-----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, Qt6mWlOmfA8zJ5jHybmwkmmSGh8wah7ITJ0USI53qUC24vBT1TA+u/NUXdAceIww /RTg5ZZ4YSdvzs7qbnYzXg== 0000930661-02-002407.txt : 20020715 0000930661-02-002407.hdr.sgml : 20020715 20020715130601 ACCESSION NUMBER: 0000930661-02-002407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020531 FILED AS OF DATE: 20020715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNACQ INTERNATIONAL INC CENTRAL INDEX KEY: 0000890908 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 760375477 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21574 FILM NUMBER: 02702652 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 10-Q 1 d10q.txt FORM 10-Q FOR THE QUARTER ENDED 05/31/2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ___________________ Commission file number 0-20554 DYNACQ INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) NEVADA 76-0375477 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10304 INTERSTATE 10 EAST, SUITE 369, HOUSTON, TEXAS 77029 (address of principal executive offices) Zip Code Registrants telephone number, including area code (713)673-6432 N/A (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X. No . APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable dates. Title of Each Class Outstanding at June 15, 2002 Common Stock, $0.001 par value 14,831,100 shares Transitional Small Business Disclosure Format (check one) Yes ______ No X PART I. - FINANCIAL INFORMATION ITEM I. - FINANCIAL STATEMENTS DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited) ASSETS MAY 31 AUGUST 31 2001 2001 ------------ ------------ CURRENT ASSETS: Cash and Cash equivalents $ 6,662,033 $ 5,031,614 Receivables (Net of Allowance for $ 21,314,332 $ 18,993,648 Doubtful Accounts) Inventory $ 471,767 $ 511,248 Prepaid expenses $ 215,298 $ 109,993 Due from related parties $ 1,585,000 Deferred tax assets $ 71,000 $ 71,000 ------------ ------------ Total Current Assets $ 28,734,430 $ 26,302,503 FIXED ASSETS, NET $ 14,881,017 $ 10,497,730 OTHER ASSETS, NET $ 240,505 $ 130,890 ------------ ------------ TOTAL ASSETS $ 43,855,952 $ 36,931,123 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 1,109,962 $ 798,787 Accrued Liabilities $ 1,072,590 $ 725,412 Current Maturities of Long-Term Debt $ 67,426 $ 228,697 Income Taxes Payable $ 3,246,620 ------------ ------------- TOTAL CURRENT LIABILITIES $ 2,249,978 $ 4,999,516 LONG-TERM DEBT, NET OF CURRENT MATURITIES $ 519,075 DEFERRED INCOME TAXES PAYABLE $ 29,000 $ 29,000 NEGATIVE GOODWILL, NET $ 282,581 $ 332,581 MINORITY INTERESTS IN SUBSIDIARIES $ 2,382,724 $ 3,505,769 STOCKHOLDERS' EQUITY: Preferred Stock, $0.01 Par Value, 5,000,000 Shares Authorized, None Issued or Outstanding Commom Stock, $0.001 Par Value, 300,000,000 Shares Authorized, after 8 to 1 and 4 to 1 Reverse Stock Splits & 100% Stock Dividends on 1/10/2000 and 3/12/2001, 16,488,195 Shares Issued and 14,823,100 Shares Outstanding $ 16,488 $ 16,266 Additional Paid In Capital $ 7,700,344 $ 6,690,042 Retained Earnings $ 33,492,251 $ 22,445,443 Treasury Stock: 1,665,095 shares at cost $ (1,959,412) $ (1,190,507) Deferred compensation $ (338,002) $ (416,062) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY $ 38,911,669 $ 27,545,182 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,855,952 $ 36,931,123 ============ ============
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED 5/31/2002 5/31/2001 5/31/2002 5/31/2001 ------------ ------------ ------------ ------------ NET REVENUES (net of contractual adjustments) $ 19,621,751 $ 12,778,986 $ 48,512,575 $ 31,470,925 LESS EXPENSES: Wages and benefits $ 2,299,201 $ 1,673,649 $ 6,122,792 $ 3,907,529 Medical supplies $ 4,792,399 $ 3,182,469 $ 11,504,442 $ 6,555,235 General and administrative $ 3,857,604 $ 1,456,746 $ 8,192,191 $ 4,173,705 Professional fees $ 427,150 $ 636,496 $ 1,322,209 $ 1,537,490 Rent, lease and occupancy $ 681,869 $ 383,482 $ 1,451,776 $ 892,130 Bad debt expense $ 175,551 $ 59,796 $ 305,574 $ 94,546 Depreciation & amortization $ 355,827 $ 232,545 $ 949,684 $ 632,994 Interest $ 9,853 $ 15,012 $ 26,806 $ 47,285 ------------ ------------ ------------ ------------ Total Expenses $ 12,599,454 $ 7,640,195 $ 29,875,474 $ 17,840,914 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES & MINORITY INTERESTS $ 7,022,297 $ 5,138,791 $ 18,637,101 $ 13,630,011 PROVISION FOR INCOME TAXES $ 2,230,442 $ 1,422,640 $ 5,888,338 $ 3,950,238 ------------ ------------ ------------ ------------ INCOME BEFORE MINORITY INTERESTS $ 4,791,855 $ 3,716,151 $ 12,748,763 $ 9,679,773 MINORITY INTERESTS $ (664,690) $ (933,534) $ (1,701,956) $ (2,108,818) ------------ ------------ ------------ ------------ NET INCOME $ 4,127,165 $ 2,782,617 $ 11,046,807 $ 7,570,955 ============ ============ ============ ============ BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.20 $ 0.75 $ 0.53 DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.19 $ 0.73 $ 0.53 WEIGHTED AVERAGE COMMON SHARES-BASIC 14,797,989 14,256,832 14,797,989 14,256,832 WEIGHTED AVERAGE COMMON SHARES-DILUTED 15,057,681 14,406,918 15,057,681 14,406,918 (1) (2) (1) (2)
(1) AS ADJUSTED 100% STOCK DIVIDEND EFFECTIVE 3/12/2001. (2) COMMON SHARES PRESENTED IN THE CORRESPONDING QUARTER OF THE PREVIOUS YEAR IN COMPUTING THE EARNINGS PER SHARE ARE RESTATED AS IF THE 2 FOR 1 STOCK SPLIT EFFECTED IN THE FORM OF A 100% STOCK DIVIDEND ON JANUARY 10, 2000 & MARCH 12, 2001 HAD BEEN RETROACTIVELY APPLIED FOR COMPARISON PURPOSES. DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31 (UNAUDITED)
