-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BHTb7a0ZtSwtVhz+IPDYPZY/paQ00S68YQHPLfm1nFvLOhQyOxT5z6CEVFngJueM mv12yhGtFmwN2PTIJ6Di3g== 0000899243-00-002577.txt : 20001201 0000899243-00-002577.hdr.sgml : 20001201 ACCESSION NUMBER: 0000899243-00-002577 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNACQ INTERNATIONAL INC CENTRAL INDEX KEY: 0000890908 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 760375477 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-21574 FILM NUMBER: 781126 BUSINESS ADDRESS: STREET 1: 10304 INTERSTATE 10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 BUSINESS PHONE: 7136736639 MAIL ADDRESS: STREET 1: 10304 I-10 EAST STREET 2: SUITE 369 CITY: HOUSTON STATE: TX ZIP: 77029 10KSB40 1 0001.txt FORM 10-KSB FOR YEAR ENDED AUGUST 31, 2000 FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended August 31, 2000 --------------------------------------------- [_] 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 ------------------------------------------------ DYNACO INTERNATIONAL, INC. ---------------------------------------------------------------------- (Name of Small Business Issuer in its charter)
NEVADA 76-0375477 ------------------------------------------------------------- ------------------------------------------------- (state or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.) 1030 INTERSTATE 10 EAST, SUITE 369 HOUSTON, TEXAS 77069 -------------------------------------------------------------- ------------------------------------------------- (Address of principal executive officers) (Zip Code) Issuer's telephone number, including area code 713-673-6432 -------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.001 Par Value ------------------------------ (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . ------ No ______. Check if there is no disclosure of delinquent filers in response to Item 405 fo Regulation S-B contained in this form, and no such disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's gross revenues for the most recent fiscal year: $26,032,441 As of August 31, 2000 there were 7,658,856 shares of the registrant's common stock, .001 par value, issued and outstanding 2,033,464 of which having an aggregate market value of approximately $21,859,738 (based on the last trade price of $10.75 as of November 28, 2000) were held by non-affiliates of the registrant. In determining the number of shares held by non-affiliates, shares held by officers, directors, and the Company's majority shareholder were excluded. DOCUMENTS INCORPORATED BY REFERENCE. None Transitional Small Business Format. Yes _______. No x . -------- FORM 10-KSB DYNACQ INTERNATIONAL, INC. TABLE OF CONTENTS PART I.......................................................................... 1 ITEM 1. Description of Business.......................................... 1 ITEM 2. Description of Property.......................................... 8 ITEM 3. Legal Processings................................................ 10 ITEM 4. Submission of Matters to a Vote of Security Holders.............. 10 PART II......................................................................... 10 ITEM 5. Market for Common Equity and Related Stockholder Matters......... 10 ITEM 6. Management's Discussion and Analysis or Plan of Operation........ 12 ITEM 7. Financial Statements............................................. 16 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 16 PART III........................................................................ 17 ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act................ 17 ITEM 10. Executive Compensation........................................... 18 ITEM 11. Security Ownership of Certain Beneficial Owners and Management................................................... 23 ITEM 12. Certain Relationships and Related Transactions................... 23 ITEM 13. Exhibits and Reports on Form 8-K.................................
PART I ITEM 1. Description of Business General Dynacq International, Inc., a Nevada corporation incorporated on June 16, 1989 (the "Company"), is engaged in (i) the operation of an outpatient surgical facility, (ii) the business of providing home infusion healthcare services and supplies to patients in their homes, (iii) the operation of a medical office complex, (iv) the management of physician practices, all located in the Houston metropolitan area, and (v) the ownership and management of an acute care hospital. In May 1998, the Company organized Vista Community Medical Center, L.L.C., a Texas limited liability company which is 70% owned by a subsidiary of the Company ("Vista Medical"), for the purpose of operating a General Acute Care Hospital located adjacent to the "Vista Facility" (defined below), which was completed and opened in May 1999 (the "Hospital"). Unless otherwise indicated, all references to the Company herein include its subsidiaries. See Note 1.B. of Notes to Consolidated Financial Statements. Effective August 1, 1992, the Company commenced operations as a provider of healthcare services and supplies to patients in their homes specializing in home infusion therapy. Home infusion therapy is the administration to a patient of nutrients, antibiotics or other medications whether intravenously or through a feeding tube, usually as a continuation of treatment initiated in a hospital. The Company's home infusion therapy business was its core operation for several years before it diversified its healthcare operations. The Company's diversification effort includes (i) the acquisition of Vista Healthcare, Inc., a Texas corporation ("Vista") described below in August 1994 which then owned and operated a 15,000 square foot outpatient surgical facility located in Pasadena, Texas (the "Vista Facility"), (ii) the formation of Doctors Practice Management, Inc., a Texas corporation ("DPMI") in March 1994, to manage physician practices, (iii) the construction and operation of a professional medical building completed in May 1995, and (iv) the construction and operation of the Hospital completed in May 1999.The Company transferred its home infusion therapy business to Ambulatory Infusion Therapy Specialists, Inc., a Texas corporation ("AITS") in December 1999 in exchange for 100% of the common stock of AITS. The reason for this transfer was an attempt by the Company to reduce the operating exposure to the Company of the possible liabilities arising from the operations the business in view of its declining significance to the Company's operations overall. In September 1993, the Company's Common Stock commenced trading on the NASDAQ Small Cap System under the symbol DYII. In February 1998, the Company amended its Articles of Incorporation to effectuate a four (4) to one (1) reverse stock split in order to increase the price of its Common Stock to, among other things, maintain the listing of the Common Stock on the NASDAQ Small Cap System and to attempt to enhance the acceptability and marketability of the Common Stock. In fiscal 2000 the Board of Directors of the Company deemed it to be in the best interests of the Company and its shareholders and approved as of December 30, 1999 a stock split effected in the form of a 100% stock dividend on all issued shares of its common stock, $.001 par value (the "Common Stock") effective as of 5:00 p.m. on January 10, 2000. On April 11, 2000, the Company's request for listing of its securities on The Nasdaq National Market System was approved by NASDAQ and its Common Stock started trading on the Nasdaq National Market System under the same trading symbol DYII on April 14, 2000. In 1994, the Company completed the acquisition of approximately 65% of the outstanding common stock of Vista in exchange for approximately 5% of the Company's then outstanding Common Stock which was issued to 30 shareholders of Vista in exchange for their shares of Vista common stock pursuant to an Exchange Agreement. Subsequent to the initial exchange, the Company has reacquired additional Vista shares increasing its ownership of Vista to approximately 96%. Vista operated the Vista Facility, which provides a variety of surgeries, medical treatments and laboratory services on an outpatient basis. Under the Company's control, Vista continues to utilize its facilities and equipment in the same manner, however, the Company expanded the services offered and purchased 1 new equipment. Revenues from the Vista Facility substantially increased in the last three years and it has become the Company's largest revenue producer and profit center, exceeding the combined revenues from the Company's home infusion therapy business and revenues from the Company's management of physician practices. The Company's Hospital has become the Company's second largest profit center and revenue producer behind Vista. The Company completed construction of a 35,900 square foot medical office building adjacent to the Vista Facility in 1995 at a total cost of approximately $1,937,000 (the "Office Building"). Several of the offices in the Office Building are currently utilized by physicians with whom the Company has management contracts through its wholly-owned subsidiary DPMI. Offices are also leased to other physician practices that are not subject to management agreements with DPMI. In March 1994, the Company formed DPMI for the purpose of providing (i) fee-based management services to physicians' groups, and (ii) assistance in consolidating medical providers into integrated delivery systems. DPMI began managing Vista in January 1996. It currently has agreements to manage three (3) physician practices and it has a Management Agreement to manage the Vista Facility and the Hospital. In fiscal 2000 the Company undertook several steps to reduce the company's operational risks and liability exposure with respect to its various healthcare operations. As discussed above, it transferred its home therapy infusion business to AITS. It also formed Vista Land and Equipment, L.L.C., a Texas limited liability company 100% owned by the Company ("VLE") to hold substantially all of the operational assets of the Company and its subsidiaries which will be leased back to the various entities by VLE. In addition it is intended that DPMI or other entities to be formed, will serve as the manager or operator of the Company's different businesses including, to date, the operations of Vista, the Hospital, the home infusion therapy operations and the management of physician practices. To date the Company has not incurred material liabilities or lawsuits from its various operations and believes that its operations are adequately insured. Its restructuring of asset ownership and operational control to subsidiaries is intended to provide additional protection to the Company's consolidated operations and assets overall such that liabilities in one operational area may be contained to the maximum extent permitted by state laws limiting entity liabilities from their owners. The Home Infusion Healthcare Market. As previously discussed, all operations and assets of the Company's home infusion healthcare business were transferred to AITS. AITS is solely responsible for operating this business utilizing its own employees, pharmacists and consulting nurses. The Company's only involvement will be to perform certain general administrative services for AITS as part of its consolidated operations. The Company's home infusion healthcare business principally involves the administration of physician-prescribed nutrients, antibiotics or other medications to patients in their homes, usually as a continuation of a treatment program initiated in a hospital and is generally comprised of Parenteral Nutrition Therapy and Antibiotic Therapy services described below. Throughout the course of treatment, a company licensed pharmacist compounds or supervises the preparation of all prescribed drugs, solutions and related supplies and answers questions concerning the prescribed therapy and the Company's services. In certain cases where the patient is incapable of self-administering the therapy, a nurse is also present at each administration of the therapy. Company nurses visit patients periodically to review training, catheter placement and compliance with the patient care plan. The Company's personnel are available to respond to patient needs 24 hours a day, seven days a week. Due to increasing competition and decreasing reimbursable charges paid by third parties, the Company is not emphasizing home infusion therapy services in its business growth strategy. See "Management's Discussion and Analysis" hereinafter referred to as "MD&A." 2 Parenteral Nutrition Therapy Parenteral nutrition therapy is prescribed for individuals unable to eat or digest food due to a failure of their gastrointestinal tracts. Parenteral nutrition is typically administered through central vein catheters that are surgically implanted during hospitalization. The Company formulates, compounds and dispenses solutions pursuant to a physician's order. Solutions used in this therapy typically contain amino acids (protein), dextrose (carbohydrate), lipids (fat), electrolytes, vitamins and trace minerals. Some patients requiring this type of therapy periodically require routine re-hospitalization throughout their treatment. Some patients may require therapy for the remainder of their life. Antibiotic Therapy Antibiotic and anti-infection therapies are used to treat a variety of infections, including osteomyelitis (bone infections), bacterial endocarditis (heart valve infections), septicemia (blood infections), wound infections, bone and joint infections and infections associated with cystic fibrosis and diabetes. By intravenously administering antibiotics into the bloodstream (as opposed to ingesting them orally), the effectiveness of the medication is generally increased. Antibiotic therapy is also a significant therapy for treating individuals suffering from Acquired Immune Deficiency Syndrome ("AIDS"). Because of the gradual destruction of the immune system by the AIDS virus, orally administered drugs typically become less effective against opportunistic infections, and consequently antibiotics must be introduced intravenously. Physicians' Practice Management During fiscal 2000, DPMI had agreements to manage the medical practices of three (3) physician-group practices and the Vista Facility and the Hospital. Each physician practice management agreement is called a "Full Service Facility and Management Agreement" (the Management Agreement"). The Management Agreements generally require DPMI, at its expense, to: (i) act as the sole and exclusive agent of the physician or physician group for the management and administration of business functions and services related to the physicians' medical practice; (ii) undertake marketing, billing, record keeping, collection, clerical staffing and support services; (iii) provide physical office space, facilities and equipment necessary for the physician's practice, including the repair and maintenance thereof and all utilities and supplies related thereto including licenses and permits; (iv) undertake the hiring, firing, selection, training and supervision of all non-medical personnel; (v) prepare and maintain accounting and financial records and patient files; and (vi) undertake other management and administrative functions related to the foregoing. In consideration of its services, DPMI receives a management fee ranging from 35% to 65% of revenues generated by the physicians. DPMI attempts to negotiate long-term (5 years or longer) noncancellable Management Agreements due to its large initial costs in setting up and equipping fully staffed and functional facilities for physicians. The Management Agreements may be terminated by the non-defaulting party in the event of a breach by the defaulting party. DPMI and the physicians each agree to indemnify the other for claims which may arise in connection with the performance of their respective obligations. Pursuant to the Management Agreements, DPMI is entitled to a fixed percentage of collections from the physicians' practice and is obligated to pay certain fixed categories of expenses which obligation is not limited in amount. To the extent DPMI's share of collections is not sufficient to cover its expense obligations under the Management Agreements, DPMI is obligated to pay the excess expenses and is subject to losses under the Management Agreements. The Company is not pursuing additional physician Management Agreements at this time and is concentrating its resources on the operations of the Vista Facility and the Hospital. 