, we have no
assurances that this will be done correctly or in a timely manner and in the
Y2K-compliant format so that HCFA's systems can continue to process and pay
bills promptly throughout the millennium transition.
PART II - OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99-1 Financial Statements as of June 30, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
An 8-K was filed on April 14, 1999 to announce the ACS items
discussed elsewhere in this document.
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: August 23, 1999 By:
Grace Sim, Secretary/Treasurer
5
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 231,326 $ 478,418
Accounts receivable (less allowance for doubtful accounts of
$427,644 in 1999, $2,552,100 in 1998) 3,443,769 3,741,260
Loans receivable - related parties 52,500 52,500
Other receivables 268,372 86,662
Prepaid expense and other current assets 43,670 109,950
Deferred tax benefit 0 300,000
----------------- ------------------
TOTAL CURRENT ASSETS 4,039,637 4,768,790
PROPERTY, PLANT & EQUIPMENT 132,319 228,733
OTHER ASSETS
Deferred debt issue costs (less amortization of $261,128) 616,069 1,331,307
Investment - restricted stock 4,000 17,000
Goodwill (less amortization of $6,535,640) 18,322,135 19,594,775
Deposits 0 410
----------------- ------------------
18,942,204 20,943,492
----------------- ------------------
$ 23,114,160 $ 25,941,015
================= ==================
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts payable $ 164,897 $ 596,812
Accrued expenses 567,419 275,101
Current portion of long-term debt 11,907 3,978
Accrued interest payable 21,587 791,851
----------------- ------------------
TOTAL CURRENT LIABILITIES 765,810 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 9,442,310 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 (5,493,010) (11,264,987)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 13,671,850 7,261,567
----------------- ------------------
$ 23,114,160 $ 25,941,015
================= ==================
F - 1
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------------ ----------------- ----------------- ------------------
Management fees $ 2,029,246 $ 4,041,724 $ 4,513,412 $ 7,764,230
------------------ ----------------- ----------------- ------------------
2,029,246 4,041,724 4,513,412 7,764,230
General & administrative expenses 1,568,440 2,473,156 3,422,522 5,586,061
Depreciation 15,026 15,694 30,054 30,668
Amortization of goodwill 636,320 636,320 1,272,640 1,272,640
Bad debts (recovery) (12,560) 485,000 1,174,077 735,000
------------------ ----------------- ----------------- ------------------
2,207,226 3,610,170 5,899,293 7,624,369
------------------ ----------------- ----------------- ------------------
NET OPERATING INCOME (LOSS) (177,980) 431,554 (1,385,881) 139,861
OTHER INCOME (EXPENSE)
Interest income 651 4,342 651 13,995
Interest expense (192,772) (475,190) (483,824) (947,305)
Bad debts - former subsidiaries 0 0 0 (2,169,806)
Disposition of subsidiaries 0 0 0 256,493
Unrealized (decrease) in investment (4,000) 12,000 (13,000) (2,800)
------------------ ----------------- ----------------- ------------------
(196,121) (458,848) (496,173) (2,849,423)
------------------ ----------------- ----------------- ------------------
NET (LOSS) BEFORE INCOME TAXES (374,301) (27,294) (1,882,054) (2,709,562)
INCOME TAX EXPENSE (BENEFIT) (1,800) 101,550 301,800 146,550
------------------ ----------------- ----------------- ------------------
NET (LOSS) BEFORE
EXTRAORDINARY ITEM (372,301) (128,844) (2,183,854) (2,856,112)
Extraordinary item - Gain on restructuring of debt
(no applicable income taxes) 0 0 7,955,831 0
------------------ ----------------- ----------------- ------------------
NET INCOME (LOSS) $ (372,301) $ (128,844) $ 5,771,977 $ (2,856,112)
================== ================= ================= ==================
Net income (loss) per weighted average share:
Operations $ (.02) $ (.01) $ (.13) $ (.20)
Extraordinary item .00 .00 .47 .00
------------------ ----------------- ----------------- ------------------
NET INCOME (LOSS) $ (.02) $ (.01) $ .34 $ (.20)
================== ================= ================= ==================
Weighted average number of common shares
used to compute net income (loss) per weighted
average share 18,386,429 14,223,929 16,998,929 14,146,581
================== ================= ================= ==================
F - 2
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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 period 5,771,977
----------------- ------------------ ------------------ -----------------
Balances at 6/30/99 18,386,429 $ 18,386 $ 19,146,474 $ (5,493,010)
================= ================== ================== =================
F - 3
DYNAMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
1999 1998
------------------ -----------------
OPERATING ACTIVITIES
Net income (loss) $ 5,771,977 $ (2,856,112)
Adjustments to reconcile net income (loss) to cash used by
operating activities:
Depreciation and amortization 1,374,189 1,403,154
Non-cash debt restructuring (7,955,831) 0
Book value of spun-off subsidiaries 0 1,743,312
Book value of disposed assets 66,360 0
Bad debts 1,174,077 735,000
Unrealized change in investment 13,000 2,800
Deferred taxes 300,000 0
Changes in assets and liabilities:
Accounts receivable (1,058,296) (1,947,820)
Prepaid expenses and other 66,280 5,626
Accounts payable and accrued expenses 3,019 96,980
Income taxes payable 0 (226,528)
------------------ -----------------
NET CASH USED BY OPERATING ACTIVITIES (245,225) (1,043,588)
INVESTING ACTIVITIES
Loan - other 0 (9,892)
Purchase of equipment 0 (6,766)
Deposits 410 (11,496)
------------------ -----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 410 (28,154)
FINANCING ACTIVITIES
Cash from (to) subsidiaries 0 (387,982)
Principal payments on debt (2,277) (15,076)
Proceeds from sale of common stock 0 250,000
------------------ -----------------
NET CASH (USED) BY
FINANCING ACTIVITIES (2,277) (153,058)
------------------ -----------------
DECREASE IN CASH AND CASH EQUIVALENTS (247,092) (1,224,800)
Cash and cash equivalents at beginning of period 478,418 2,616,174
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 231,326 $ 1,391,374
================== =================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 274,431 $ 866,089
Cash paid for income taxes 23,931 253,878
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: SEGMENT INFORMATION
Pre-consolidation net income (loss) is as follows:
Dynamic $ 6,284,909
Genesis (685,047)
GCCA 172,115
---------------
$ 5,771,977
===============
F - 5