2002 2002 ------------ ------------ RECONCILIATION OF NET INCOME TO NET CASH USED BY OPERATING ACTIVITIES: Net Income $ 11,046,807 $ 7,570,955 ADD: ITEMS NOT REQUIRING CASH: Depreciation $ 949,684 $ 632,994 Minority Interests $ 1,701,956 $ 2,058,818 Deferred compensation amortization $ 78,060 $ - Adjustments to reconcile net income to net cash provided by operating activities: (Increase) Decrease in Accounts Receivable $ (2,320,684) $ (7,121,827) (Increase) Decrease in Inventory $ 39,481 $ (25,510) (Increase) Decrease in Prepaid expenses $ (105,305) Increase (Decrease) in Accounts Payable $ 311,175 $ (819,231) Increase (Decrease) in Accrued Liabilities $ 347,178 $ 188,408 Increase (Decrease) in Income Taxes Payable $ (3,246,620) $ 618,451 ------------ ------------ Net Cash Provided by Operating Activities $ 8,801,732 $ 3,103,058 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Fixed Assets $ (5,332,971) $ (1,214,370) Due from related party $ 1,585,000 (Decrease) Increase of Other Assets $ (109,615) $ (1,150,072) ------------ ------------ Net Cash (Used) by Investing Activities $ (3,857,586) $ (2,364,442) ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES: Retirements of Long -Term Debt, Net $ (680,346) $ (220,050) Issuance of Common Stock $ 1,360,524 $ 1,100,229 Acquisition of Treasury Stock, Net $ (768,905) $ (48,961) Reduction of Negative Goodwill $ (50,000) Purchase of minority interests $ (590,000) Distribution to Minority Interests $ (2,585,000) ------------ ------------ Net Cash Provided by Financing Activities $ (3,313,727) $ 831,218 ------------ ------------ Net Increase in Cash and Cash Equivalents $ 1,630,419 $ 1,569,834 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 5,031,614 $ 4,301,523 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,662,033 $ 5,871,357 ============ ============
DYNACQ INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 (UNAUDITED) Notes to Consolidated Financial Statements Basis of presentation The accompanying unaudited financial statements have been prepared by Dynacq International, Inc. without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These financial statements include all of the adjustments which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. These unaudited financial statements should be read in conjunction with the audited financial statements at August 31, 2001. Operating results for the nine months period ended May 31, 2002 are not necessarily indicative of the results that may be expected for the year ending August 31, 2002. General The Company provides surgical healthcare services and related ancillary services through surgical hospital facilities and surgery centers. While historically the Company has offered a range of healthcare services, including ambulatory infusion and physician practice management, the focus over the last five years has been on surgical services. During the last four quarters, management has focused on same store growth of inpatient surgical services and identification of additional surgical hospital sites, as it believes such operations to be a more profitable and efficient use of resources. As of May 31, 2002, the Company operated two locations in the Houston metropolitan area, a medical center with inpatient and outpatient facilities located in Pasadena, Texas and an outpatient surgery center located in Houston, Texas. In November of 2001, the Company purchased a hospital in Baton Rouge, Louisiana which is being renovated as a surgical hospital expected to be operational in the winter of 2002. The Company continues to evaluate lease and purchase options of additional surgical hospitals. Use of estimates The Company's unaudited quarterly consolidated financial statements are prepared based on management's estimates, assumptions and judgments that are believed to be reasonable under the circumstances for a fair presentation of financial position and results of operations. Should the underlying estimates, assumptions or judgments prove incorrect, the reported amounts could differ materially in some cases with respect to particular items in the financial statements. Determination of net revenues, contractual adjustments The Company's billings for services are predominately to third-party payors and are subject to contractual adjustments. Consequently, our net revenues are reported at estimated net realizable amounts from third-party payors. The Company's provisions for contractual adjustments are based on management's monthly review and analysis of historical collection rates. 