3 Outpatient Surgical Facility, Office Building and Hospital The Company's Vista Facility, consisting of approximately 15,000 square feet, provides outpatient surgical facilities, x-ray diagnostic services and full service laboratory testing to physicians and their patients. The Vista Facility, Office Building and Hospital are located adjacent to each other. Effective October 1, 1998, DPMI entered into a one (1) year Management Agreement renewable for two (2) additional years for the Vista Facility which entitles DPMI to 60% of the revenues generated by the facility in exchange for comprehensive management services provided by DPMI. The Management Agreement for the Vista Facility is similar in scope and nature to the ones entered into by DPMI to manage physician practices and was renewed for one (1) year in October 1999 and again in October 2000. The Office Building, consisting of approximately 35,900 square feet, is utilized by DPMI for the location of physician practices under Management Agreements and for leasing space to physician practices which are not under management with DPMI. The Hospital was completed in May 1999 and has two (2) surgical suites and 42 beds. See "Item 2. Description of Property." Business Growth Strategy Beginning in late fiscal 1994 and during fiscal 1995, the Company commenced implementation of a new business strategy of diversifying from an almost exclusively home infusion service provider into an integrated medical/healthcare services Company. The foundation of this strategy was the acquisition of a majority interest in Vista in August 1994 and the completion of the Office Building adjacent to the Vista Facility in April 1995. The Company also formed DPMI to provide management services to medical practices. DPMI provides office space and fee-based management services to certain client physicians located in the Office Building. Vista provides outpatient surgical facilities, x-ray diagnostic services and third-party laboratory testing to physicians and their patients in the Vista Facility. In fiscal 1998, the Company decided to build a 42-bed hospital adjacent to its Vista Facility (the outpatient surgical center) and its Office Building which was completed in May 1999. With the addition of the Hospital, the Company has expanded the range of medical services it can provide including major surgical cases which require hospitalization. The Company intends to grow as a provider of healthcare services by (i) expanding the business of its existing operations locally, (ii) acquiring established healthcare facilities, and (iii) opening new branch facilities in selected local markets. The Company will periodically evaluate possible acquisitions and suitable locations for new facilities. The Company's growth strategy is dependent in a large part on the ability of the Company to attract and retain key management, marketing and operating personnel at the local facility level. Such persons are in high demand and are often subject to competing offers from other healthcare service companies and related businesses. The Company primarily will target growth opportunities in the ambulatory surgical center business where it has established the greatest operating success. The Company's target markets are areas with major industrial companies and middle class blue-collar workers, generally with strong union ties and with superior insurance coverage. This population group has proven to be very open to the type of healthcare center concept offered by the Company. The Company's operations are in Pasadena, Texas, a petrochemical industry hub which provides a stable patient base of insured patients. The Company anticipates growth within a targeted area by purchasing or constructing an outpatient surgical center and, if it is successful, adding a professional building or a hospital at the same location or nearby. It is anticipated that each hub area will consist of a central core of outpatient surgical, diagnostic and laboratory centers, infusion therapy facilities and specialized practices serving outlying clusters of general practitioners. Subsequent alliances of physicians, specialists and clinics are feasible in other areas around Houston, such as Clear Lake, La Porte, Baytown, Deer Park, and other industrial/petrochemical centers wherever located. 4 Competition The Company is one of many in the greater Houston metropolitan area that provide medical practice management, outpatient surgical facilities, professional buildings, hospitals or home infusion therapy. Several major hospital organizations with greater financial resources are planning to or have entered the Pasadena area (the Company's principal market) which will directly compete with the Company's operations. Such competition could be particularly acute with respect to the Company's outpatient surgical facility and the Hospital and have an adverse effect on the ability of the Company to attract and retain physician practices in the Office Building. The home infusion healthcare therapy market is highly competitive and management anticipates that competition, particularly for patient referrals, will intensify in all metropolitan areas. The industry has been subject to market consolidation in recent years and the Company believes that this trend will continue. The Company currently competes with other home infusion therapy companies, hospitals, physician groups and other healthcare organizations, many of which operate on a regional or national basis and are larger and have significantly greater resources than the Company. In the past three years, the Company has experienced substantial pressure from insurance companies with respect to the need for and the cost of home infusion therapy treatments. This pressure has resulted in a declining patient base and reimbursable charges per patient resulting in substantially lower revenues to the Company from home infusion operations. Presently, the Company operates only in the greater Houston metropolitan area. However, the Company would expand its operations into other markets through acquisitions if suitable acquisition properties or businesses are identified and the acquisition terms are acceptable to the Company. With respect to the Company's healthcare operations, the primary competitive factors are (i) quality of care, including responsiveness of service and quality of professional personnel, (ii) the ability to establish and maintain relationships with referring physicians, hospitals, health maintenance organizations, clinics and nursing agencies, (iii) price, (iv) breadth of services offered, and (v) general reputation with physicians, other referral sources and potential patients. Management believes that the Company competes successfully in all of these areas. Marketing and Sales With respect to the Company's home infusion business and its outpatient surgical facility, the Company relies primarily on patient referrals from physicians, including those officing in the Office Building. With respect to home infusion therapy, these referral sources tend to be concentrated among a limited number of physician specialists, allowing the Company to conduct a directed selling effort. Primarily due to escalating pressures to contain healthcare costs, insurance companies and other third-party payers are participating to a greater extent in decisions regarding healthcare alternatives. Consequently, management believes that such third-party payers will be increasingly important in marketing the Company's services in the future. In connection with the opening of the Hospital, the Company utilized traditional billboard and newspaper advertising. Healthcare Regulation The federal government and the state of Texas regulate various aspects of the Company's business. The Company's Vista Facility is licensed as a pharmacy and is subject to federal and state laws and regulations governing pharmacies. Federal laws require, among other things, that the Company's facilities comply with rules relating to controlled substances. These rules include an obligation to register with the Drug Enforcement Administration of the United States Department of Justice and to meet certain requirements concerning security, record keeping, inventory controls, prescription forms, order forms and labeling. The Company's pharmacists and nurses also are subject to state licensing requirements and laws regarding standards of professional conduct. Each nurse and pharmacist used 5 by the Company must have a valid license. Management believes that the Company's operations comply in all material respects with applicable pharmacy licensing requirements. The healthcare industry is highly regulated at the federal and state levels. The Company believes its business is in material compliance with applicable law. The various relationships between the Company and its affiliated physician groups, however, are varying and in some respects unique, and many aspects of these relationships have not been the subject of judicial or regulatory interpretation. There can be no assurance that a review of the Company's business by courts or by healthcare, tax, labor or other regulatory authorities would not result in determinations that could adversely affect the Company's operations or that the healthcare regulatory environment will not change so as to restrict the Company's existing operations or potential for expansion. A federal statute (the "federal anti-kickback statute") prohibits the offer or payment of remuneration, or the solicitation or receipt of remuneration, to induce either (i) the purchase of any item or service reimbursable in whole or in part by Medicare or certain state healthcare programs (including Medicaid); or (ii) the referral of an individual for the furnishing of any item or service reimbursable in whole or in part by Medicare or certain state healthcare programs. Both criminal and civil penalties can be imposed for violations of the federal-kickback statute, including exclusion from participation in the Medicare and Medicaid programs. The Department of Health and Human Services and law enforcement authorities are increasingly scrutinizing arrangements between healthcare providers and referring physicians to ensure that those arrangements do not constitute mechanisms for paying for referrals. In addition, a number of states have adopted similar legislation that applies to patients not covered by Medicare or Medicaid programs. The Company does not believe that its business operations violate federal or state anti-kickback statutes. Medicare and state healthcare programs do not reimburse medical practices for management fees paid to the Company, and the Company does not refer patients to the medical practices. Nevertheless, because of the breadth of federal and state anti- kickback statutes and the absence of court decisions interpreting their application to arrangements such as those entered into by the Company, there can be no assurance that the Company's activities will not be challenged by regulatory authorities or that the Company's position will prevail if challenged. Numerous legislative proposals have been introduced or proposed in the U.S. Congress and in some state legislatures that would effect major changes in the U.S. healthcare system nationally or at the state level. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect, if any, such proposals would have on the Company's business. Certain proposals, such as reducing Medicare and Medicaid, could adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. General business corporations (as opposed to professional corporations which are wholly-owned by physicians) are generally not allowed to render medical care. While the Company structures its operations to comply with applicable laws concerning the corporate practice of medicine, there can be no assurance that, given varying and uncertain interpretations of such laws, the Company would be found to be in compliance with such laws. A determination that the Company is in violation of applicable restrictions on the practice of medicine could have a material adverse effect on the Company if the Company were unable to restructure its operations to comply with applicable state requirements. Risks Inherent in Provision of Medical Services The Company's operations involve the delivery of healthcare services to the public and the Company is exposed to the risk of negligence and other liability claims relating to personal injuries or even wrongful death. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage maintained by the Company or healthcare providers utilized by the Company or those who utilize the Company's facilities, equipment and services. Insurance against losses related to claims of this type 6 can be expensive and varies widely from state to state. The Company or its affiliated physician groups and professional service providers are required to maintain liability insurance in amounts and coverages believed to be usual and customary. Nevertheless, successful malpractice or other liability claims asserted against the medical care providers or the Company could have a material adverse effect on the Company. Reductions in Third-Party Reimbursements Healthcare providers typically bill various third-party payers, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. These third-party payers are increasingly negotiating the prices charged for medical services, pharmaceuticals and other supplies, with the goal of lowering reimbursement and utilization rates. Third-party payers can also deny reimbursement for medical services, pharmaceuticals and other supplies if they determine that a treatment was not performed in accordance with treatment protocols established by such payers or for other reasons. Loss of revenues to the Company caused by cost containment efforts could have a material adverse effect on the Company. Although the Company does not have any contracts to provide healthcare services on a capitated or other risk sharing basis, the Company anticipates that it may offer its services to payers in the future on a capitated or other risk sharing basis. To the extent that patients or enrollees covered by a contract require more frequent or extensive care than is anticipated by the Company, the revenue to the Company derived from such contracts may be insufficient to cover the costs of the services provided. Insufficient revenue under capitated or other risk sharing contracts could have a material adverse effect on the Company. Insurance In recent years, physicians, hospitals and other participants in the healthcare market have become subject to an increasing number of lawsuits alleging malpractice, product liability or related legal theories, many of which involve large claims and significant defense costs. With respect to its home infusion healthcare business, the Company does not carry liability insurance for any employee or contract representative. The Company requires that all healthcare professionals, including registered nurses with whom the Company contracts, carry personal professional liability insurance. However, the Company does not require continuing proof of insurance, mandate policy limits or deductibles or require that the Company be named as an additional insured. Should one of the Company's agents or contracting healthcare professionals commit a negligent or other liability producing act or omission in the Company's home infusion operations, the patient could have a direct claim against the Company which would be uninsured. Mr. Chiu Chan has in force personal professional liability insurance with coverage limits of $1 million per incident. He has not experienced difficulty in obtaining insurance in the past and believes the current insurance coverage is adequate to provide for any claims that may arise and related settlements, if any, involving him personally. As the pharmacist in charge of home infusion therapy, any claims would probably involve Mr. Chiu Chan and AITS or the Company and Mr. Chan's insurance may apply to the extent the loss is related to his pharmacy services. The Company or AITS may, however, be exposed to the extent Mr. Chiu Chan's insurance does not apply or is insufficient to cover any losses for which AITS may be jointly liable. Management believes the Company has reasonable and customary insurance coverage with respect to the remainder of its business operations although the Company cannot provide any assurance that its insurance would cover all losses to which the Company may be subject. Employees The Company and its subsidiaries employed approximately 125 full-time employees as of August 31, 2000 and additionally employs part-time employees (25-50) when needed. 7 Hospital Operations The Company had no previous experience with respect to the ownership and operation of a hospital prior to opening its Hospital in May 1999. The Hospital is owned by the Company and managed by DPMI. The Company leases the Hospital to Vista Medical pursuant to a five (5) year long-term lease for $57,500 per month. Vista Medical is owned 70% by DPMI and 30% by Halcyon, L.L.C. The Company funded the costs to equip and construct the Hospital of approximately $5,000,000 from its cash flow and cash on hand. The Company cannot provide any assurances that the operations of the Hospital will be successful in the long-term or short-term. In the long-term, the Company's ability to manage the Hospital and competition will be key factors in the success of the Hospital. The operations of the Hospital were profitable in fiscal 2000 and exceeded the Company's expectations. Employee Benefit Plans In August 1995, the Board of Directors approved a 1995 Non-Qualified Stock Option Plan for consultants and non-employee directors. Under the terms of the Plan, the Company may grant stock options to consultants and non-employee directors of the Company and its subsidiaries. The options granted under the Plan are not intended to qualify as "incentive stock options" as that term is defined under Section 422A of the Internal Revenue Code and, as such, the nonstatutory options granted under the Plan are not entitled to special treatment under Section 422 of the Code. In addition, in August 1995, the Company's shareholders approved a 1995 Incentive Stock Option Plan. The 1995 Incentive Stock Option Plan was recommended by the Board of Directors because of its belief that the Plan will advance the interests of the Company by providing key employees, who have substantial responsibility for the direction and management of the Company, with additional incentive for them to promote the success of the Company by increasing their proprietary interest in the success of the Company. It is intended that options issued under the Plan will qualify as Incentive Stock Options under Section 422A of the Internal Revenue Code. In fiscal 2000, The Board of Directors recommended that the shareholders of the Company approve The Year 2000 Stock Incentive Plan on August 29, 2000, at the Annual Meeting of Shareholders. The Year 2000 Stock Incentive Plan was approved and provides for: (i) incentive stock options, (ii) non-qualified stock options, (iii) rights to receive all or some portion of the increase in the value of the Common Stock ("Stock Appreciation Rights"), (iv) the right to receive all or some portion of cash dividends with respect to the Common Stock, (v) rights to receive cash and/or Common Stock contingent upon the attainment of defined performance goals, and (vi) shares of Common Stock subject to temporary restrictions on transfer. The Year 2000 Stock Incentive Plan includes as "Eligible Individuals" employees, officers, and directors of the Company or a subsidiary of the Company or consultants or advisors receiving cash compensation from the Company or a subsidiary of the Company. The maximum number of shares subject to awards under the Plan is 2,500,000. The Year 2000 Stock Incentive Plan was recommended by the Board of Directors for a number of reasons including the fact that a majority of shares subject to award under the former plans had been previously awarded or were subject to the exercise of outstanding options and the former plans only provided for option awards as compared to the various types of awards permitted