<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
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 issurer (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 March 31, 1998
Common Stock, $0.001 par value 3,314,909 shares
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<PAGE> 2
Page 1 of 8
PART I. - FINANCIAL INFORMATION
ITEM I. - FINANCIAL STATEMENTS
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31
1998 1997
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash 1,390,300 842,343
Restricted Short-Term Investments 192,787 189,638
Receivable (Net of Allowance for 1,905,653 2,274,008
Doubtful Accounts)
Inventory 27,346 31,679
Due from Related Party 1,400 16,800
Other Current Assets 181,294 181,294
---------- ----------
Total Current Assets 3,698,780 3,535,762
FIXED ASSETS - NET 4,910,152 5,057,627
OTHER ASSETS 344,492 266,200
---------- ----------
TOTAL ASSETS 8,953,424 8,859,589
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 117,388 431,366
Accrued Liabilities 274,348 718,881
Notes Payable 250,000 250,000
Current Portion of Notes Payable 150,335 180,353
Deferred Income Taxes Payable 131,000 131,000
---------- ----------
TOTAL CURRENT LIABILITIES 923,071 1,711,600
LONG-TERM DEBT 1,226,199 788,473
DEFERRED FEDERAL INCOME TAX PAYABLE 404,999 127,000
MINORITY INTERESTS IN SUBSIDIARY 1,023,346 895,267
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 Par Value,
5,000,000 Shares Authorized,
None Issued or Outstanding
Common Stock, $0.001 Par Value,
300,000,000 Shares Authorized
After 8 to 1 reverse Stock Split,
14,235,136 Shares Issued and
3,319,084 Shares Outstanding 3,607 14,235
Additional Paid In Capital 3,552,761 3,452,130
Retained Earnings 2,394,263 1,928,206
LESS TREASURY STOCK (574,822) (57,322)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,375,809 5,337,249
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,953,424 8,859,589
========== ==========
</TABLE>
<PAGE> 3
Page 2 of 8
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME 2,336,093 2,253,684 4,606,654 4,436,177
COST OF SALE 183,289 101,851 312,397 154,385
----------- ----------- ----------- -----------
GROSS PROFIT 2,152,804 2,151,833 4,294,257 4,281,792
LESS EXPENSES :
Contract payments to physicians 485,320 750,273 908,673 1,511,147
Compensation and benefits 437,246 610,947 990,619 1,097,628
Medical supplies 148,116 249,367 299,022 400,819
Other general & administrative exp 365,637 261,064 765,423 647,113
Depreciation & amortization 122,355 115,588 243,920 225,434
Rent and occupancy 107,870 97,374 146,225 195,640
Interest 32,280 27,891 64,071 57,491
----------- ----------- ----------- -----------
Total Expenses 1,698,824 2,112,504 3,417,953 4,135,272
----------- ----------- ----------- -----------
NET INCOME FROM OPERATIONS 453,980 39,329 876,304 146,520
MINORITY INTERESTS IN (62,557) (9,904) (139,679) (30,807)
(PROFIT)/LOSS OF SUBSIDIARY
LESS PROVISION FOR FEDERAL
INCOME TAXES
Current 0 15,435 0 28,378
Deferred 153,205 0 270,568 0
----------- ----------- ----------- -----------
Total Income Taxes 153,205 15,435 270,568 28,378
----------- ----------- ----------- -----------
NET INCOME (LOSS) 238,218 13,990 466,057 87,335
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
INCOME BEFORE PROVISION
FOR FEDERAL INCOME TAX 0.109 0.008 0.205 0.033
----------- ----------- ----------- -----------
PROVISION FOR FEDERAL INCOME TAX 0.043 0.004 0.075 0.008
----------- ----------- ----------- -----------
NET INCOME 0.066 0.004 0.130 0.025
WEIGHTED AVERAGE NUMBER 3,600,195 3,558,784 3,600,195 3,558,784
OF SHARES OUTSTANDING (2) (1) (2) (1)
</TABLE>
(1)(AS RETROACTIVELY ADJUSTED FOR 4 TO 1 REVERSE STOCK SPLIT EFFECTIVE
FEBRUARY 10, 1998)
(2)(AS ADJUSTED FOR 4 TO 1 REVERSE STOCK SPLIT EFFECTIVE FEBRUARY 10, 1998
AND 287,500 POST 4 TO 1 REVERSE SPLIT TREASURY SHARES.)