2 Bad Debt Expense and Allowance for Doubtful Accounts As with any healthcare provider, some of our accounts receivable will ultimately prove uncollectible, primarily due to the inability of patients to satisfy their financial obligations to us. Since substantially all of our admissions are pre-certified or pre-authorized from third party payors, our bad debt reserve is nominal. Minority Interests In May 1998, the Company through its wholly-owned subsidiary DPMI organized Vista Community Medical Center, L.L.C. to operate a hospital adjacent to its outpatient surgical center in Pasadena, Texas. The Company funded over $5,000,000 from its cash flow to complete the construction and equip the hospital in May 1999 and DPMI and Halcyon collectively invested $1,200,000 in Vista Community Medical Center, L.L.C. From its inception and through August 31, 2001, Vista Medical was owned 70% by DPMI and 30% by Halcyon L.L.C. In September 2001, pursuant to its contractual right, the Company purchased two-thirds of Halcyon's interest for $240,000, reducing Halcyon's interest to 10%. The Company has distributed $1,385,000 and $900,000 as profit distributions to Halcyon for its 30% ownership interest in the Hospital operations for the period from inception through August 31, 2001 and 10% ownership interest in the Hospital operations for the nine months ended May 31, 2002, respectively. As of August 31, 2001, the `Due from related parties' account in the Balance Sheet had a balance of $1,585,000 which included $1,385,000 advance to Halcyon from October, 1999 through August, 2001 and was treated as profit distributions to Halcyon by reducing both the `Due from related parties' account and the `minority interests liability' account for the same amount in this period. The payment of buy back price of $240,000 and the advance of $900,000 to Halcyon in the first nine months of the current fiscal year were booked as return of capital and profit distributions to Halcyon by reducing both the `Due to related parties' account and `minority interest liability' account for $1,140,000 in this period. Halcyon will continue to receive its proportionate share of profit distributions from the hospital and will reduce the Company's minority interests liability owed to Halcyon. In March 2001, the Company through its wholly-owned subsidiary DPMI organized Vista Surgical Center West, L.L.C., hereinafter known as "Vista West" to operate a outpatient surgical center in Houston, Texas. From its inception and through April 2002, Vista West was owned 70% by DPMI and 30% by Piney Point Associates, L.L.C. The Company has distributed $200,000 and $100,000 as profit distribution to Piney Point Associates L.L.C. for its 30% ownership interest in Vista Surgical Center West, L.L.C. operations for the period from inception through August 31, 2001 and eight months ended April 30, 2002, respectively. In May 2002, pursuant to contractual right, the Company purchased all Piney Point Associates's interest for $350,000. Segment and related information The Company has three reportable segments: surgical hospital, outpatient surgical centers, and other. The surgical hospital segment is comprised of a four surgical suites hospital and provide a wide range of ancillary medical services located at 4301 Vista Road in Pasadena, Texas. The outpatient surgical centers segment provides outpatient surgical facilities, which include two centers; one located at 4301 Vista Road in Pasadena, Texas and the other one located at 2500 Fondren in Houston, Texas, both of which have a total of six surgical suites, contracted x-ray diagnostic services and laboratory testing. The Other segment includes property and equipment, which holds of all the fixed assets of the outpatient surgical centers segment and the surgical hospital segment, physician practice management, and infusion therapy both of which no longer constitute the core business of the Company. The Company's reportable segments are business units that offer different services. They are managed separately because each business requires different technology, marketing strategies and performance evaluations. 3 Summarized financial information concerning the Company's reportable segments is shown in the following table for the three months ended May 31, 2002 and May 31, 2001, respectively:
Outpatient Surgical Surgical Hospital Centers Other Total ------------ -------------- ------------ ------------- 2002 Revenues-external $ 15,843,875 $ 3,358,650 $ 355,771 $ 19,558,296 Intersegment revenues 0 0 4,527,622 4,527,622 Segment assets 20,847,513 7,643,053 20,637,068 49,127,634 Segment profit 4,812,966 (465,945) 621,386 4,968,407 2001 Revenues-external $ 7,123,336 $ 4,708,321 $ 858,898 $ 12,690,555 Intersegment revenues 0 0 4,082,482 4,082,482 Segment assets 12,260,093 14,309,956 29,489,546 56,059,595 Segment profit 2,768,167 1,078,764 608,603 4,455,534
Summmarized financial information concerning the Company's reportable segments is shown in the following table for the nine months ended May 31, 2002 and May 31, 2001, respectively:
Outpatient Surgical Surgical Hospital Centers Other Total ------------- -------------- ------------ ----------- 2002 Revenues-external $36,229,675 $10,814,696 $ 1,312,158 $48,356,529 Intersegment revenues 0 0 12,814,663 12,814,663 Segment assets 20,847,513 7,643,053 20,637,068 49,127,634 Segment profit 10,903,976 482,517 1,481,602 12,868,095 2001 Revenues-external 15,351,729 13,431,837 2,449,370 31,232,936 Intersegment revenues 0 0 12,538,077 12,538,077 Segment assets 12,260,093 14,309,956 29,489,546 56,059,595 Segment profit 6,564,315 2,781,547 2,008,333 11,354,195