by The Year 2000 Stock Incentive Plan. The Company believes its compensation paid to employees and its compensatory plans are sufficient to attract and retain qualified employees. ITEM 2. Description of Property The Company's office space for its headquarters at 10304 Interstate 10 East, Suite 369 consisting of approximately 1,000 square feet is leased on a month-to-month basis for $1,286.00 per month. The lessor of the office space is Capital Bank. One of the Company's directors is a director of Capital Bank. Management believes that the lease rate being paid is consistent with other commercial rates available in the East Houston area. 8 In August 1994, the Company consummated the acquisition of 65% of the outstanding common stock of Vista, which owned the Vista Facility, an outpatient surgical center in Pasadena, Texas consisting of a one story building containing approximately 15,000 square feet. The Vista Facility serves as collateral for a note payable to G.E. Capital. Vista is the Maker of the Note which bears a fixed interest rate of 9.65%, requires monthly installment payments of $19,533, and has a maturity date of September 1, 2002. The note is guaranteed by the Company. As of August 31, 2000, the balance was $440,772. Management believes the facility is adequately covered by insurance. Depreciation on the Vista Facility is computed using the straight line method over thirty-nine years, furniture and fixtures are depreciated over seven years, and equipment is depreciated over five years. The property tax rate is about 3% of appraised value and the annual real and personal property taxes are about $80,000. The Vista Facility is 100% utilized as an outpatient surgical center and to provide laboratory and diagnostic testing services. Due to high utilization of the three (3) surgical suites at the Vista Facility the Company intends to add an additional surgical suite during fiscal 2001. On September 1, 1998, Vista sold the Vista Facility building and the land on which the Vista Facility, the Office Building and Hospital are located to the Company for a total purchase price of $1,670,000 payable pursuant to two (2) promissory notes bearing interest at 8.5% per annum and payable in eighty-four monthly installments of $26,446.93 in the aggregate. Subsequently, as part of its asset protection restructuring plan, the Company transferred the Vista Facility and the land on which the Vista Facility, the Office Building and Hospital are located, as well as the Office Building, Hospital and all furniture fixtures and equipment of all of the foregoing facilities to VLE which will serve as an asset holding and leasing company to the various operating entities. VLE is 100% owned by the Company. In September 1994, the Company commenced construction of the Office Building (adjacent to the existing Vista Facility described above) which was completed in 1995. The total cost of the Office Building was approximately $1,937,000, and was financed from working capital. The Office Building was constructed as a professional office building for physician practices. There is competition from several professional buildings in the surrounding area. Management believes the Office Building is adequately covered by insurance. The Office Building is comprised of two stories and contains approximately 35,900 square feet of space all of which is leased or otherwise utilized by the Company for its operations as described below. In addition, the Company has invested approximately $700,000 for new equipment and furnishings for the Office Building. All depreciation is calculated on the straight line method, with the building being depreciated over thirty-nine years, furniture and fixtures over seven years, and equipment over five years. The property tax rate is approximately 3% of appraised value and the annual real and personal property taxes are about $80,000. As of August 31, 2000, there were three (3) physician practices under management with DPMI which are located in the Office Building. Pursuant to the Management Agreements which provide DPMI with a percentage of revenues from each physician's practice, DPMI agrees to provide fully-equipped office space and other services. Approximately 10% of the space in the Office Building is utilized by DPMI for physician practices under its management. Four (4) physician groups and other independent physicians (not under DPMI's management) collectively lease approximately 65% of the Office Building space. The Company (and its subsidiaries) collectively utilize approximately 35% of the office space. The Office Building is fully leased or otherwise utilized by the Company. Due to increased demand for medical office space in the Pasadena area, the Company does not believe the loss or cancellation of any lease would be material. On July 1, 1996, DPMI leased approximately 3,000 square feet of office space from the City of Pasadena pursuant to a five (5) year lease (containing an option for an additional five (5) years) which requires lease payments of $7,200 annually. The property is located at 1001 East Shaw, Pasadena, Texas. DPMI leased the property for the location of a medical practice under a Management Agreement which relocated to the Office Building. The Hospital is located next to the Vista Facility and the Office Building in Pasadena, Texas. It has 42 beds, two surgical suites, an emergency room, an intensive care area, nurse station, kitchen and other facilities necessary to operate as a complete hospital. The Hospital was completed in May 1999 at a total cost of approximately $5,000,000 which includes furniture, fixtures and equipment of approximately $1,579,000. The Company funded the foregoing cost from internally generated funds and cash-on-hand. The Hospital and its associated equipment are depreciated on the same basis as the Company's Vista Facility and Office Building. Depreciation and taxes on the Hospital are calculated and incurred on the same basis as described for the Vista Facility and Office Building above. The Company is working to increase utilization of its surgical suites and room occupancy. However, due to high utilization of its surgical suites at the Hospital, the Company intends to add two (2) additional surgical suites at the Hospital. 9 The Company's Office Building is owned by the Company free of any liens or encumbrances owed to third parties. The remainder of the Company's real estate holdings, including the Vista Facility and the Hospital, are subject to a first lien deed of trust to secure the remaining indebtedness owed to G.E. Capital of approximately $440,772 as of August 31, 2000. Additionally, the Vista Facility is subject to a deed of trust and second lien to secure the Company's purchase money notes in the aggregate principal amount of $1,670,000 payable to Vista Healthcare, Inc. which is now approximately 96% owned by the Company. The Vista Facility was transferred to the Company in fiscal 1999 in exchange for the Company's payment of the book value of the property in the amount of $1,670,000. ITEM 3. Legal Proceedings The Company is not a party to any material litigation. ITEM 4. Submission of Matters to a Vote of Security Holders On August 29, 2000, the following matters were submitted to a vote of the Company's shareholders at the Company's Annual Meeting of Shareholders, with the votes for and against each proposal listed above. Proposal 1. ELECTION OF DIRECTORS
NAME OF EACH DIRECTOR ELECTED FOR AGAINST --- ------- AND WHOSE TERM OF OFFICE CONTINUED ---------------------------------- Chiu Moon Chan 4,698,561 0 Philip Chan 4,698,561 0 Stephen L. Huber 4,698,561 0 Earl R. Votaw 4,698,561 0 Proposal 2. APPROVAL OF THE COMPANY'S FOR AGAINST --- ------- YEAR 2000 STOCK INCENTIVE PLAN ------------------------------ 4,686,094 12,467 Proposal 3. TO RATIFY APPOINTMENT OF THE COMPANY'S AUDITORS FOR FISCAL 2000 FOR AGAINST ---------------------------------- --- ------- 4,686,561 0
PART II. ITEM 5. Market for Common Equity and Related Stockholder Matters In September 1993, the Company's Common Stock began trading on NASDAQ's Small Capitalization Market under the symbol DYII. Prior to obtaining the NASDAQ listing, the Company's Common Stock had traded in the over-the-counter market on the pink sheets and on the NASD Electronic Bulletin Board. On April 11, 2000, the 10 Company's request for listing its securities on The NASDAQ NATIONAL MARKET was approved and the Company shares began trading on THE NASDAQ NATIONAL under the symbol DYII on April 14, 2000. The following table sets forth the high and low closing bid prices for the Company's Common Stock during each of the last eight fiscal quarters as reported by published market reports from investor services.
High Low ---- --- 2000 Fiscal Year - Quarter Ended: November 30, 1999 $15.25 $ 12.00 February 28, 2000 8.75 8.25 May 31, 2000 7.125 6.875 August 31, 2000 9.15 8.9375 1999 Fiscal Year - Quarter Ended: November 30, 1998 $ 2.62 $ 2.37 February 28, 1999 4.75 2.37 May 31, 1999 4.75 3.81 August 31, 1999 8.50 4.71
These quotations reflect inter-dealer prices, without retail markup, mark- down or commission and may not represent actual transactions and are adjusted to reflect the Company's four (4) to one (1) reverse stock split effective February 1998 and the Company's stock split effected in the form of a 100% dividend effective as of January 10, 2000. As of August 31, 2000, the Company had approximately 325 shareholders of record. This number does not include shareholders who hold the Company's securities in nominee accounts with broker-dealer firms or depository institutions. Including the beneficial owners of shares held in nominee accounts or depository institutions, the Company believes it has in excess of 650 beneficial owners of its Common Stock. The Company has not paid any cash dividends on its Common Stock and intends to retain all earnings for operations and expansion of its business. The Company does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon the Company's results of operations, financial condition and capital requirements, as well as such other factors as the Company's Board of Directors may consider. There are no contractual or other restrictions which limit the Company's right to declare and pay dividends should the Board of Directors elect to do so. As stated above, the Company effectuated a stock split in the form of 100% stock dividend effective on January 10, 2000, and, the Board of Directors intends to consider future stock dividends depending on the price of the Company's stock, trading volumes and such other factors as it may deem to be in the best interests of the Company and its shareholders. 11 In fiscal 2000, the Company effectuated an exchange of its Common Stock for the common stock held by certain Vista minority shareholders and increased its ownership in Vista to approximately 96% pursuant to the share exchange or direct purchases. The exchange was undertaken pursuant to private placement exemptions under Section 4(2) of the Act and applicable state laws. ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Operations The following discussion provides an analysis of the Company's results of operations and reasons for material changes therein for the three years ended August 31, 2000. August 31, 2000 August 31, 1999 The Company recorded consolidated net income of $5,858,406 for the year ended August 31, 2000, as compared to consolidated net income of $2,663,832 in fiscal 1999 and a net income of $945,843 in 1998. There were no significant, unusual or non-recurring items of income or expense during the three years ended August 31, 2000. The Company does not expect to record further significant writeoffs due to uncollectible loans in future years. As a result of a significant increase in the Company's revenues and expenses during fiscal 2000 relating to the Company's Vista Facility and the Hospital operations, it is difficult to meaningfully compare revenues and expenses on a year-to-year basis. According to the American Institute of Certified Public Accountants (AICPA) health care industry guide, revenues reported in the consolidated statements of income should be net revenues which is gross revenues minus contractual adjustments instead of gross revenues that have been reported in the prior periods. During the year ended August 31, 2000, the Company determined that a major portion of the consolidated provision for uncollectible accounts consisted of contractual adjustments. As a result, the contractual adjustments that were previously included as a component of consolidated costs and expenses are reflected as a component of consolidated net revenues. Amounts reported for the year ended August 31, 1999 have been reclassified to conform to the current presentation and result in the reduction of consolidated costs and expenses and consolidated net revenues by $4,083,765. Before the reclassification, the gross revenue for fiscal 2000 and fiscal 1999 were $39,165,582 and $22,415,531, respectively. After the reclassification the net revenue for fiscal 2000 and fiscal 1999 were $26,032,441 and $16,212,656, respectively. Therefore effective fiscal 2000, net revenues net of contractual adjustments are reported and fiscal 1999 gross revenues that were previously reported are restated to subtract contractual adjustments as net revenues for comparison purposes. For the fiscal year ended August 31, 2000 total consolidated net revenues net of contractual adjustments increased by $9,819,785 to $26,032,441, a 61% increase. Of this amount, net revenues of $1,870,216 were recorded by DPMI in fiscal 2000 compared to $1,934,224 in fiscal 1999 as a result of the Company's decision to limit its expansion in the management of physician practices during fiscal 2000. The Company expects physician management net revenues (and corresponding expenses) to further decrease in fiscal 2001 as it reduces its business in the area of physician management practice. The Company records net revenues from the management of physician practices on a combined or consolidated basis and reflects as net revenues all patient billings of the respective practices and expenses payments to physicians and other physician practice costs. Net revenues attributable to operations of the Vista Facility were $15,394,954 in fiscal 2000, compared to $12,357,894 in fiscal 1999, an increase of 25%. Net revenues from home infusion therapy were $1,356,650 in fiscal 12 2000 compared to $1,120,300 in fiscal 1999, an increase of 21%, primarily as a result of higher recoverable charges per day per patient and a slightly larger patient load. Net revenues from the Hospital increased by $6,610,383 or 826% to $7,410,621 in fiscal 2000 when compared to $800,238 which represented approximately four months of operation in fiscal 1999. Expenses for compensation and benefits to employees increased by 37% to $4,344,977 as a result of more employees needed by the Company to service the increased activities of Vista and the new business associated with the management of the Hospital by DPMI. The number of employees employed by the Company and its subsidiaries increased from approximately 100 in fiscal 1999 to approximately 125 as of August 31, 2000. The Company's provision for uncollectible trade accounts increased from $37,097 in fiscal 1999 to $60,585 in fiscal 2000 primarily as a result of increased trade revenues resulting in corresponding increases for uncollectible trade accounts. As a percentage of revenues, the hospital and Vista's provision for uncollectible trade accounts for both fiscal 1999 and fiscal 2000 were both at approximately 1%. The Company expects its uncollectible trade accounts as a percentage of revenues for both the hospital and Vista to remain relatively constant in the future. The Company recorded no writeoffs for uncollectible loans in both fiscal 2000 and 1999. Expenses for medical supplies increased 45% to $3,960,863 associated with the increased revenues and business from the Hospital and Vista operations. General and administrative expenses increased 20% to $4,830,564 primarily as a result of increased operational activities at the Vista Facility and the addition of the Hospital operations for twelve months. Rent and other income increased from $336,744 in fiscal 1999 to $388,299 in fiscal 2000 primarily as a result of additional rental income received from outside physicians not under DPMI management. Rent and occupancy expense increased by $66,535 or 76% to $153,940 in fiscal 2000 primarily due to the new hospital building. The Company's physician management practice (exclusive of the Vista Facility Management Agreement) and its home infusion division did not significantly contribute to the Company's operating profit. DPMI's net income of $2,373,360 was primarily derived from the operations of the Vista outpatient surgery clinic, through the Vista Facility Management Agreement. The future success of the Company is largely dependent on successful operations at the Vista Facility and the Hospital. The Company faces certain general business risks with respect to all of its operations. In addition to regulatory concerns and increasing competition with respect to all of its operations, the Company's home infusion therapy operations are subject to substantial risks because the Company serves a relatively small number of patients. The Company's home infusion healthcare revenues decreased from $ 2,730,753 in fiscal 1995 to $1,356,650 in fiscal 2000 as a result of a significant decrease in the number of full-time patients from approximately ten (10) in fiscal 1995 to an average of three (3) full-time patients in fiscal 2000. The Company does not intend to aggressively market its home infusion therapy services at this time primarily because of reduced recoverable patient day rates being paid by third-party payers. The Company will not continue to accept home infusion patients if rates continue to decline. In the past four (4) years, the Company has faced increasing pressure from insurance companies to justify the need for continued home infusion therapy in some cases and the Company's charges therefore. The Company expects these pressures to continue and to increase. With respect to its physician's practice management services, the Company has yet to establish a consistently successful operating history, particularly in view of the writeoffs for uncollectible notes recorded in fiscal 1997. The Company does not intend