<PAGE> 4
Page 3 of 8
DYNACQ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
Net Income (Loss) 466,057 87,335
ADD: ITEMS NOT REQUIRING CASH:
DEPRECIATION 243,920 225,434
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
(Increase) Decrease in Accounts Receivable 368,355 (49,604)
(Increase) Decrease in Inventory 4,333 (4,917)
(Increase) Decrease in Other Current Assets 0 (3,029)
(Increase) Decrease in Due from Related Party 15,400 68,333
Increase (Decrease) in Accounts Payable (313,978) (47,256)
Increase (Decrease) in Accrued Liabilities (444,533) (62,582)
Increase (Decrease) in Current Notes Payable (30,018) 0
Increase (Decrease) in Current Income Taxes 0 (185,200)
Increase (Decrease) in Deferred Income Taxes 277,999 0
---------- ----------
Net Cash Used by Operating Activities 587,535 28,514
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (96,445) (263,840)
Purchase of Other Assets (78,292) 0
(Decrease) Increase of Minority Interests 128,079 30,807
in subsidiary
---------- ----------
Net Cash Used by Investing Activities (46,658) (233,033)
CASH FLOW FROM FINANCING ACTIVITIES:
Retirement of Long -Term Debt 437,726 (151,443)
Issuance of Common Stock (10,628) 0
Issuance of Paid In Capital 100,631 0
Acquisition of Treasury Stock (517,500) 0
---------- ----------
Net Cash Provided by Financing Activities 10,229 (151,443)
---------- ----------
Net Increase/(Decrease) in Cash 551,106 (355,962)
CASH BALANCE AT BEGINNING OF YEAR 1,031,981 1,134,579
---------- ----------
CASH BALANCE AT END OF THE QUARTER 1,583,087 778,617
========== ==========
</TABLE>
<PAGE> 5
Page 4 of 8
DYNACQ INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
(UNAUDITED)
NOTE 1. - 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 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, 1997. Operating results for the six months
period ended February 28,1998 are not necessarily indicative of the results that
may be expected for the year ending August 31, 1998.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 28, 1998
TO THE THREE MONTHS ENDED FEBRUARY 28, 1997
Consolidated revenues for the three months ended February 28, 1998 increased
$82,409 or 4 % from that for the corresponding previous quarter ended February
28, 1997. Notwithstanding this moderate increase in consolidated revenues, there
were a number of significant increases and decreases in the component revenue
categories. For instance, while Doctor's Practice Management, Inc. ("DPMI")
generated $1,462,613 revenues in the corresponding fiscal quarter of 1996, it
only generated $576,800 revenues in the current quarter, a reduction of $885,813
or 61% due to fewer physicians under management. Revenue attributable to home
infusion therapy operations in the current quarter did not increase or decrease
significantly compared to the corresponding quarter of the previous fiscal year.
Rental revenue increased $53,200 and revenue attributable to Vista operations
increased $915,000 or 224% from that of the prior year due to more patient
referrals as a result of the marketing effort undertaken by the new
administrator.
Consolidated costs of sale for the three months ended February 28, 1998
increased $81,438 or 80% from that for the corresponding previous quarter ended
February 28, 1997, was primarily attributable to Vista, which has increased
activities in the current quarter.
Consolidated operating expenses for the three months ended February 28, 1998
decreased $413,680 or 20% from that for the corresponding previous quarter ended
February 28, 1997 primarily due to decrease in activities of DPMI. The
significant increases and decreases in the component expense categories of the
consolidated operating expenses are explained as follows:
(1) The decrease in contract payments to physicians of $264,953 or 35% was
primarily attributable to DPMI, which had fewer physicians under management
in the current quarter. The number of physicians under management have been
reduced from 13 in the corresponding previous quarter to 5 in the current
quarter.
<PAGE> 6
Page 5 of 8
(2) The decrease in compensation and benefits expenses of $173,301 or 28% was
primarily attributable to DPMI, which had fewer physicians under management
in the current quarter.
(3) The decrease in medical supplies expense of $101,251 or 41% was primarily
attributable to DPMI, which had fewer physicians under management in the
current quarter.
(4) The increase in other general and administrative expenses of $104,573 or
40% was primarily due to incurring of about $50,000 in legal fee and about
$30,000 in software maintenance expense by DPMI, and about $24,000 in
software maintenance expense by Vista in the current quarter.
COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 28, 1998 TO THE SIX MONTHS
ENDED FEBRUARY 28, 1997.