The following table provides a reconciliation of the reportable segments' revenues and profit to the consolidated totals for three months and nine months ended May 31, 2002 and May 31, 2001, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED 5/31/2002 5/31/2001 5/31/2002 5/31/2001 ------------ ----------- ------------ ------------ REVENUES - -------- Total revenues for reportable segments 19,558,296 12,690,555 48,356,529 31,232,936 Interest income 83,808 113,575 220,789 316,804 Elimination of intersegment interest income (20,353) (25,144) (64,743) (78,815) ----------- ----------- ----------- ----------- Consolidated total revenues 19,621,751 12,778,986 48,512,575 31,470,925 PROFIT: - ------- Total profit for reportable segments $ 4,968,407 $ 4,455,534 $12,868,095 $11,354,195 Elimination of intersegment income (176,552) (739,383) (119,332) (1,674,422) Elimination of minority interests (664,690) (933,534) (1,701,956) (2,108,818) ----------- ----------- ----------- ----------- Consolidated net income $ 4,127,165 $ 2,782,617 $11,046,807 $ 7,570,955
4 Contingencies The Company and its wholly owned subsidiary, Doctors Practice Management, Inc. sued Benchmark, an architectural corporation, general contractors, engineers, and some sub-contractors in the 151/st/ Judicial District Court of Harris County, Texas for fraud, negligence, breach of contract, loss of profits and/or goodwill, and punitive damages arising out of certain construction defects in connection with the completion and remodeling of Vista Community Medical Center L.L.C. Doctors Practice Management Inc. has filed a nonsuit in this case and is no longer involved. Dynacq International, Inc. is suing for actual damages of $10,000,000.00 and punitive damages of another $10,000,000. On April 26, 2000, defendant filed a counterclaim of $540,011 actual damages and $2,000,000 in punitive and/or exemplary damages claiming fraud, satisfaction of the lien, breach of contract, substantial performance, and punitive damages. The Company believes the counterclaims particularly the fraud and punitive damages claims, asserted in the above lawsuit are without merit, and expect to vigorously defend against such claims. Because the lawsuit remains at an early stage, the Company cannot currently predict the outcome of the lawsuit or the magnitude of any potential loss if the Company's defense is unsuccessful. A nurse at Vista Community Medical Center L.L.C. claimed she was injured on the job and filed a suit in the 133rd Judicial District Court of Harris County, Texas against Vista Community Medical Center L.L.C. The exact date of the injury that was the subject of this case is disputed. There is substantial information which indicates that at the time of Ms. Harrison's injury there was insurance coverage, and Vista Community Medical Center L.L.C. was a subscriber under the Texas Worker's Compensation Act. Therefore, Ms. Harrison's claims should be directed to the Texas Worker's Compensation Commission, and should not result in any material liability to Vista Community Medical Center L.L.C. Plaintiff have failed to specify the exact amount of damages that she is seeking, however she have alleged punitive damages. Since January 2002, the Company and two of its officers were named as defendants in several virtually identical lawsuits in the United States District Court for the Southern District of Texas claiming, among other things, that the defendants violated certain federal securities laws and regulations. Each complaint seeks certification as a class action on behalf of virtually all purchasers of the Company's stock from November 29, 1999 through January 16, 2002. The various Complaints that have been consolidated claim that the Company violated Sections 10(b) and 20(a) and SEC Rule 10b-5 under the Securities Exchange Act of 1934 by making materially false or misleading statements or omissions regarding revenues and receivables and regarding whether the Company's operations complied with various federal regulations. The district court has consolidated these actions and appointed a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995, and the court has ordered the lead plaintiff to file a Consolidated Amended Complaint no later than August 30, 2002. The Company anticipates moving to dismiss that Consolidated Amended Complaint after it is filed. The Court has set a deadline for the Motion to Dismiss of October 25, 2002. These actions are at an early stage. The complaints seek damages, pre-judgment interest, costs and attorneys' fee. The Company intends to defend against the claims vigorously. However, the Company could incur substantial costs defending the lawsuit, has no insurance coverage relating to these claims, and has undertaken to indemnify the individual defendants for any losses they may suffer. The Company has not yet established a reserve for legal costs. The lawsuits could also divert the time and attention of the Company's management. The Company cannot predict the outcome of the lawsuits at this time, and there can be no assurance that the litigation will not have a material adverse impact on its financial condition or results of operations. In March 2002, the Company accepted service of the Brill v. Chan, et al. shareholder derivative action in the 295/th/ District Court of Harris County, Texas purportedly brought on behalf of the Company against its officers and directors, outside auditor, an investment bank, and two analysts affiliated with the investment bank. The suit alleges breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence and breach