to pursue additional management agreements for physician practices at this time. Revenues from the Vista Facility increased significantly during fiscal 1999 due to increased patient referrals. The Company expects, and will aggressively pursue, increased patient referrals for the Vista Facility during fiscal 2000 and expects to maintain revenue and operating profit. The Company has no operating history for the Hospital although 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 assurance at this time to its shareholders. In the short-term, expected operating 13 results from the Hospital could be negatively impacted by low patient utilization (particularly in the first year), which could have a material adverse effect on the Company's liquidity and capital resources. In the long- term, the skill and experience of the Hospital's management team and competition will play critical roles. August 31, 1999 August 31, 1998 The Company recorded consolidated net income of $2,663,832 for the year ended August 31, 1999, as compared to consolidated net income of $945,843 in fiscal 1998 and a net loss of $1,059,195 in 1997. There were no significant, unusual or non-recurring items of income or expense during the three years ended August 31, 1999, except for writeoffs in fiscal 1997 of uncollectible notes in the amount of $776,922 and the writeoff of $371,736 in uncollectible advances to a subsidiary. As discussed below, the Company's loss for fiscal 1997 includes the writeoff of loans previously made by the Company to various physician groups. The Company does not expect to record further significant writeoffs due to uncollectible loans in future years. As a result of a significant increase in the Company's revenues and expenses during fiscal 1999 relating to the Company's Vista Facility and the Hospital operations, it is difficult to meaningfully compare revenues and expenses on a year-to-year basis. For the fiscal year ended August 31, 1999 total consolidated revenues increased by $7,598,344 to $16,212,656, a 88% increase. Of this amount, revenues of $1,939,224 were recorded by DPMI in fiscal 1999 compared to $2,049,588 in fiscal 1998 as a result of the Company's decision to limit its expansion in the management of physician practices during fiscal 1999. The Company expects physician management revenues (and corresponding expenses) to further decrease in fiscal 2000 as it reduces its business in the area of physician management practice. The Company records revenues from the management of physician practices on a combined or consolidated basis and reflects as revenues all patient billings of the respective practices and expenses payments to physicians and other physician practice costs. Revenues attributable to operations of the Vista Facility were $12,357,894 in fiscal 1999, compared to $5,323,792 in fiscal 1998, an increase of 132%. Revenues from home infusion therapy were $1,120,300 in fiscal 1999 compared to $1,240,932 in fiscal 1998, a decrease of 10%, primarily as a result of lower recoverable charges per day per patient and a smaller patient load. Revenues from the Hospital for the first four months of operation were approximately $800,238 in fiscal 1999. Expenses for compensation and benefits to employees increased by 72% to $3,165,407 as a result of more employees needed by the Company to service the increased activities of Vista and the new business associated with the management of the Hospital by DPMI. The number of employees employed by the Company and its subsidiaries increased from approximately 53 in fiscal 1998 to approximately 100 as of August 31, 1999. The Company's provision for uncollectible trade accounts increased from $23,900 in fiscal 1998 to $37,097 in fiscal 1999 primarily as a result of increased trade revenues resulting in corresponding increases for uncollectible trade accounts. As a percentage of revenues, the Company's provision for uncollectible trade accounts for both fiscal 1998 and fiscal 1999 remained unchanged at approximately 1%. The Company expects its uncollectible trade accounts as a percentage of revenues to remain relatively constant in the future at approximately 1%. The Company recorded writeoffs for uncollectible loans in fiscal 1999 of $0 as compared to $149,698 in fiscal 1998. The Company does not expect to incur similar recurring writeoffs of notes receivable in fiscal 2000 and does not intend to fund advances or loans to physician groups in the future in connection with its management of physician practices. Expenses for medical supplies increased 159% to $2,724,407 associated with the increased revenues and business from the Hospital and Vista operations. 14 General and administrative expenses increased 141% to $4,027,931 primarily as a result of increased operational activities at the Vista Facility and the addition of the Hospital operations for about four months. Rent and other income increased from $195,359 in fiscal 1998 to $336,744 in fiscal 1999 primarily as a result of additional rental income received from outside physicians not under DPMI management. The Company's physician management practice (exclusive of the Vista Facility Management Agreement) and its home infusion division did not significantly contribute to the Company's operating profit. DPMI's net income of $2,182,592 was primarily derived from the operations of the Vista outpatient surgery clinic, through the Vista Facility Management Agreement. The future success of the Company is largely dependent on successful operations at the Vista Facility and the Hospital. The Company faces certain general business risks with respect to all of its operations. In addition to regulatory concerns and increasing competition with respect to all of its operations, the Company's home infusion therapy operations are subject to substantial risks because the Company serves a relatively small number of patients. The Company's home infusion healthcare revenues decreased from $ 2,730,753 in fiscal 1995 to $1,120,300 in fiscal 1999 as a result of a significant decrease in the number of full-time patients from approximately ten (10) in fiscal 1995 to an average of two (2) full-time patients in fiscal 1999. The Company does not intend to aggressively market its home infusion therapy services at this time primarily because of reduced recoverable patient day rates being paid by third-party payers. The Company will not continue to accept home infusion patients if rates continue to decline. In the past three (3) years, the Company has faced increasing pressure from insurance companies to justify the need for continued home infusion therapy in some cases and the Company's charges therefore. The Company expects these pressures to continue and to increase. With respect to its physician's practice management services, the Company has yet to establish a consistently successful operating history, particularly in view of the writeoffs for uncollectible notes recorded in fiscal 1997. The Company does not intend to pursue additional management agreements for physician practices at this time. Revenues from the Vista Facility increased significantly during fiscal 1999 due to increased patient referrals. The Company expects, and will aggressively pursue, increased patient referrals for the Vista Facility during fiscal 2000 and expects to maintain revenue and operating profit. The Company has no operating history for the Hospital although 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 assurance at this time to its shareholders. In the short-term, expected operating results from the Hospital could be negatively impacted by low patient utilization (particularly in the first year), which could have a material adverse effect on the Company's liquidity and capital resources. The Company believes it obtained breakeven cash flow with respect to Hospital operations in the sixth month. In the long-term, the skill and experience of the Hospital's management team and competition will play critical roles. Liquidity and Capital Resources The Company maintained sufficient liquidity in fiscal 2000 and 1999 to meet its business needs. The Company had working capital of $7,437,687 as of August 31, 2000 and $2,510,981 as of August 31, 1999. The Company had net cash provided by operating activities of $5,459,904 for fiscal 2000 as opposed to $3,211,402 for fiscal 1999. As of August 31, 2000, the Company maintained a liquid position evidenced by a current ratio of 2.32 to 1 and a total debt to equity ratio of 0.50 to 1. The Company expects to have positive cash flow from operations for fiscal 2001. The Company is actively targeting opportunities to expand in the outpatient surgical clinic markets by acquisition of existing facilities or the construction of new facilities. The Company has funded approximately 15 $5,000,000 to equip and construct the Hospital. 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. 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 future payment obligations on its long-term third-party indebtedness of $685,587 as of August 31, 2000 and long-term indebtedness owed to its affiliate Vista Healthcare of approximately $2,029,308. 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. In the short-term, expected operating results from the Hospital could be negatively impacted by problems including staffing and equipment, low patient utilization (particularly in the first year), licensing or regulatory delays or other problems, which could have a material adverse effect on the Company's liquidity and capital resources. In the long-term, the skill and experience of the Hospital's management team and competition will play critical roles. Inflation. Inflation has not significantly impacted the Company's financial position or operations. Forward-Looking Information. Information in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, words such as "anticipate," "believe," "estimate," "expect," "intend," and similar expressions, as they relate 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 Annual Report on Form 10-K, 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, expected, or intended, or the like. ITEM 7. Financial Statements The information required by this item is included in a separate section of this Annual Report on Form 10-K beginning on Page F-1 and is incorporated herein by reference. ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 16 PART III. ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The following table (and accompanying text) sets forth the names and ages of all the directors and executive officers of the Company during the last fiscal year, all positions and offices with the Company held by each person, each such person's term of office as a director and business experience for the past five years. NAME AGE POSITION Chiu Moon Chan 48 Chairman of the Board of Directors, Chief Executive Officer, President and Secretary (July 1992-Present) Philip Chan 49 Vice President - Finance and Treasurer/Director (July 1992-Present) Stephen L. Huber 50 Director (July 1992-Present) Earl R. Votaw 74 Director (July 1992-Present) Glenn Rodriguez 54 CEO, Vista Healthcare, Inc. (November 1995-October 2000) ---------------------------------- Chiu Moon Chan has served as a director and as the Company's President, Secretary and Chief Executive Officer since July 1992. Mr. Chan is a registered pharmacist and since May 1978, was employed by various healthcare service organizations in Houston, Texas prior to his affiliation with the Company. Mr. Chan earned a Bachelor of Science degree in Pharmacy from the University of Houston. Philip Chan has served as a director and as the Company's Vice President of Finance, CFO and Treasurer since July 1992. Mr. Chan earned advanced accounting degrees from the University of Houston and is a CPA in the State of Texas. Mr. Chan has previous corporate and outside accounting experience. He is not related to Chiu Moon Chan. Stephen L. Huber is a registered pharmacist and earned a Bachelor of Science degree in Pharmacy from the University of Houston. Since December 1991, Mr. Huber served as the Deputy Division Head for patient care services at the University of Texas M.D. Anderson Cancer Center. Mr. Huber joined M.D. Anderson in 1984 as Assistant Director of Operations. In 1999, Mr. Huber joined Cortex Communications, Inc., a medical education company, as President and Chief Operating Officer. Mr. Huber remains a research consultant at M.D. Anderson. Mr. Huber has served as director of the Company since 1992 and currently serves on the Company's Audit and Compensation committees. Earl R. Votaw retired in December 1993. He earned a Bachelor of Arts degree from the University of the Americas in Mexico City and a certificate of graduation from the Graduate School of Mortgage Banking from Northwestern University of Chicago. Prior to his retirement, Mr. Votaw served as a director and as the President and Chief Executive Officer of Capital Bank, a Texas chartered bank located in Houston, Texas. Mr. Votaw has served as a director of the Company since 1992 and currently serves on the Company's Audit and Compensation committees. 17 Glenn Rodriguez, age 52, earned a B.B.A. in Accounting from Florida International University in Miami, Florida, graduating in 1976. Mr. Rodriguez has served as the CEO of Vista Healthcare, Inc., a majority-owned subsidiary of the Company since March 1997, and prior to that served as CEO of Surgical Care Center of Texas, an outpatient surgical facility in Pasadena, Texas. Mr. Rodriguez is not a director of the Company. *Glenn Rodriguez resigned from the Company and signed a Separation Agreement with the Company on November 28, 2000 which pays him $300,000 in twelve equal monthly payments of $25,000 each as full and final compensation for the non-compete covenant for 2 years effective November 28, 2000 and expires on November 30, 2002. Glenn Rodriguez also signed a Consulting Agreement with the Company on November 28, 2000 which pays him $5,000 a month for twelve months beginning on December 1, 2000 and ending November 30, 2001 for 2 years consulting services to the Company until November 30, 2002. Each director holds office until the earlier of the election of his successor at the next annual meeting of stockholders or his resignation or removal. Compliance with Section 16(a) of the Exchange Act Based solely upon the Company's review of Forms 3, 4, and 5 filed by the Company's officers and directors and persons who beneficially own 10% or more of the Company's Common Stock and the written representations of such persons, the Company is not aware that any of such persons failed to timely file the foregoing forms during the last fiscal year. ITEM 10. Executive Compensation The Summary Compensation Table sets forth in summary form the compensation received during each of the Company's last three completed fiscal years by the named executive officers. In addition, the remaining tables show the options granted to the Company's named executive officers in fiscal 2000 and the value of exercised and unexercised options, respectively. 18 SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------- Annual Compensation Long-Term Compensation ------------------------------------------------------------------------- Awards Payouts Name and Year Salary Bonus Other ------------------------------------------------- Principal Position ($) ($) Annual Restricted Securities LTIP All other Compens- Stock Underlying Payout Compen- ation Award(s) Options/ ($) sation ($) ($) SARs ($) (#) - -------------------------------------------------------------------------------------------------------------------- Chiu Chan, CEO 2000 152,507 50,000 -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------- 1999 80,000 100,000 -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------- 1998 80,000 -0- -0- -0- -0- -0- -0- - -------------------------------------------------------------------------------------------------------------------- Glenn Rodriqez, 2000 145,323 -0-** -0- -0- -0- -0- -0- President - Vista --------------------------------------------------------------------------------------------- Healthcare, Inc. 1999 79,000 200,000 -0- -0- 60,000* -0- -0- --------------------------------------------------------------------------------------------- 1998 60,000 -0- -0- -0- 45,000* -0- -0- - -------------------------------------------------------------------------------------------------------------------- Philip Chan, CFO 2000 97,607 11,000 -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------- 1999 53,300 -0- -0- -0- -0- -0- -0- --------------------------------------------------------------------------------------------- 1998 53,300 -0- -0- -0- 48,000* -0- -0- --------------------------------------------------------------------------------------------- 1997 53,300 -0- -0- -0- 40,000* -0- -0- --------------------------------------------------------------------------------------------- 1996 53,300 -0- -0- -0- 78,803* -0- -0- - --------------------------------------------------------------------------------------------------------------------
19 * Reflects a 100% stock dividend effected as a 2 for 1 stock split effective January 10, 2000. ** Glenn Rodriguez resigned from the Company in October, 2000 and signed a Separation agreement which pays him $300,000 in twelve equal monthly payments of $25,000 each as full and final compensation for the non-compete covenant for two years effective November 28, 2000, expiring November 30, 2002. Glenn Rodriguez also signed a Consulting Agreement which pays Glenn Rodriguez $5,000 a month for twelve months beginning on December 1, 2000 and ending November 30, 2001. Glenn Rodriguez shall perform no fewer than thirty (30) hours of services for the Company each week. The covenant not to compete is for a period of two years ending November 30, 2002, and covers an area within a 50 mile radius from the city limits of Pasadena, Harris County, Texas. Glenn Rodriguez may not compete in any manner with the business of Dynacq or any subsidiary of Dynacq within the covered area. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Securities Total Options/ Name Underlying SAR's Granted Exercise Price Expiration Date ---- -------------- --------------- Options/SAR's to Granted Employees in ------- ------------ Fiscal Year ----------- Chiu Chan, 0 N/A N/A N/A CEO Glenn D. 60,000* 34% $1.1875 1/3/2004 Rodriguez, President - - Vista Healthcare, Inc.