Consolidated revenues for the six months ended February 28, 1998 increased
$170,477 or 4 % from that for the corresponding period ended February 28 of the
previous fiscal year. Notwithstanding this moderate increase in consolidated
revenues, there were a number of significant increases and decreases in the
component revenue categories. For instance, while DPMI generated $2,722,869
revenues in the corresponding previous period of fiscal 1997, it only generated
$1,483,102 revenues in the current period, a reduction of $1,239,767 or 46 % due
to fewer physicians under management. Revenue attributable to home infusion
therapy operations decreased $147,893 or 18% in the current period due to lower
patient load as a result of fewer referrals and lower reimbursable insurance
charges per patient compared to the corresponding period of the previous fiscal
year. Revenues attributable to Vista operations increased $1,558,786 or 177 %
from that of the prior year due to more patient referrals, primarily as a result
the marketing effort by the new administrator.
Consolidated costs of sale for the six months ended February 28, 1998 increased
$158,012 or 102 % from that for the corresponding period ended February 28 of
the previous fiscal year, primarily attributable to Vista, which has increased
activities in the current quarter.
Consolidated operating expenses for the six months ended February 28, 1998
decreased $717,319 or 17 % from that for the corresponding period ended February
28 of the previous fiscal year. The significant increases and decreases in the
component expense categories of the consolidated operating expenses are
explained as follows:
(1) The decrease in contract payments to physicians expense of $602,474 or 40 %
was primarily attributable to DPMI, which had fewer physicians under
management in the current period.
(2) The decrease in compensation and benefits expense of $107,009 or 10 % was
primarily attributable to DPMI, which had fewer physicians under management
in the current period.
(3) The decrease in medical supplies expense of $101,797 or 25% was primarily
attributable to DPMI, which had fewer physicians under management in the
current period.
(4) The increase in administrative expense of $118,310 or 18 % was primarily
due to incurring of about $50,000 in legal fee and about $30,000 in
software maintenance expense by DPMI, and about $24,000 in software
maintenance expense by Vista in the current period.
(5) The decrease in rent and occupancy expense of $49,415 or 25 % was primarily
attributable to DPMI, which had fewer physicians, who had other satellite
office spaces under management in the current period.
<PAGE> 7
Page 6 of 8
FINANCIAL CONDITION
COMPARISON OF THE BALANCE SHEETS AT SIX MONTHS ENDED FEBRUARY 28, 1998 TO THE
AUDITED BALANCE SHEET AT FISCAL YEAR ENDED AUGUST 31, 1997.
Consolidated cash for the three months ended February 28, 1998 increased
$547,957 or 65 % from that of the previous audited balance sheet ending August
31, 1997 was due to $587,535 provided by operating activities, $46,658 used by
investing activities and $10,229 provided by financing activities. Consolidated
accounts payable and accrued liabilities for the six months ended February 28,
1998 decreased $758,511 or 66 % from that of the previous audited balance sheet
ended August 31, 1997 due to the payment of payable.
Liquidity and Capital Resources
Working Capital of $2,775,706 at February 28, 1998 increased $951,544 or 52 %
from working capital at August 31, 1997 primarily due to increase in cash, and
decrease in accounts payable and accrued liabilities. At February 28, 1998, the
Company maintained a liquid position evidenced by a current ratio of 4 to 1 and
total debt to equity of 0.67 to 1.
PART II.
ITEM 1. - LEGAL PROCEEDINGS
In March, 1997 DPMI filed a civil lawsuit styled Doctors Practice
Management, Inc., Plaintiff vs. Houston Physical Medicine Associates, M.D., P.A.
and Anjali Jain, M.D., Defendants: Cause No. 97-08711; in the 269th Judicial
District Court of Harris County, Texas to seek repayment of advances of $110,000
owed to DPMI pursuant to a revolving credit agreement and security agreement
executed in July of 1996. The Defendants are a physician group that DPMI entered
into a Management Agreement with to manage their practice. In April 1997, the
Defendants filed a counterclaim against DPMI and the president of the Company,
jointly and severally, alleging fraud, intentional misrepresentation, violations
of the Texas Deceptive Trade Practices Act, and various other causes of action,
including breach of contract, seeking actual damages in excess of $300,000,
consequential damages in an amount in excess of $200,000 and exemplary damages,
attorneys' fees and court costs. In May 1997, DPMI and the Company's President
filed a response denying all allegations made in the counterclaim by the
Defendants. The Company intends to vigorously defend this case and believes that
a settlement or related judgment will not have a material adverse effect on the
Company's financial position. The Company believes that the Defendants filed the
counterclaims against DPMI in an effort to find some legal basis to attempt to
avoid or delay repayment of the advances. The Company may not have insurance
coverage for any of the claims filed by the Defendants. In the opinion of
management, the Company's allowance for doubtful accounts is adequate to cover
the loss, if any, on the advances made to the physician. No additional amounts
are recorded on the books of the Company in anticipation of a loss as a result
of this contingency.