of contract. Plaintiff makes general allegations of Defendants' alleged misconduct in "(i) causing or allowing the Company to conduct its business in an unsafe, imprudent and unlawful 5 manner; (ii) failing to implement and maintain an adequate internal control system; and (iii) exposing Dynacq to enormous losses," including allegations that various press releases and/or public statements issued between January 1999 and January 2002 were misleading. Plaintiff made no demand on either the Company or its Board of Directors prior to filing suit. Another derivative suit making similar allegations, Grubb v. Dynacq, was filed in the 152nd Judicial District of Harris County, Texas state district court; however, the plaintiff has subsequently asked the Court to approve his voluntary dismissal of that action. These actions are at an early stage. Therefore, the Company cannot predict the ultimate outcome of the lawsuits at this time, and there can be no assurance that the litigation will not have a material adverse impact on its financial condition or results of operations. The Company intends to engage outside competent and independent person to investigate the allegations made in the lawsuit(s), and take appropriate action upon conclusion of the investigation. Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2002 TO THE THREE MONTHS ENDED MAY 31, 2001. Net revenues for the three months ended May 31, 2002 increased $6,842,765 or 54% from that for the corresponding previous quarter ended May 31, 2001, primarily due to increased revenues from the Company's surgical hospital. Net revenue from the surgical hospital in the current period increased $8,720,539 or 122 % due to more surgical cases, while net revenue from the outpatient surgical centers decreased $1,349,671 or 29% primarily due to shifting of the Company's priority to hospital operations, and other net revenue comprising of home infusion operations and physician practice management decreased $503,127 or 59% due to decrease in patient load, and interest revenue decreased $24,976 or 28% due to reduction in interest rate. Management believes that future revenues will continue to be derived primarily from its surgical hospital as the Company intends to allocate its resources to expanding this segment of the business and de-emphasizing outpatient surgical centers and other non surgical operations. Operating expenses for the three months ended May 31, 2002 increased $4,959,259 or 65 % from that for the corresponding quarter ended May 31, 2001 primarily due to increased surgical hospital activities. Wages and benefits increased $625,552 or 37% during the current quarter ended May 31, 2002 from the corresponding quarter ended May 31, 2001, and medical supplies increased $1,609,930 or 51% for the identical period; such increases were primarily due to increased operations of the surgical hospital. General and administrative expenses for the three months ended May 31, 2002 increased $2,400,858 or 165% from the corresponding quarter ended May 31, 2001 primarily due to increased activities of the surgical hospital and the Company's increased management and expanded operations. Professional fees for the three months ended May 31, 2002 decreased $209,346 or 33% from that of the corresponding quarter ended May 31, 2001, primarily due to decreased payments to physicians under management. Rent and lease expense for the three months ended May 31, 2002 increased $298,387 or 78% from that of the corresponding quarter ended May 31, 2001, primarily due to increased surgical hospital operations. Depreciation and amortization expenses for the three months ended May 31, 2002 increased $123,282 or 53% from that of the corresponding quarter ended May 31, 2001, primarily due to increased activities of the surgical hospital. Net income increased $1,344,548 or 48% from $2,782,617 in the corresponding period of the previous fiscal year to $4,127,165 in the current period. Basic earnings per common share increased $0.08 per share or 40% from $0.20 per share in the corresponding period of the previous fiscal year to $0.28 per share in the current period. Diluted earnings per common share increased $0.08 per share or 42% from $0.19 in the corresponding period of the previous fiscal year to $0.27 per share in the current period. 6 COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2002 TO THE NINE MONTHS ENDED MAY 31, 2001. Net revenues for the nine months ended May 31, 2002 increased $17,041,650 or 54% from that for the corresponding period ended May 31, 2001 primarily due to increased revenues from the Company's surgical hospital. Net revenue from the surgical hospital increased $20,877,946 or 136% in the current period compared to the corresponding period of the previous fiscal year due to more surgical cases, while net revenues from the outpatient surgical centers decreased $2,617,141 or 19% in the current period primarily due to the shifting of the Company's priority to the hospital operations, and other net revenues, which include both physician practice management and home infusion operations decreased $1,137,212 or 46% primarily due to less patient load, and interest revenue decreased $81,942 or 34% due to reduction in interest rate in the current period. Operating expenses for the nine months ended May 31, 2002 increased $12,034,560 or 67 % from that for the corresponding period ended May 31, 2001 primarily due to increased surgical hospital activities. Wages and benefits increased $2,215,263 or 57% during the nine months ended May 31, 2002 from the corresponding period ended May 31, 2001 and medical supplies increased $4,949,207or 76% for the identical period; such increases were primarily due to increased operations of the surgical hospital. General and administrative expenses for the nine months ended May 31, 2002 increased $4,018,486 or 96% from the corresponding period ended May 31, 2001, primarily due to increased activities of the surgical hospital and the Company's increased management and expanded operations. Professional fees for the nine months ended May 31, 2002 decreased $215,281 or 14% from that of the corresponding previous nine months ended May 31, 2001, primarily due to decreased payments to physicians under management. Rent and lease expense for the nine months ended May 31, 2002 increased $559,646 or 63% from that of the corresponding period ended May 31, 2001, primarily due to increased surgical hospital operations. Depreciation and amortization for the nine months ended May 31, 2002 increased $316,690 or 50% from that of the corresponding period ended May 31, 2001, primarily due to increase activities of the surgical hospital. Net income increased $3,475,852 or 46% from $7,570,955 in the corresponding period of the previous fiscal year to $11,046,807 in the current period. Basic earnings per common share increased $0.22 per share or 42% from $0.53 per share in the corresponding period of the previous fiscal year to $0.75 per share in the current period. Diluted earnings per common share increased $0.20 per share or 38% from $0.53 per share in the corresponding period of the previous fiscal year to $0.73 per share in the current period. Cash and cash equivalents for the nine months ended May 31, 2002 increased $1,630,419 or 32% from that of the previous audited balance sheet ending August 31, 2001 due to $8,801,733 provided by operating activities, $3,857,586 used by investing activities and $3,313,727 used by financing activities. Accounts receivable net of allowance for doubtful accounts for the nine months ended May 31, 2002 increased $2,320,684 or 12% from that of the previous audited balance sheet ended August 31, 2001. Accounts payable and accrued liabilities increased $658,353 or 43% primarily due to state corporate franchise tax obligations. Liquidity and Capital Resources The Company maintains sufficient liquidity to meet its business needs. The Company had working capital of $26,484,452 at May 31, 2002 which increased $5,181,465 or 24% from working capital at August 31, 2001 primarily due to increase in cash and cash equivalents and accounts receivable. At May 31, 2002, the Company maintained a liquid position evidenced by a current ratio of 12.8 to 1 and total debt to equity ratio of 0.13 to 1. The Company expects to have positive cash flow from operations for fiscal 2002. 7 The Company is actively targeting opportunities to expand the hospital operations in both local and national markets by leasing, and/or acquiring of existing facilities or the constructing of new facilities. In October, 2001, the Company obtained a $7,400,000 revolving credit facility and borrowed $600,000. The $600,000 note was paid off in March 2002 and replaced by a $600,000 revolving line of credit. Both line of credit facilities have a variable interest rate of 2.3% plus the "dealer commercial paper" rate and are available by the Company until October 2011. As of July 14, 2002, the Company has no outstanding borrowings. Exposures to Market Risk We are exposed to market risk related to changes in interest rates. The impact on earnings and value market risk-sensitive financial instruments (principally marketable security investments) is subject to change as a result of movements in market rate and prices. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage features. Dynacq has no foreign operations. Our investments in marketable securities were $5,353,403 at May 31, 2002, which represents less than 13 % of total assets at that date. These securities are generally short-term, highly liquid instruments and, accordingly, their fair value approximates cost. Earnings on investments in marketable securities are not significant to our results of operations, and therefore any changes in interest rates would have a minimal impact on future pre-tax earnings. At May 31, 2002, we had no long-term debt. In March 2002, the Company paid off this long-term debt and as of the date of this Form 10-Q the Company maintains no long-term indebtedness. Segment and related information The Company has three reportable segments: surgical hospital, outpatient surgical centers, and other. The surgical hospital segment is comprised of a four surgical suites hospital and provide a wide range of ancillary medical services located at 4301 Vista Road in Pasadena, Texas. The outpatient surgical centers segment provides outpatient surgical facilities, which include two centers; one located at 4301 Vista Road in Pasadena, Texas and the other one located at 2500 Fondren in Houston, Texas, both of which have a total of six surgical suites, contracted x-ray diagnostic services and laboratory testing. The Other segment includes property and equipment, which holds of all the fixed assets of the outpatient surgical centers segment and the surgical hospital segment, physician practice management, and infusion therapy both of which no longer constitute the core business of the Company. The Company's reportable segments are business units that offer different services. They are managed separately because each business requires different technology, marketing strategies and performance evaluations. 8 Summarized financial information concerning the Company's reportable segments is shown in the following table for the three months ended May 31, 2002 and May 31, 2001, respectively:
Outpatient Surgical Surgical Hospital Centers Other Total ------------ -------------- ------------ ------------- 2002 Revenues-external $ 15,843,875 $ 3,358,650 $ 355,771 $ 19,558,296 Intersegment revenues 0 0 4,527,622 4,527,622 Segment assets 20,847,513 7,643,053 20,637,068 49,127,634 Segment profit 4,812,966 (465,945) 621,386 4,968,407 2001 Revenues-external $ 7,123,336 $ 4,708,321 $ 858,898 $ 12,690,555 Intersegment revenues 0 0 4,082,482 4,082,482 Segment assets 12,260,093 14,309,956 29,489,546 56,059,595 Segment profit 2,768,167 1,078,764 608,603 4,455,534
Summmarized financial information concerning the Company's reportable segments is shown in the following table for the nine months ended May 31, 2002 and May 31, 2001, respectively:
Outpatient Surgical Surgical Hospital Centers Other Total ------------- -------------- ------------ ----------- 2002 Revenues-external $36,229,675 $10,814,696 $ 1,312,158 $48,356,529 Intersegment revenues 0 0 12,814,663 12,814,663 Segment assets 20,847,513 7,643,053 20,637,068 49,127,634 Segment profit 10,903,976 482,517 1,481,602 12,868,095 2001 Revenues-external 15,351,729 13,431,837 2,449,370 31,232,936 Intersegment revenues 0 0 12,538,077 12,538,077 Segment assets 12,260,093 14,309,956 29,489,546 56,059,595 Segment profit 6,564,315 2,781,547 2,008,333 11,354,195
The following table provides a reconciliation of the reportable segments' revenues and profit to the consolidated totals for three months and nine months ended May 31, 2002 and May 31, 2001, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED 5/31/2002 5/31/2001 5/31/2002 5/31/2001 ------------ ----------- ------------ ------------ REVENUES - -------- Total revenues for reportable segments 19,558,296 12,690,555 48,356,529 31,232,936 Interest income 83,808 113,575 220,789 316,804 Elimination of intersegment interest income (20,353) (25,144) (64,743) (78,815) ----------- ----------- ----------- ----------- Consolidated total revenues 19,621,751 12,778,986 48,512,575 31,470,925 PROFIT: - ------- Total profit for reportable segments $ 4,968,407 $ 4,455,534 $12,868,095 $11,354,195 Elimination of intersegment income (176,552) (739,383) (119,332) (1,674,422) Elimination of minority interests (664,690) (933,534) (1,701,956) (2,108,818) ----------- ----------- ----------- ----------- Consolidated net income $ 4,127,165 $ 2,782,617 $11,046,807 $ 7,570,955
9 PART II. ITEM 1. - LEGAL PROCEEDINGS The Company and its wholly owned subsidiary, Doctors Practice Management, Inc. sued Benchmark, an architectural corporation, general contractors, engineers, and some sub-contractors in the 151/st/ Judicial District Court of Harris County, Texas for fraud, negligence, breach of contract, loss of profits and/or goodwill, and punitive damages arising out of certain construction defects in connection with the completion and remodeling of Vista Community Medical Center L.L.C. Doctors Practice Management Inc. has filed a nonsuit in this case and is no longer involved. Dynacq International, Inc. is suing for actual damages of $10,000,000.00 and punitive damages of another $10,000,000. On April 26, 2000, defendant filed a counterclaim of $540,011 actual damages and $2,000,000 in punitive and/or exemplary damages claiming fraud, satisfaction of the lien, breach of contract, substantial performance, and punitive damages. The Company believes the counterclaims particularly the fraud and punitive damages claims, asserted in the above lawsuit are without merit, and expect to vigorously defend against such claims. Because the lawsuit remains at an early stage, the Company cannot currently predict the outcome of the lawsuit or the magnitude of any potential loss if the Company's defense is unsuccessful. A nurse at Vista Community Medical Center L.L.C. claimed she was injured on the job and filed a suit in the 133rd Judicial District Court of Harris County, Texas against Vista Community Medical Center L.L.C. The exact date of the injury that was the subject of this case is disputed. There is substantial information which indicates that at the time of Ms. Harrison's injury there was insurance coverage, and Vista Community Medical Center L.L.C. was a subscriber under the Texas Worker's Compensation Act. Therefore, Ms. Harrison's claims should be directed to the Texas Worker's Compensation Commission, and should not result in any material liability to Vista Community Medical Center L.L.C. Plaintiff have failed to specify the exact amount of damages that she is seeking, however she have alleged punitive damages. Since January 2002, the Company and two of its officers were named as defendants in several virtually identical