* Reflects a 100% stock dividend effected as a 2 for 1 stock split effective January 10, 2000. 20 AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR VALUES Number of Unexcercised Value of Securities Unexercised Shares Underlying In-The-Money Acquired Options/SARs Options/SARs on at FY-End (#) at FY-End ($) Exercise Value Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable ---- --- --- ------------- ------------- Chiu Chan, CEO 0 N/A N/A N/A Glenn D. Rodriguez 45,000 419,063 -0- -0- President - Vista Healthcare, Inc. Philip Chan -0- -0- 166,803 1,435,774 21 No other officer, director or employee of the Company or its subsidiaries received total compensation in excess of $100,000 during the last three fiscal years. The Company has no employment agreements with its executives. Mr. Chiu Chan, Philip Chan, and Glenn Rodriguez prior to his resignation, devoted 100% of their time to the Company. Pursuant to the Company's 1995 Incentive Stock Option Plan, options to purchase 137,764 shares were granted on May 14, 1996, which number includes 78,804 options granted to Mr. Philip Chan. The remaining options were granted to approximately ten (10) non-executive employees fo the Company and its subsidiaries. These options are exercisable at $1.875 per share and expire May 14, 2001. Options were granted to two (2) consultants during fiscal 1996, with one option to purchase 25,000 shares exerciable at $3.25 per share expiring on September 4, 2005; the other option to purchase 62,500 shares at $2.50 per share and expires on September 11, 2005. In addition, in December 1997, the Company granted ten (10) employees options to purchase 212,500 shares in the aggregate at an exercise price of $0.69 per share which expire December 17, 2002, including options for 40,000 shares issued to Philip Chan and 45,000 to Glenn Rodriquez. In January 1999, the Company granted seven (7) employees options to purchase 176,000 shares in the aggregate at an exercise price of $1.1875 per share which expire January 3, 2004, including options to purchase 48,000 shares issued to Philip Chan and options to purchase 60,000 shares issued to Glen Rodriquez. In February 1998, the Company granted one (1) consultant options to purchase 25,000 shares at an exercise price of $1.00 per share which were exercised in November 1999. In September 1999, the Company granted two (2) consultants options to purchase 50,000 shares each for a total of 100,000 shares at an exercised price of $4.00 per share which expire January 3, 2004. One (1) consultant exercised 10,000 shares at $4.00 per share on April 5, 2000, one (1) consultant exercised 20,000 shares at $4.00 on June 30, 2000. One (1) consultant exercised non-plan options to purchase 50,000 shares at $1.50 per share on February 1, 2000 which were granted in fiscal 1999. Directors of the Company do not receive any mandatory compensation for their services as directors, although directors will be reimbursed for expenses incurred in attending board meetings. ITEM 11. Security Ownership of Certain Beneficial Ownersand Management The following sets forth certain information with respect to the beneficial ownership of shares held by directors, executive officers and persons known to management to own more than 5% of the outstanding Common Stock of the Company as of November 29, 1999. 22
Name and Address Number of Shares and Title of Class of Beneficial Owner Nature of Beneficial Ownership Percent of Class -------------- ------------------- ------------------------------ ---------------- Common Stock Chiu Moon Chan 4,529,044/1/ 65.88% 323 Wood Loop Houston, Texas 77015 Common Stock Ella Chan 4,529,044/1/ 65.88% 323 Wood Loop Houston, Texas 77015 Common Stock Philip Chan 190,554/2/ 2.77% 7930 Millbrook Drive Houston, Texas 77095 Common Stock Earl R. Votaw -0- 0.0% 10304 I10 East, Suite 369 Houston, Texas 77029 Common Stock Stephen L. Hubes -0- 0.0% 10304 I10 East, Suite 369 Houston, Texas 77029 Common Stock Glenn Rodriguez 111,500/3/ 1.62% 10304 I10 East, Suite 369 Houston, Texas 77029 Common Stock Officers and Directors 4,831,000 70.27% as a group (6)
---------------------------------- ITEM 12. Certain Relationships and Related Transactions None. ITEM 13. Exhibits and Reports on Form 8-K A. Exhibits. The exhibits required by Item 601 of Regulation S-B are -- -------- included in this report commencing on page E-1 hereof which contains a list of such exhibits. The list of exhibits and the exhibits contained herein are incorporated into this part by reference. B. C. Reports on Form 8-K. No reports on Form 8-K were filed by the Company -- ------------------- during the fourth quarter of fiscal 2000. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYNACQ INTERNATIONAL, INC. By: /s/ Chiu Moon Chan Date: November 29, 2000 -------------------- Chiu Moon Chan, Chairman of the Board Chief Executive Officer, President and Secretary In accordance with the Exchange Act, this report has been signed below by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated. 23 NAME TITLE DATE ---- ----- ---- /s/ Chiu Moon Chan Chairman of the Board, November 29, 2000 - -------------------- Chief Executive Officer, Chiu Moon Chan President and Secretary /s/ Philip S. Chan Vice President, November 29, 2000 - --------------------- Chief Financial Officer, Philip S. Chan Controller, and Director /s/ Stephen L. Huber Director November 29, 2000 - ---------------------- Stephen L. Huber /s/ Earl R. Votaw Director November 29, 2000 - -------------------- Earl R. Votaw SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS. Not Applicable. 24 DYNACQ INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS Years Ended August 31, 2000 and August 31, 1999 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INDEX
A. Financial Statements Page -------------------- ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheet as of August 31, 2000 F-3 Consolidated Statements of Income for the Years Ended F-4 August 31, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity for the F-5 Years Ended August 31, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended F-6 August 31, 2000 and 1999 Notes to Consolidated Financial Statements F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors Dynacq International, Inc. Houston, Texas We have audited the accompanying consolidated balance sheet of Dynacq International, Inc. and its subsidiaries (the "Company") as of August 31, 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended August 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2000, and the results of its operations and its cash flows for the years ended August 31, 2000 and 1999 in conformity with generally accepted accounting principles. Sugar Land, Texas KenWood & Associates, P.C. November 27, 2000 F-2 DYNACQ INTERNATIONAL, INC. Consolidated Balance Sheet August 31, 2000 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,301,523 Accounts receivable, net of allowance for doubtful accounts of $134,536 8,419,608 Inventories 346,969 ----------------- Total current assets 13,068,100 Property and equipment, net 9,493,028 Other assets, net 485,113 ----------------- Total assets $ 23,046,241 ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 297,522 Accounts payable 1,126,070 Accrued liabilities 681,515 Income taxes payable 3,380,306 Deferred income taxes payable 145,000 ----------------- Total current liabilities 5,630,413 Noncurrent liabilities: Long-term debt, net of current maturities 387,965 Negative goodwill, net 549,683 Deferred income taxes 671,000 ----------------- Total noncurrent liabilities 1,608,648 Commitments and contingencies - Minority interests 1,238,671 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued or outstanding - Common stock, $.001 par value, 300,000,000 shares authorized; 7,658,856 shares issued 7,659 Additional paid-in capital 4,309,813 Retained earnings 11,392,583 Less treasury stock; 794,392 shares at cost (1,141,546) ----------------- Total stockholders' equity 14,568,509 ----------------- Total liabilities and stockholders' equity $ 23,046,241 =================
The accompanying notes are integral part of the consolidated financial statements. F-3 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Income For the Years Ended August 31, 2000 and 1999 - --------------------------------------------------------------------------------
2000 1999 ---- ---- Revenues: Net patient service revenue: Clinic and outpatient surgical $ 15,394,954 $ 12,357,894 Emergency and inpatient surgical 7,410,621 800,238 Infusion therapy 1,356,650 1,120,300 ---------------- ----------------- Total net patient service revenue 24,162,225 14,278,432 Physician practice management 1,870,216 1,934,224 ---------------- ----------------- Total revenues 26,032,441 16,212,656 Costs and expenses: Compensation and benefits 4,344,977 3,165,407 Medical supplies 3,960,863 2,724,407 Contract payments to physicians 1,225,980 1,361,021 Depreciation and amortization 780,890 566,254 Direct costs of infusion therapy revenues 520,624 316,889 Rent and occupancy 153,940 87,405 Provision for uncollectible accounts 60,585 37,097 Other general and administrative expenses 4,830,564 4,027,931 ---------------- ----------------- Total costs and expenses 15,878,423 12,286,411 ---------------- ----------------- Income from operations 10,154,018 3,926,245 ---------------- ----------------- Other income: Rent and other income 388,299 336,744 Interest income 111,042 75,516 Interest expense (126,501) (118,165) ---------------- ----------------- Total other income 372,840 294,095 ---------------- ----------------- Income before income taxes and minority interests 10,526,858 4,220,340 Provision for income taxes 3,861,000 1,410,000 ---------------- ----------------- Net income before minority interests 6,665,858 2,810,340 Minority interests in earnings (807,452) (146,508) ---------------- ----------------- Net income $ 5,858,406 $ 2,663,832 ================ ================= Basic earnings per common share $ 0.87 $ 0.41 ================ ================= Diluted earnings per common share $ 0.82 $ 0.39 ================ ================= Weighted average common shares-basic 6,744,793 6,486,721 ================ ================= Weighted average common shares-diluted 7,134,195 6,894,397 ================ =================
F-4 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Changes in Stockholders' Equity For the Years Ended August 31, 2000 and 1999 - --------------------------------------------------------------------------------
Treasury Stock, Common Stock at Cost Additional ------------ ------- Paid-In Retained Shares Amount Shares Amount Capital Earnings Total ------ ------ ------ ------ ------- --------- ----- Balance, August 31, 1998 3,606,628 $ 3,607 326,039 $ (625,899) $ 3,552,761 $ 2,874,049 $ 5,804,518 Treasury stock acquired, net - - 44,978 (103,948) - - (103,948) Net income - - - - - 2,663,832 2,663,832 ------------ ----------- ----------- ----------- ----------- ---------- ----------- Balance, August 31, 1999 3,606,628 3,607 371,017 (729,847) 3,552,761 5,537,881 8,364,402 Restricted stock issued for services 47,500 47 - - 189,953 - 190,000 Restricted stock issued for compensation 37,600 38 150,362 150,400 Restricted stock issued on exercise of options 263,000 263 - - 416,737 - 417,000 Stock dividend 3,704,128 3,704 375,184 - - (3,704) - Treasury stock acquired - - 48,191 (411,699) - - (411,699) Net income - - - - - 5,858,406 5,858,406 ------------ ----------- ----------- ----------- ----------- ---------- ----------- Balance, August 31, 2000 7,658,856 $ 7,659 794,392 $ (1,141,546) $ 4,309,813 $ 11,392,583 $ 14,568,509 ============ =========== =========== =========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial statements F-5 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Cash Flows For the Years Ended August 31, 2000 and 1999 - --------------------------------------------------------------------------------
2000 1999 ---- ---- Cash flows from operating activities: Net income $ 5,858,406 $ 2,663,832 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 780,890 566,254 Bad debt expense 60,585 37,097 Expense related to stock issued for compensation 150,400 - Loss on retirement of property and equipment - 32,914 Deferred income taxes, net (13,000) 510,000 Minority interests 807,452 146,508 Changes in operating assets and liabilities: Accounts receivable (4,074,699) (2,777,242) Inventories (315,100) (2,261) Due from related party 32,625 (16,769) Accounts payable 294,575 643,678 Accrued liabilities (465,230) 835,391 Income taxes payable 2,343,000 572,000 -------------- -------------- Net cash provided by operating activities 5,459,904 3,211,402 -------------- -------------- Cash flows from investing activities: Purchases of property and equipment (1,326,679) (4,345,026) Issuance of notes receivable - (75,000) Repayment of notes receivable 75,000 - Due from related party (410,000) - Redemption of short-term investments - 30,000 (Increase) decrease in other assets (2,953) 474 -------------- -------------- Net cash used in investing activities (1,664,632) (4,389,552) -------------- -------------- Cash flows from financing activities: Principal payments on long-term debt (268,657) (242,612) Repayment of notes payable (250,000) - Proceeds from common stock issuance 190,000 - Proceeds from exercise of stock options 417,000 - Acquisition of treasury stock, net (411,699) (103,948) Contributions from minority interests - 360,000 Purchase of minority interests (333,928) (85,012) -------------- -------------- Net cash used in financing activities (657,284) (71,572) -------------- -------------- Net increase (decrease) in cash and cash equivalents 3,137,988 (1,249,722) Cash and cash equivalents at beginning of year 1,163,535 2,413,257 -------------- -------------- Cash and cash equivalents at end of year $ 4,301,523 $ 1,163,535 ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. F-6 DYNACQ INTERNATIONAL, INC. Consolidated Statements of Cash Flows For the Years Ended August 31, 2000 and 1999 - --------------------------------------------------------------------------------
2000 1999 ---- ---- Supplemental cash flow disclosures: Cash paid during year for: Interest $ 169,117 $ 111,436 Income taxes $ 1,521,000 $ 328,000 Noncash investing and financing activities: Property and equipment included in accounts payable $ - $ 600,619 Stock dividend issued $ 3,704 $ - Fair value of minority interests purchased in excess of cash paid $ 773,654 $ -
The accompanying notes are an integral part of the consolidated financial statements. F-7 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Business and Organization Dynacq International, Inc. (the "Company") is engaged in the business of providing home infusion health care services and supplies to patients in their homes, the operation of an outpatient surgical center, the operation of a medical office complex, the management of physician practices, and the operation of a general acute hospital, all located in the Houston metropolitan area. The Company was incorporated under the laws of the State of Utah on September 16, 1983, as Rujo, Inc. On January 14, 1987, the shareholders of the Company approved the change of name of the Company to Jackson Brothers Industries, Inc. The Company merged into a Nevada corporation of the same name on June 16, 1989, pursuant to a share-for-share exchange of stock. On January 12, 1992, the shareholders of the Company again approved a change of corporate name to Dynacq International, Inc., elected directors of the Company and approved a plan of recapitalization whereby authorized capital was increased to an aggregate of 55,000,000 shares of stock, comprised of 50,000,000 Common Shares and 5,000,000 Preferred Shares. On July 28, 1992, the Company completed the sale of 5,625,000 shares of its "restricted" common stock to several investors for a total purchase price of $2 million. As part of this recapitalization of the Company, the authorized number of common shares was increased from 50 to 300 million and three holders of "restricted" stock returned a total of 618,750 shares to the Company's treasury. In February 1993, the Company became the beneficial owners of all of the outstanding common stock of Lucky China International Limited, a Hong Kong- chartered corporation, whose corporation name has since been changed to Dynacq (Asia), Limited ("Asia"). There are two shares outstanding. One share is held in the name of the Company and the other share is held in the name of Mr. Kwong Chung Wai, as a nominee for the Company. On April 13, 1995, Mr. Wai accepted an appointment as Director of Asia. During 1995, Asia disposed of substantially all of its assets and ceased its operations. Effective March 8, 1993, the Company's shareholders approved a reverse split of the outstanding shares of the Company's common stock on the basis of one share for every eight shares outstanding, with the par value of each share remaining at $.001. The reverse split was recommended by the Board of Directors because of its belief that the pre-split per share price level adversely affected the marketability of the Company's common stock and that an increase in the per share price was important to qualify for a listing on the National Association of Securities Dealer, Inc. Automated Quotation System (NASDAQ). In September 1993, the Company's common stock received its listing and began trading on the NASDAQ Small Cap system under the symbol DYII. On April 11, 2000, the Company's common stock began trading on the NASDAQ National Market. In August 1994, the Company consummated the acquisition of approximately 65% of the outstanding stock of Vista Healthcare, Inc. ("Vista"), which operates a medical clinic and outpatient surgical center in Pasadena, Texas. The Company issued 358,186 shares of its common stock in a transaction valued at $1,289,461. This acquisition, which was accounted for as a purchase, resulted in the recording of excess costs over net assets acquired totaling $230,717. In 1994, the Company commenced construction of a new medical office building (adjacent to the Vista facility) which was completed in 1995 at a total cost of approximately $1,925,000. Several of the existing physician-minority shareholders of Vista relocated their offices to the new facility. In September 1994, the Company formed Doctors Practice Management, Inc. ("DPMI") to provide fee based practice management services to physicians and to assist in consolidating medical providers into integrated delivery systems. F-8 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In November 1997, Aso Medical, Inc. ("ASO") was formed as a wholly owned subsidiary of DPMI to provide billing and related services to physicians. ASO had no operations during 2000 and 1999. Effective January 15, 1998, the Company's shareholders approved a reverse split of the outstanding shares of the Company's Common Stock on the basis of one share for every four shares outstanding, with the par value of each share remaining at $.001. The reverse split was recommended by the Board of Directors because of its belief that the post-split per share price would enhance the acceptability and marketability of the Company's common stock by the financial community and investing public. Additionally, management believed that the reverse split would result in the Company's common stock having a minimum bid price in excess of $1.00 per share and would, therefore, enable the Company to maintain the listing of its common stock on the Nasdaq Small Cap Market. In May 1998, DPMI organized Vista Community Medical Center, L.L.C. ("Vista Medical"), a Texas limited liability company, for the purpose of operating a General Acute Hospital (the "Hospital"). The Hospital is located adjacent to the Vista medical clinic and outpatient surgical center in Pasadena, Texas. In 1998, the Company commenced construction of the new Hospital which was completed and opened in 1999 at a total cost, including furnishings, of approximately $4,960,000. DPMI has a 70% membership interest in Vista Medical. In December 1999, the Company purchased for a nominal fee, Ambulatory Infusion Therapy Specialists, Inc. ("AITS"), a Texas Corporation. AITS is a wholly owned subsidiary of the Company whose business principally involves the administration of physician prescribed nutrients, antibiotics or other medicines to cancer patients in their home. Prior to its acquisition, AITS had no operations. As of December 30, 1999, the Company's Board of Directors approved a 100% stock dividend of the Company's Common Stock to shareholders of record as of that date. The stock dividend was issued effective January 10, 2000. All references to number of shares, except shares authorized, weighted average shares outstanding, per share amounts, option shares, and exercise prices included in the accompanying consolidated financial statements and related footnotes reflect the stock dividend and its retroactive effect. On February 11, 2000, Texas Gulf Coast Surgical Care Center, L.L.C. ("Gulf Coast") was renamed Vista Land and Equipment, L.L.C. ("Vista Land"), a Texas limited liability company. Gulf Coast was organized by the Company in October 1998. The Company has a 100% membership interest in Vista Land which holds the majority of the Company's property and equipment. B. Consolidated Statements The accompanying financial statements present the consolidated accounts of Dynacq International, Inc., a Nevada corporation, and its wholly owned and majority owned subsidiaries. Accordingly, the consolidated financial statements include all of the assets, liabilities, income, expenses, and cash flows for these companies. All significant intercompany transactions and balances have been eliminated. F-9 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C. Revenue Recognition Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered. Substantially all of the Company's revenues are derived from claims filed under major medical policies, workers' compensation policies, Medicare or Medicaid, or personal injury claims. Allowances for discounts on services or adjustments for non-covered costs and expenses are recognized in the period in which the related revenues are provided. Allowances for doubtful accounts are determined by management based upon historical experience and an assessment of the circumstances applicable to individual accounts. D. Stock-Based Compensation The Company accounts for employee stock options under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has adopted the "disclosure only" alternative described in Statement of Financial Accounting Standards No. 123, "Accounting for the Stock-Based Compensation" ("SFAS 123"), which requires proforma disclosure of compensation expense using fair value based method of accounting for stock-based compensation plans. E. Cash and Cash Equivalents The Company considers all highly liquid investments with maturity of three months or less as cash equivalents. At August 31, 2000, cash equivalents were composed primarily of investments in money market funds. F. Inventories Inventories are valued at the lower of cost or market with substantially all stated at the first-in, first-out (FIFO) method. G. Property and Equipment Land, buildings and improvements, furniture, fixtures and equipment are stated at cost. Ordinary maintenance and repairs are charged to income as incurred. Expenditures which extend the physical or economic life of the assets are capitalized and depreciated. Gains or losses on the disposition of assets sold are recognized in income and the related asset and accumulated depreciation accounts are adjusted accordingly. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 3 to 39 years. The Company provides tax depreciation using various accelerated methods in conformity with the provisions of applicable tax law. H. Other Non-Current Assets Loan origination fees are amortized on the straight-line basis over the terms of the related debt. F-10 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) I. Impairment of Long-Lived Assets The Company reviews its property and equipment and unamortized intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company estimates the future cash flows expected to result from operations and if the sum of the expected undiscounted future cash flows is less than the carrying amount of the long- lived asset, the Company recognizes an impairment loss by reducing the unamortized cost of the long-lived asset to its estimated fair value. To date the Company has not recognized any significant impairment on long-lived assets. J. Negative Goodwill Net assets acquired in excess of costs incurred from the Vista acquisition and subsequent purchases of minority interests are amortized on the straight- line basis over a period of 14 years. The amortization of negative goodwill is included in the consolidated statements of income as a reduction in consolidated depreciation and amortization. K. Advertising Costs The Company expenses advertising costs as incurred. Amounts expended for the years ended August 31, 2000 and 1999, were approximately $127,403 and $82,083, respectively. L. Income Taxes The Company utilizes Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax liabilities or assets be recognized for differences between the income tax basis and the financial reporting basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income. M. Earnings Per Common Share Earnings per common share for the years ended August 31, 2000 and 1999, are presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the presentation of primary and fully diluted earnings per share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128, basic EPS excludes dilution for common stock equivalents and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the years ended August 31, 2000 and 1999, diluted common and common equivalent shares outstanding includes 475,766 and 638,766, respectively, of common share equivalents, consisting of stock options, determined under the treasury stock method. F-11 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) N. Segments For the year ended August 31, 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) which establishes standards for the way public business enterprises report information about operating segments in annual financial statements. Also established were standards for related disclosures about products, services, geographical areas, and major customers. The adoption of SFAS 131 did not have an effect on the Company's primary financial statements. O. Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. Accounts receivable and revenues in the health care industry are subject to possible third party payor adjustments. Management periodically reviews such estimates and it is reasonably possible that management's assessment of recoverability of accounts receivable may change based on actual results and other factors. P. Reclassifications Certain accounts in the prior-year consolidated financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year consolidated financial statements. During the year ended August 31, 2000, the Company determined that a major portion of the consolidated provision for uncollectible accounts consisted of contractual adjustments. As a result, the contractual adjustments that were previously included as a component of consolidated costs and expenses are reflected as a component of consolidated net revenues. Amounts reported for the year ended August 31, 1999 have been reclassified to conform to the current presentation and result in the reduction of consolidated costs and expenses and consolidated net revenues by $4,083,765. NOTE 2. VISTA HEALTHCARE, INC. On August 25, 1994, the Company completed the acquisition of approximately 65% of the common stock of Vista in a transaction accounted for as a purchase. Accordingly, the accompanying financial statements reflect the results of operations of Vista for the period subsequent to August 25, 1994. During 1995, the Company sold a portion of its investment in Vista to certain affiliates for $80,000 cash. During 1996, Vista repurchased a portion of its common stock from certain affiliates for $134,958 and resold $20,000 of this stock to an affiliated physician. During 1997, the remaining treasury stock was sold to the Company at Vista's cost of $114,958. During the years ended 1998, 1999 and 2000, the Company purchased 1.45%, 2.56%, and 21.09% respectively of the common stock of Vista for cash of $11,600, $37,000 and $333,929. Consideration paid for the common stock in 1998 and 1999 was approximately the fair value of the interests acquired. The fair value of the minority interests purchased in 2000 was $773,654 in excess of the cash paid. As of August 31, 2000, the Company owned approximately 91% of the outstanding common stock of Vista. F-12 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 3. PROPERTY AND EQUIPMENT At August 31, 2000, property and equipment consisted of the following: Land $ 497,109 Buildings and improvements 7,523,848 Furniture and fixtures 471,364 Equipment 4,237,754 Automobile 24,125 ----------- 12,754,200 Less, accumulated depreciation (3,261,172) ----------- Net property and equipment $ 9,493,028 =========== Vista's existing physical facility is pledged as collateral on a long-term mortgage to a financing company in the amount of $440,772 as of August 31, 2000. In connection with its 1994 acquisition of approximately 65% interest in Vista, the Company has guaranteed 65% of the outstanding balance of this long-term mortgage. For the years ended August 31, 2000 and 1999, depreciation expense was $812,239 and $546,365, respectively. NOTE 4. NEGATIVE GOODWILL Subsequent purchases from minority interests have resulted in the fair value acquired being $773,654 in excess of the cash consideration paid. Goodwill associated with the original Vista acquisition of $230,717 and the negative goodwill related to subsequent purchases from the minority interest of $773,654 are being amortized over a period of fourteen years on the straight-line basis. For the years ended August 31, 2000 and 1999, amortization expense was ($35,924) and $16,480 respectively. NOTE 5. LONG-TERM DEBT At August 31, 2000, long-term debt consisted of the following: Note payable to a former shareholder, payable in monthly installments of $10,007, including interest at 11.50%, through December 2002, uncollateralized. $ 244,715 Note payable to a financing company payable in monthly installments of $19,533, including interest at 9.65%, through September 2002, collateralized by land and guaranteed by certain minority stockholders of Vista. 440,772 --------- 685,487 Less, current maturities (297,522) --------- $ 387,965 ========= F-13 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 5. LONG-TERM DEBT (continued) The aggregate principal payments on long-term debt subsequent to August 31, 2000, are as follows: Year ending August 31, 2001 $ 297,522 2002 329,512 2003 58,453 ---------- Total $ 685,487 ========== NOTE 6. INCOME TAXES The provision for income tax expense consisted of the following at August 31: 2000 1999 ---------- ---------- Current tax expense: Federal $3,599,000 $1,087,000 State 275,000 93,000 ---------- ---------- Total current 3,874,000 1,180,000 Deferred tax expense: Federal (benefit) (12,000) 212,000 State (1,000) 18,000 ---------- ---------- Total deferred (13,000) 230,000 ---------- ---------- Total $3,861,000 $1,410,000 ========== ========== For the year ended August 31, 2000, the Company and its subsidiaries converted from the cash method of accounting to the accrual method of accounting for the preparation of their respective individual tax returns. Deferred taxes arise primarily due to the use of the cash basis for tax reporting and the related conversion to the accrual basis, the use of the specific charge-off method for tax reporting, and accelerated methods of computing depreciation for tax purposes. The components of the provision for deferred income taxes, at August 31, were as follows: 2000 1999 --------- -------- Applicable to: - -------------- Cash basis of accounting for federal income tax purposes. $(159,000) $210,000 Use of reserve for bad debts for financial reporting and specific charge- off method for tax reporting. (22,000) (14,000) Special allocation of interest in partnership operations. 163,000 - Difference in methods of computing depreciation for tax and financial 5,000 34,000 reporting purposes and other. --------- -------- $ (13,000) $230,000 ========= ======== F-14 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 6. INCOME TAXES (continued) Significant components of the Company's deferred tax liabilities and assets, at August 31, 2000, were as follows: Current Noncurrent ------- ---------- Deferred tax liabilities: Basis in property and equipment $ - $(217,000) Cash basis of accounting for federal income tax purposes, net (194,000) (291,000) Special allocation of interest in partnership operations (163,000) Deferred tax assets Reserve for bad debts 49,000 - ---------- --------- Net liability $ (145,000) $(671,000) ========== ========= The following table reconciles the Federal statutory income tax rate and the Company's effective income tax rate: 2000 1999 ---- ---- Provision for income taxes at federal statutory rate 34.0% 34.0% State tax provision, net of federal benefits 3.0 3.0 Minority interest in loss of partnership on which tax benefit was not recorded (.1) (3.3) Other differences (.2) (0.3) -------- --------- Effective tax rate 36.7% 33.4% ======== ========= NOTE 7. RELATED PARTY TRANSACTIONS The Company leases to its President his personal residence at a monthly rate of $1,400. Total rent income for the years ended August 31, 2000 and 1999, was $16,800 for each year. During 2000, the Company advanced $410,000 to the minority member of Vista Medical. The advances which are included in other assets in the accompanying consolidated balance sheet will be repaid from future earnings of the Hospital. Due to the legislative requirements concerning the practice of medicine in the state of Texas, the Company has entered into agreements with various Professional Associations and individual doctors (the "Physicians") for the services of physicians. The Physicians provide services to third parties and after covering the costs associated with the Physicians, remit proceeds to the Company for management services. The structure of the agreements between the Company for its clinic and the Physicians require that all income be paid to the Company for management services or to the physicians for compensation. The accompanying financial statements reflect transactions with the Physicians on a basis as if the Company and Physicians were "combined" or "consolidated" as revenues reflect all clinic revenues billed to patients and expenses reflect compensation incurred to the Physicians. F-15 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 8. CAPITAL STOCK Pursuant to an Asset Purchase Agreement dated October 22, 1997, the Company issued 90,000 shares of restricted common stock valued at $90,000. This issuance was valued at fair market value based upon management's estimation of the open market closing price. In exchange for the restricted common stock, the Company assumed liabilities of $63,300 and received tangible and intangible property with a fair value of $153,300. In addition to the restricted common shares, the Company granted a two-year option to purchase an additional 75,000 restricted shares of common stock at $1.00 per share. In October 1998, the Company filed a civil lawsuit claiming breach of contract of the Asset Purchase Agreement. On October 29, 1998, a Compromise, Settlement and Mutual Release Agreement was entered into whereby the Company agreed to pay $118,000 in exchange for the return of the 90,000 shares of restricted common stock, the cancellation of the option to acquire 75,000 restricted shares of common stock and the transfer of approximately $57,849 of the original $63,300 of liabilities assumed. During 2000, the Company issued 95,000 shares of restricted common stock to a vendor as settlement of a $190,000 liability. Additionally, the Company issued 37,600 shares of restricted common stock with a fair market value of $150,400 as employee bonuses. Stock Options The Company has various stockholder-approved stock option plans which provide for the grant of options to directors, officers, key employees and consultants to purchase Common Stock at a price determined by the Board of Directors which may not be less than 100% of the fair market value as of the date of grant. The Board of Directors administers the stock option plans. Options may be granted as incentive stock options or as non-qualified stock options. Incentive stock options vest 100% annually, upon completion of one year of employment subsequent to the date of grant. The non-qualified stock options are subject to vesting schedules determined by the Board of Directors at the date of grant subject to a minimum six month vesting provision. The options expire at dates ranging from five to ten years from the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and allows for the option of continuing to account for stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, or selecting the fair value method of expense recognition as described in SFAS 123. The Company has elected to follow APB 25 in accounting for its stock option plans. The total compensation expense associated with stock options granted in 2000 and 1999 was $379,847 and $295,164, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000 and 1999, respectively: risk-free interest rates of 6.07% and 5.19%; dividend yield of zero as the Company has not paid and does not anticipate paying any dividends in the future; volatility factors of the expected market price of the Company's common stock of 1.64 and 1.69; and a weighted-average expected life of the options of three years. F-16 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 8. CAPITAL STOCK (continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The Company's pro forma information follows: 2000 1999 ---- ---- Net income available for common stock as reported $5,858,406 $2,663,832 SFAS No. 123 effect (675,011) (200,760) ---------- ---------- Pro forma net income available for common stock $5,183,395 $2,463,072 ========== ========== Pro forma basic earnings per share $ 0.77 $ 0.38 Pro forma diluted earnings per share $ 0.73 $ 0.36 The following is a summary of the Company's stock option activity and related information for the years ended August 31, 2000 and 1999:
Weighted Average Price Number of Shares Date of Grant or Exercise ---------------- ------------------------- Outstanding at August 31, 1998 412,766 $1.46 Options Granted 226,000 1.26 Options Exercised - - Options Canceled - - --------- ----- Outstanding at August 31, 1999 638,766 1.39 Options Granted 100,000 4.00 Options Exercised (263,000) 1.59 Options Canceled - - --------- ----- Outstanding at August 31, 2000 475,766 $1.83 ========= ===== Options exercisable at year-end 475,766 $1.83 Weighted-average fair value of options granted during the year $ 4.00
F-17 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 8. CAPITAL STOCK (continued) The following table summarizes information about the Company's stock options at August 31, 2000: Options Outstanding and Exercisable ------------------------------------------------------------------------ Weighted-Average Range of Remaining Weighted-Average Exercise Prices Number Contractual Life Exercise Price --------------- ------ ---------------- -------------- $ 1 - 2 380,766 2.61 $1.34 $ 3 - 5 95,000 4.38 $3.80 ------- $ 1 - 5 475,766 2.96 $1.83 ======= NOTE 9. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain of its facilities and equipment under operating leases with net aggregate future lease payments of $6,000 at August 31, 2000, payable as follows: Year ending August 31, 2001 $6,000 ====== Rent expense related to its facilities and equipment leases, for the years ended August 31, 2000 and 1999, was $97,243 and $35,444, respectively. The Company also leases corporate office space under an operating lease on a month-to-month basis. Rent expense for its corporate lease was $15,432 and $16,372 for each of the years ended August 31, 2000 and 1999. In addition, the Company pays certain operating leases on behalf of the physicians being managed by Doctors Practice Management, Inc. For the years ended August 31, 2000 and 1999, total physicians' operating lease expenses were $41,265 and $35,589, respectively. Total rent expenses, including those physicians' operating leases paid by the Company, for the years ended August 31, 2000 and 1999, was approximately $153,940 and $87,405, respectively. Other Risks The Company maintains insurance for worker's compensation, automobile, general liability, property loss, and medical malpractice claims. Management does not believe the Company's exposure to medical malpractice is significant, and is not aware of any pending or potential claims against the Company. F-18 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 10. SUPPLEMENTARY INFORMATION At August 31, 2000, the detail of certain balance sheet accounts was as follows: Accounts receivable: Trade $ 8,551,060 Other 3,084 ----------- 8,554,144 Less, allowance for doubtful accounts (134,536) ----------- $ 8,419,608 =========== Other assets: Due from related party $ 410,000 Other 75,113 ----------- $ 485,113 =========== Accrued liabilities: Compensation to Physicians $ 312,971 Interest expense 14,595 Wages and payroll taxes 192,409 Property taxes 160,000 Other 1,540 ----------- $ 681,515 =========== NOTE 11. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments which are exposed to concentrations of credit risk; they consist primarily of cash investments and trade accounts receivable. The Company routinely maintains cash and temporary cash investments at certain financial institutions in amounts substantially in excess of FDIC insurance limits; however, management believes that these financial institutions are of high quality and the risk of loss is minimal. As is customary in the health care business, the Company has trade accounts receivable from various private insurers, and the balance due from a particular insurer at any point in time may be in excess of the allowance for doubtful accounts. The Company does not request collateral from its customers and continually monitors its exposure for credit losses and maintains allowances for anticipated losses. The trade receivables from private insurers is normally in excess of 90% of the total trade receivables at any point in time. The carrying amounts of cash and cash equivalents, short-term investments, receivables, notes payable and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying amounts of the Company's long-term borrowings, at August 31, 2000, approximate their fair value. F-19 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- NOTE 12. SEGMENT AND RELATED INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131 during the fiscal year ended August 31, 1999. The Company has five reportable segments (four in 1999): infusion therapy, physician practice management, emergency and inpatient surgical center, clinic and outpatient surgical center, and property and equipment holding, which was added in 2000. 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 physician practice management segment provides office space and fee-based management services to physicians. The emergency and inpatient surgical center segment is comprised of a forty-two bed hospital which provides a wide range of medical services including major surgical cases which require hospitalization. The clinic and outpatient surgical center segment provides outpatient surgical facilities, X-ray diagnostic services and full service laboratory testing. The property and equipment holding segment has acquired all of the fixed assets of the emergency and inpatient surgical center segment and the clinic and outpatient surgical center segment. 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. 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. Summarized financial information concerning the Company's reportable segments is shown in the following table.