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
<PAGE> 8
Page 7 of 8
ITEM 5. - OTHER INFORMATION
In January 1998, the Company's Board of Directors adopted a resolution
by unanimous written consent to amend its Articles of Incorporation (the
"Amendment") to effect a 4 to 1 reverse split (the "Reverse Stock Split") of the
Company's outstanding Common Stock $0.001 par value (the "Common Stock"). The
Amendment was approved by the Board of Directors and adopted by written consent
of the holders of a majority of the outstanding shares of the Company's common
stock. The Amendment became effective on February 10, 1998, the date on which
the Company expects to file the Amendment with the Nevada Secretary of State
(the "Effective Date"). The Reverse Stock Split is expected to facilitate the
continued listing of the Company's Common Stock on the Nasdaq Small Cap Market.
The Company had 14,426,336 shares of Common Stock issued and outstanding before
the Reverse Stock Split. The Reverse Stock Split reduces the number of shares of
the Company's outstanding Common Stock on the Effective date to approximately
3,606,584 shares. The Information Statement detailing the Reverse Stock Split
was provided to all stockholders of record as of January 22, 1998.
In February, 1998 the Company issued 180,000 restricted pre 4 to 1
Reverse Split shares and 150,000 stock option to Medtek Management, Inc. for
acquisition of all its tangible and intangible assets used for medical billings
and collection services. The option is exercisable to purchase 150,000
restricted pre 4 to 1 Reverse Split shares prior to October 22, 1999 at $0.50
per pre 4 to 1 Reverse Split share price.
On February 26, 1998, the Company and one of its shareholders reached
an agreement to purchase back 287,500 post 4 to 1 reverse split shares of its
outstanding common stock as treasury shares for $517,500 or $1.80 per share, of
which $62,500 was paid in cash by the Company and the balance of $455,000 will
be paid pursuant to a promissory note in sixty monthly installments of
$10,006.64 each at an annual interest rate of 11.50 %.
On March 24, 1998, the Company purchased back 4,175 post 4 to 1 Reverse
Split shares at $2.70 per share for a total purchase price of $11,272.50 as
treasury shares.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(10.28) Asset Purchase Agreement dated October 22, 1997 by and between
Doctor's Practice Management, Inc. and Medtek Management,
Inc., which was previously filed in and is incorporated herein
by this reference.
27 Financial Data Schedule
Form 14C dated January 23, 1998, pertaining to 4 to 1 Reverse Stock
Split which was previously filed in and is incorporated herein by this
reference.
Schedule 13D dated March 9, 1998 pertaining to the Company's purchase
back of its 287,500 post 4 to 1 Reverse Split shares and the $455,000 note
payable by the Company to Hi Lite Development Ltd., which was previously filed
in by Hi Lite Development Ltd. and is incorporated herein by this reference.
FORWARD-LOOKING INFORMATION
The information in this Form 10-QSB contains forward-looking statements
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 Form 10-QSB, words such as
"opinion", "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 or
expectations of the Company with respect to future events, and are subject to
change based on numerous factors including, but not limited to, regulatory
changes and changes in management's intentions or beliefs.
<PAGE> 9
Page 8 of 8
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: April 14, 1998 BY: /s/ Philip Chan
Philip Chan
VP-Finance/Treasurer &
Chief Financial Officer
<PAGE> 10
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 1,583,087
<SECURITIES> 0
<RECEIVABLES> 1,905,653
<ALLOWANCES> 0
<INVENTORY> 27,346
<CURRENT-ASSETS> 3,698,780
<PP&E> 4,910,152
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,953,424
<CURRENT-LIABILITIES> 923,071
<BONDS> 1,226,199
0
0
<COMMON> 3,607
<OTHER-SE> 5,372,202
<TOTAL-LIABILITY-AND-EQUITY> 8,953,424
<SALES> 0
<TOTAL-REVENUES> 4,606,654
<CGS> 312,397
<TOTAL-COSTS> 3,353,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,071
<INCOME-PRETAX> 876,304
<INCOME-TAX> 270,568
<INCOME-CONTINUING> 605,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466,057
<EPS-PRIMARY> 0.014
<EPS-DILUTED> 0.014
</TABLE>