lawsuits in the United States District Court for the Southern District of Texas claiming, among other things, that the defendants violated certain federal securities laws and regulations. Each complaint seeks certification as a class action on behalf of virtually all purchasers of the Company's stock from November 29, 1999 through January 16, 2002. The various Complaints that have been consolidated claim that the Company violated Sections 10(b) and 20(a) and SEC Rule 10b-5 under the Securities Exchange Act of 1934 by making materially false or misleading statements or omissions regarding revenues and receivables and regarding whether the Company's operations complied with various federal regulations. The district court has consolidated these actions and appointed a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995, and the court has ordered the lead plaintiff to file a Consolidated Amended Complaint no later than August 30, 2002. The Company anticipates moving to dismiss that Consolidated Amended Complaint after it is filed. The Court has set a deadline for the Motion to Dismiss of October 25, 2002. These actions are at an early stage. The complaints seek damages, pre-judgment interest, costs and attorneys' fee. The Company intends to defend against the claims vigorously. However, the Company could incur substantial costs defending the lawsuit, has no insurance coverage relating to these claims, and has undertaken to indemnify the individual defendants for any losses they may suffer. The Company has not yet established a reserve for legal costs. The lawsuits could also divert the time and attention of the Company's management. The Company cannot predict the outcome of the lawsuits at this time, and there can be no assurance that the litigation will not have a material adverse impact on its financial condition or results of operations. In March 2002, the Company accepted service of the Brill v. Chan, et al. shareholder derivative action in the 295/th/ District Court of Harris County, Texas purportedly brought on behalf of the Company against its officers and directors, outside auditor, an investment bank, and two analysts affiliated with the investment bank. The suit alleges breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence and breach of contract. Plaintiff makes general allegations of Defendants' alleged misconduct in "(i) causing or allowing the Company to conduct its business in an unsafe, imprudent and unlawful 10 manner; (ii) failing to implement and maintain an adequate internal control system; and (iii) exposing Dynacq to enormous losses," including allegations that various press releases and/or public statements issued between January 1999 and January 2002 were misleading. Plaintiff made no demand on either the Company or its Board of Directors prior to filing suit. Another derivative suit making similar allegations, Grubb v. Dynacq, was filed in the 152nd Judicial District of Harris County, Texas state district court; however, the plaintiff has subsequently asked the Court to approve his voluntary dismissal of that action. These actions are at an early stage. Therefore, the Company cannot predict the ultimate outcome of the lawsuits at this time, and there can be no assurance that the litigation will not have a material adverse impact on its financial condition or results of operations. The Company intends to engage outside competent and independent person to investigate the allegations made in the lawsuit(s), and take appropriate action upon conclusion of the investigation. ITEM 2. - CHANGES IN SECURITIES None ITEM 3. - DEFAULT UPON SENIOR SECURITIES None ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. - OTHER INFORMATION None ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K On June 5, 2002 the Company filed Form 8-K with the Securities and Exchange Commission to dismiss KenWood & Associates, PC and engaged Ernst & Young LLP effective May 31, 2002 as the Company's independent public accountants for the fiscal year 2002. FORWARD-LOOKING INFORMATION Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this Form 10-Q concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, Dynacq, through its management, from time to time makes forward-looking public statements concerning our expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information, involve a number of risks and uncertainties and are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. There can be no assurance that other factors will not affect the accuracy of such forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to, changes in the regulation of the healthcare industry at either or both of the federal and state levels, changes or delays in reimbursement for our services by third-party payors, competitive pressures in the healthcare industry and our response thereto, our ability to obtain and retain favorable arrangements with third-party payors, general conditions in the economy and capital markets, and other factors which may be identified from time to time in our Securities and Exchange Commission filings and other public announcements. 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYNACQ INTERNATIONAL, INC. DATE: July 15, 2002 BY: /s/ Philip Chan Philip Chan VP-Finance/Treasurer & Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----