Physician Emergency and Clinic and Property and Infusion Practice Inpatient Outpatient Equipment Therapy Management Surgical Center Surgical Center Holding Totals ------- ---------- --------------- --------------- ------- ------ 2000 ---- Revenues from external customers $ 1,397,006 $ 2,172,055 $7,410,621 $15,396,058 $ 45,000 $26,420,740 Intersegment revenues 795,000 13,871,519 - - 960,000 15,626,519 Interest revenue 15,527 60,269 20,907 134,500 64 231,267 Interest expense 157,276 37,099 - 52,351 - 246,726 Depreciation and amortization 192,133 57,042 - 61,151 470,564 780,890 Income tax expense 75,000 1,654,000 709,000 1,413,000 10,000 3,861,000 Segment assets 563,902 8,316,646 5,103,347 10,263,699 9,539,521 33,787,115 Expenditures for segment assets - 8,926 555,849 84,770 677,134 1,326,679 Segment profit 172,906 2,854,360 1,223,010 2,397,412 18,170 6,665,858 1999 ---- Revenues from external customers $ 1,145,266 $ 2,244,257 $ 800,238 $12,359,639 - $16,549,400 Intersegment revenues 970,000 10,703,955 - - - 11,673,955 Interest revenue 21,478 33,133 8,979 136,230 - 199,820 Interest expense 173,573 - - 68,895 - 242,468 Depreciation and amortization 366,854 53,870 - 145,530 - 566,254 Income tax expense (benefit) (90,000) 1,060,000 (414,000) 854,000 - 1,410,000 Segment assets 10,511,929 3,974,496 2,333,942 7,003,964 - 23,824,331 Expenditures for segment assets 4,047,964 124,664 - 172,398 - 4,345,026 Segment profit/(loss) (179,870) 2,112,592 (824,607) 1,702,225 - 2,810,340
F-20 DYNACQ INTERNATIONAL, INC. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 12. SEGMENT AND RELATED INFORMATION (continued) The following table provides a reconciliation of the reportable segments' revenues, profit/(loss), assets, and other significant items to the consolidated totals.
2000 1999 ---- ---- REVENUES: --------- Total revenues for reportable segments $ 26,420,740 $ 16,549,400 Elimination of rent and other income (388,299) (336,744) ------------ ----------- Consolidated total revenues $ 26,032,441 $ 16,212,656 ============ =========== PROFIT/(LOSS): -------------- Total profit/(loss) for reportable segments $ 6,665,858 $ 2,810,340 Elimination of minority interests (807,452) (146,508) ------------ ----------- Consolidated net income $ 5,858,406 $ 2,663,832 ============ =========== ASSETS: ------- Total assets for reportable segments $ 33,787,115 $ 23,824,331 Elimination of intercompany accounts and other (10,740,874) (8,311,819) ------------ ----------- Consolidated total assets $ 23,046,241 $ 15,512,512 ============ =========== OTHER SIGNIFICANT ITEMS: ------------------------ Interest income $ 231,267 $ 199,820 Elimination of intersegment income (120,225) (124,303) ------------ ----------- Consolidated interest income $ 111,042 $ 75,517 ============ =========== Interest expense $ 246,726 $ 242,468 Elimination of intersegment expense (120,225) (124,303) ------------ ----------- Consolidated interest expense $ 126,501 $ 118,165 ============ ===========
The Company's revenues and long-lived assets are derived and domiciled from a customer base located solely in the United States. F-21 INDEX TO EXHIBITS All Exhibits listed below are incorporated by reference from prior filings except for those denoted by an asterisk which are filed herewith. (2.1.) Stock Sale Agreement, dated July 21, 1992, pertaining to a change in control of Dynacq International, Inc. (the "Company") which was previously filed in and is incorporated herein by this reference to, the Company's Registration Statement on Form 10, No. 0-20554. (2.2.) Exchange Agreement by and among the Company, Vista Healthcare, Inc. ("Vista") and certain Vista shareholders which was previously filed in, and is incorporated by this reference to, the Company's Current Report on Form 8-K, dated August 4, 1994. (3.0) Articles of Incorporation, filed June 16, 1989, which were previously filed in, and are hereby incorporated by reference to the Company's Registration Statement on Form 10, No. 0-20554. (3.1.) Amendment to Articles of Incorporation, filed February 12, 1992, which was previously filed in, and is hereby incorporated by reference to, the Company's Registration Statement on Form 10, No. 0-20554. (3.2.) Amendment to Articles of Incorporation, filed July 20, 1992, which was previously filed in, and is hereby incorporated by reference to, the Company's Registration Statement on Form 10, No. 0-20554. (3.3.) Amendment to Articles of Incorporation filed February 10, 1998. (3.4.) Bylaws (amended August 1, 1995) which were previously filed in and are hereby incorporated by reference to the Company's Amended Form 10-K for fiscal 1995 dated May 1, 1996, File No. 0-20554. (10.1.) Pledge-Security Agreement between the Company and Capital Bank dated July 20, 1994, which was previously filed in and incorporated by this reference to, the Company's current Report on Form 8-K, dated August 4, 1994, No. 0-20554. (10.2.) Guaranty Agreement between the Company and Metlife Capital Corporation dated July, 1994, which was previously filed in and is hereby incorporated by reference to, the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1993. Comission File No. 0-20564. (10.3.) Security Agreement dated July 18, 1996, between Vista and Capital Bank, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.4.) 1995 Incentive Stock Option Plan for Employees and Employee Directors, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.5.) 1995 Non-Qualified Stock Option Plan for Consultants and Non-Employee Directors, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. E-1 (10.6.) 1995 Stock Option Agreement between the Company and Philip S. Chan, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.7.) Full Service Facility and Management Agreement between DPMI and JCW Medical Associates, P.A. dated May 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.8.) Full Service Management Agreement between DPMI and Ping S. Chu, M.D., dated March 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0- 20554. (10.9.) Promissory Note dated November 15, 1996, from JCW Medical Associates, P.A. payable to the Company in the principal amount of $666,922.22, bearing interest at 8% per annum and payable in 180 monthly installments, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.10.) Security Agreement dated May 1, 1996, by JCW Medical Associates, P.A. to DPMI, filed with the Company,s Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.11.) Credit Agreement dated May 1, 1996, between JCW Medical Associates, P.A. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.12.) Revolving Credit Note from JCW Medical Associates, P.A. to DPMI dated April 1, 1996 for $675,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.13.) Credit Agreement dated April 1, 1996, between R.S. Arora, M.D., as Borrower, to DPMI as Lender, for advances up to $100,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.14.) Security Agreement dated April 1, 1996, by R.S. Arora M.D. as Grantor to DPMI as Lender, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0- 20554. (10.15.) Revolving Credit Note dated April 1, 1996, in the principal amount of $100,000 from R.S. Arora, M.D. to DPMI, filed with the Company=s Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.16.) $100,000 Revolving Credit Note dated July 1, 1996, from Houston Physical Medicine Associates, M.D., P.A. to DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.17.) Credit Agreement dated July 1, 1996, between Houston Physical Medicine Associates, M.D., P.A. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, Commission File No. 0-20554. (10.18.) Full Service Facility and Management Agreement dated October 1, 1996 by and between Milton Kirkwood, D.O. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. E-2 (10.19.) Asset Purchase Agreement and Bill of Sale dated October 22, 1997 by and between Medtek Management, Inc. and DPMI, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.20.) Asset Purchase Agreement dated November 13, 1997 by and among DPMI, Kirkwood Medical Associates, P.A., Milton E. Kirkwood, D.O., Ron Kirkwood, D.O., and John Kirkwood, D.O., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.21.) Lease Agreement effective July 1, 1996 by and between DPMI as Tenant and the City of Pasadena as Landlord relating to 3,000 square feet of office space in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.22.) Lease Agreement dated November 1, 1997 by and between DPMI as Landlord and Kirkwood Medical Associates as Tenant relating to approximately 9,200 square feet of office space located at 4301A Vista Road, Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0- 20554. (10.23.) Amendment No. 1 effective September 1, 1996 to the Full Service Management Agreement between DPMI and Ping S. Chu, M.D. dated March 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.24.) Amendment No. 1 effective September 1, 1996 to Full Service Facility and Management Agreement between DPMI and JCW Medical Associates, P.A. dated May 1, 1996, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0- 20554. (10.25.) $60,000.00 Promissory Note dated November 30, 1996, of the Company, payable to JCW Medical Associates, P.A., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.26.) $190,000.00 Promissory Note dated January 31, 1997, of DPMI, payable to JCW Medical Associates, P.A., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, Commission File No. 0-20554. (10.27.) Stock Option Agreement for Philip Chan dated effective December 18, 1997, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.28.) Stock Option Agreement for Glenn Rodriguez dated effective December 18, 1997, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.29.) Letter Agreement regarding pharmaceutical services between Vista and the Company dated effective September 1, 1998, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.30.) Office/Surgical Care Center Lease Agreement dated September 1, 1998, between the Company as Landlord and Vista as Tenant, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. E-3 (10.31.) Management Support and Marketing Agreement dated October 1, 1998, by and between DPMI and Ultramed, L.C., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.32.) Full Service Management Agreement dated October 1, 1998, by and between DPMI and Vista, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0- 20554. (10.33.) Real Estate Lien Note dated September 1, 1998, in the principal amount of $1,400,000.00 from the Company to Vista, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.34.) Warranty Deed with Vendor's Lien from Vista to the Company dated September 1, 1998, relating to 4.5799 acres of land in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.35.) Deed of Trust dated September 1, 1998 from the Company regarding 4.5799 acres of land in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.36.) AIA Construction Contract dated April 13, 1998, by and between the Company and Beck-Ford Construction, Inc. for construction of the Hospital for approximately $2,500,000, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, Commission File No. 0-20554. (10.37) Stock Option Agreement for Philip Chan dated January 4, 1999, relating to options to purchase $24,000 shares at $2.375, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. (10.38) Stock Option Agreement for Glenn Rodriguez dated January 4, 1999, relating to options to purchase 30,000 shares at $2.375, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. (10.39) Hospital Lease Agreement from Dynacq to Vista Community Medical Center, L.L.C. for 23,000 square with annual retails of $57,500 per month for through January 31, 2004, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. (10.40) The Company's Real Estate Lien Note dated September 1, 1998 in the principal amount of $270,000 payable to Vista Healthcare, Inc., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. (10.41) Deed of Trust dated September 1, 1998, from the Company with respect to its real estate properties in Pasadena, Texas, filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. (10.42) Regulations of Vista Community Medical Center, L.L.C., filed with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Commission File No. 0-20554. E-4 (10.43) The Company's Year 2000 Stock Incentive Plan adopted on August 29, 2000, and incorporated by reference as Appendix B from the Company's Definitive Proxy Statement for its Annual Meeting dated August 9, 2000 and filed with the Commission on or about that date. Commission File No. 0-20554. (10.44)* Separation Agreement and Consulting Agreement entered into by and among Dynacq International, Inc., Vista Health Care, Inc. and Glenn D. Rodriguez on or about November 28, 2000. (21.0)* Listing of subsidiaries of the Company, filed herewith. (27.)* Financial Data Schedule. __________________________________ * Filed herewith. E-5 EX-10.44 2 0002.txt SEPARATION AGREEMENT EXHIBIT 10.44 SEPARATION AGREEMENT -------------------- THIS AGREEMENT is made and entered into effective the 28th day of November, 2000, in Houston, Harris County, Texas, by and between DYNACQ INTERNATIONAL, INC., a Texas corporation, and VISTA HEALTH CARE, INC., a Texas corporation, hereinafter collectively referred to as "Dynacq", and GLENN D. RODRIGUEZ hereinafter referred to as "Rodriguez". RECITALS WHEREAS, Rodriguez is presently engaged by Dynacq in the following capacities: Chief Executive Officer - Vista Health Care, Inc. Vice President and Chief Operation Officer - Dynacq International, Inc. WHEREAS, both Dynacq and Rodriguez desire to terminate all of the foregoing employment relationships, and any other employment relationships which may exist between Rodriguez and Dynacq or any affiliate(s) of Dynacq, and to release each other from all liabilities arising therefrom, and NOW THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency is hereby acknowledged and confessed, the parties hereby agree as follows: 1.01. Both Dynacq and Rodriguez agree that all of the employment relationships between them, whether or not described above, are hereby terminated for all purposes. 1.02. Each of the parties, for himself or itself and his or its predecessors, successors, assigns, heirs, executors, administrators, officers, directors, shareholders, and legal representatives, releases, acquits, and forever discharges the others and their or its predecessors, successors, assigns, heirs, executors, administrators, agents, officers, directors, shareholders, and legal representatives, of and from any and all claims, demands, damages, actions, causes of action or suits in equity of whatsoever kind or nature, at common law, statutory, or otherwise, whether heretofore or hereafter accruing or whether now known or not known to the parties, for or because of any matter or thing done, omitted or suffered to be done by any of such parties prior to and including the date hereof and in any way, directly or indirectly, arising out of the employment relationships described herein, save and except any claims for indemnity that either party may have against the other. 1.03. It is expressly understood and agreed that the terms hereof are contractual and not merely recitals, and that the agreements herein contained and the consideration herein transferred shall not be construed as an admission of liability by any party hereto, all liability being expressly denied by all of the parties hereto. 1.04. Rodriguez shall be paid THREE HUNDRED THOUSAND DOLLARS ($300,000.00) in twelve equal monthly payments of $25,000.00 each, as full and final compensation for the non-compete covenant set forth in paragraph 1.05 below and the confidentiality covenant set forth in paragraph 1.06 below. The first such payment shall be due contemporaneously with the execution of this Agreement. 1.05. For a period ending November 30, 2002, and within a radius of fifty (50) miles from the city limits of Pasadena, Harris County, Texas, Rodriguez shall not, without the prior written permission of Dynacq, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in other individual or representative capacity, engage or participate in any business that is in competition in any manner whatever with the business of Dynacq or any subsidiary of Dynacq. Furthermore, during the same two (2) year period ending November 30, 2002, and within a radius of fifty (50) miles from the city limits of Pasadena, Harris County, Texas, Rodriguez expressly agrees not to, either directly or indirectly: a. Make known to any person, firm, or corporation the names and addresses of any of the customers of Dynacq that are accounts of Dynacq at the time of the execution of this Agreement or at the time of termination of this Agreement; or b. Call on, solicit, or take away, or attempt to call on, solicit, or take away any of the customers of Dynacq that were accounts of Dynacq at the time of the execution of this Agreement or at the time of termination of this Agreement. Rodriguez and Dynacq recognize that the time restrictions set forth herein are reasonable and are not burdensome, and are properly allowed by law for the adequate protection of Dynacq and its shareholders. If such territorial or time restrictions or any other provision contained herein shall be deemed to be illegal, unenforceable or unreasonable by an arbitrator or court of competent jurisdiction, such territorial or time restriction or other provision shall be reduced by such arbitrator or court to such area or period as such arbitrator or court shall deem reasonable. 1.06. During the term of the employment relationships which are terminated hereby, Rodriguez has had access to and become familiar with various trade secrets and confidential information consisting of client lists, pricing, compilations of information, financial records, records and specifications owned by Dynacq and regularly used in the operation of the business of Dynacq. Rodriguez agrees and acknowledges that all such trade secrets, financial information and confidential information is the property of Dynacq, constitute trade secrets and confidential information belonging to Dynacq in which Dynacq has a proprietary interest, and that it is essential for the continued operation of Dynacq that same remains confidential. Rodriguez expressly covenants and agrees that he will not reveal, divulge, disclose or communicate to any person, firm or corporation, other than employees, agents and consultants of Dynacq, in any manner whatsoever, any of the above-referenced trade secrets, confidential or proprietary knowledge or information of Dynacq without the prior written consent of Dynacq. 1.07. Rodriguez shall immediately deliver to Dynacq any property in the Rodriguez' possession or under the Rodriguez' control belonging to Dynacq. 1.08. All notices or other communications required under this Agreement may be effected either by personal delivery in writing or by certified mail, return receipt requested. Notice shall be deemed to have been given when delivered or mailed to the parties at their respective addresses as set forth below or when mailed to the last address provided in writing to the other party by the addressee: To Dynacq --------- Dynacq International, Inc. 4301-A Vista Pasadena, Texas 77504 To Rodriguez ------------ Glenn D. Rodriguez 4422 N. Pinebrook Houston, Texas 77059 1.09. If any litigation is commenced between the parties to this Agreement concerning the terms of same, the party prevailing in such litigation will be entitled, in addition to such other relief as may be granted, to a reasonable sum for attorneys fees incurred in such litigation. 1.10. The waiver by a party hereto of the breach of any provision hereof by the other shall not constitute a continuing waiver or a waiver of any subsequent breach of the same or any other provision of this Agreement. 1.11. Time is expressly declared to be of the essence in this Agreement. 1.12. The rights and remedies provided by this Agreement are cumulative, and the use of any one right or remedy shall not preclude or waive that party's right to use any or all other remedies, These rights and remedies are given in addition to any other rights the parties may have by law, statute, or otherwise. 1.13. In case any one or more of the provisions contain in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement must be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 1.14. This Agreement shall be construed under and in accordance with the laws of the State of Texas. 1.15. No amendment, modification, or alteration of the terms of this Agreement shall be binding unless the same be in writing, stated subsequent to the date hereof, and executed by the parties hereto. 1.16. This Agreement constitutes the only Agreement of the parties hereto regarding the subject matter hereof and supersedes any prior understanding or written or oral agreements between the parties respecting said subject matter. 1.17. Venue of any action hereunder shall lie in the courts of Harris County, Texas. DYNACQ INTERNATIONAL, INC. By:________________________________ Philip Chan, Vice President VISTA HEALTH CARE, INC. By:__________________________________ Philip Chan, Vice President ____________________________________ Glenn D. Rodriguez CONSULTING AGREEMENT -------------------- THIS AGREEMENT is made and entered into November ____, 2000, but effective as of December 1, 2000, in Houston, Harris County, Texas, by and between DYNACQ INTERNATIONAL, INC., a Texas corporation, and VISTA HEALTH CARE, INC., a Texas corporation, hereinafter collectively referred to as "Dynacq", and GLENN D. RODRIGUEZ hereinafter referred to as "Rodriguez". WHEREAS, both Dynacq and Rodriguez desire to enter into a consulting relationship on the terms and conditions set forth below, NOW THEREFORE, in consideration of $10.00 and other good and valuable consideration, the receipt and sufficiency is hereby acknowledged and confessed, the parties hereby agree as follows: 1.01. By this Agreement Dynacq engages Rodriguez, and Rodriguez accepts engagement with Dynacq, for a period of one (1) year beginning on December 1, 2000 and ending November 30, 2001; however, this Agreement may be terminated earlier, as provided in Article 7, below. At the end of the term, this Agreement may continue upon the mutual written agreement of the parties hereto. 1.02. As compensation for all services rendered under this Agreement, Rodriguez shall be paid by Dynacq a salary of FIVE THOUSAND DOLLARS ($5,000.00) per month during the period of engagement. 1.03. Rodriguez shall be eligible for participation in Dynacq's major medical insurance plan and choose to do so, Rodriguez shall pay the standard employee's share of costs associated with such major medical insurance coverage. 1.04. Rodriguez shall perform the duties of a consultant to Dynacq. The parties agree that Rodriguez' duties shall be limited to consultation by telephone or other electronic means from Rodriguez' home or such other place where Rodriguez may be found on any such matters relating to the Company that may arise. Rodriguez shall perform no fewer than thirty (30) hours of services for Dynacq per week. 1.05. During the term of this Agreement, Rodriguez may render services of a business, commercial, or professional nature to any other person or organization, so long as such services do not violate the terms of Article 1.06 below. 1.06. During the term of this Agreement and for a period ending November 30, 2002, and within a radius of fifty (50) miles from the city limits of Pasadena, Harris County, Texas, Rodriguez shall not, without the prior written permission of Dynacq, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in other individual or representative capacity, engage or participate in any business that is in competition in any manner whatever with the business of Dynacq or any subsidiary of Dynacq. Furthermore, during the term of this Agreement and for a period ending November 30, 2002, and within a radius of fifty (50) miles from the city limits of Pasadena, Harris County, Texas, Rodriguez expressly agrees not to, either directly or indirectly: a. Make known to any person, firm, or corporation the names and addresses of any of the customers of Dynacq that are accounts of Dynacq at the time of the execution of this Agreement or at the time of termination of this Agreement; or b. Call on, solicit, or take away, or attempt to call on, solicit, or take away any of the customers of Dynacq that were accounts of Dynacq at the time of the execution of this Agreement or at the time of termination of this Agreement. Rodriguez and Dynacq recognize that the time restrictions set forth herein are reasonable and are not burdensome, and are properly allowed by law for the adequate protection of Dynacq and its shareholders. If such territorial or time restrictions or any other provision contained herein shall be deemed to be illegal, unenforceable or unreasonable by an arbitrator or court of competent jurisdiction, such territorial or time restriction or other provision shall be reduced by such arbitrator or court to such area or period as such arbitrator or court shall deem reasonable. 1.07. Rodriguez shall indemnify and hold harmless Dynacq from all liability from loss, damage, or injury to persons or property resulting from the gross negligence or misconduct of Rodriguez committed in the scope of Rodriguez' engagement, and hereby agrees to do so. 1.08. During the term of this Agreement as a result of the nature of the duties to performed by Rodriguez, Rodriguez may have access to and become familiar with various trade secrets and confidential information consisting of client lists, pricing, compilations of information, financial records, records and specifications owned by Dynacq and regularly used in the operation of the business of Dynacq. Rodriguez agrees and acknowledges that all such trade secrets, financial information and confidential information is the property of Dynacq, constitute trade secrets and confidential information belonging to Dynacq in which Dynacq has a proprietary interest, and that it is essential for the continued operation of Dynacq that same remains confidential. Rodriguez expressly covenants and agrees that during the term of this Agreement and after the termination of his engagement, he will not reveal, divulge, disclose or communicate to any person, firm or corporation, other than employees, agents and consultants of Rodriguez, in any manner whatsoever, any of the above-referenced trade secrets, confidential or proprietary knowledge or information of Dynacq without the prior written consent of Dynacq. 1.09. On the termination of engagement or whenever requested by Dynacq, Rodriguez shall immediately deliver to Dynacq any property in the Rodriguez' possession or under the Rodriguez' control belonging to Dynacq. 1.10. Either party may terminate the consulting relationship described herein upon thirty (30) days written notice to the other. In the event of the termination of the consulting relationship by Dynacq prior to the completion of the Term of the relationship, Rodriguez shall be entitled to the immediate payment of all compensation described herein for the remaining balance of the full one (1) year Term hereof. In the event of the termination of the consulting relationship by Rodriguez prior to the completion of the Term, Rodriguez shall not be entitled any compensation after the effective date of such termination. 1.11. All notices or other communications required under this Agreement may be effected either by personal delivery in writing or by certified mail, return receipt requested. Notice shall be deemed to have been given when delivered or mailed to the parties at their respective addresses as set forth below or when mailed to the last address provided in writing to the other party by the addressee: To Dynacq --------- Dynacq International, Inc. 4301-A Vista Pasadena, Texas 77504 To Rodriguez ------------ Glenn D. Rodriguez 4422 N. Pinebrook Houston, Texas 77059 1.12. If any litigation is commenced between the parties to this Agreement concerning the terms of same, the party prevailing in such litigation will be entitled, in addition to such other relief as may be granted, to a reasonable sum for attorneys fees incurred in such litigation. 1.13. The waiver by a party hereto of the breach of any provision hereof by the other shall not constitute a continuing waiver or a waiver of any subsequent breach of the same or any other provision of this Agreement. 1.14. Time is expressly declared to be of the essence in this Agreement. 1.15. The rights and remedies provided by this Agreement are cumulative, and the use of any one right or remedy shall not preclude or waive that party's right to use any or all other remedies, These rights and remedies are given in addition to any other rights the parties may have by law, statute, or otherwise. 1.16. In case any one or more of the provisions contain in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement must be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 1.17. This Agreement shall be construed under and in accordance with the laws of the State of Texas. 1.18. No amendment, modification, or alteration of the terms of this Agreement shall be binding unless the same be in writing, stated subsequent to the date hereof, and executed by the parties hereto. 1.19. This Agreement constitutes the only Agreement of the parties hereto regarding the subject matter hereof and supersedes any prior understanding or written or oral agreements between the parties respecting said subject matter. 1.20. Venue of any action hereunder shall lie in the courts of Harris County, Texas. DYNACQ INTERNATIONAL, INC. By:________________________________ Philip Chan, Vice President VISTA HEALTH CARE, INC. By:__________________________________ Philip Chan, Vice President ____________________________________ Glenn D. Rodriguez EX-21 3 0003.txt SUBSIDIARIES Exhibit 21.0 LIST OF SUBSIDIARIES 1. Vista Healthcare, Inc., a Texas corporation 2. Vista Community Medical Center, L.L.C., a Texas limited liability company 3. ASO Medical, Inc. 4. Doctors Practice Management, Inc., a Texas corporation 5. Ambulatory Infusion Therapy Specialists, Inc., a Texas corporation 6. Vista Land and Equipment, L.L.C., a Texas limited liability EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 1 12-MOS AUG-31-2000 AUG-31-2000 4,301,523 0 8,419,608 0 346,969 13,068,100 9,493,028 0 23,046,241 5,630,413 387,965 0 0 7,659 14,560,850 23,046,241 0 26,032,441 520,624 15,297,214 0 60,585 126,501 10,526,858 3,861,000 6,665,858 0 0 0 5,858,406 0.87 0.82
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