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UNITED STATES

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 November 30, 2004

 

¨ 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: 000-21574

 


 

DYNACQ HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   76-0375477

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10304 Interstate 10 East, Suite 369    
Houston, Texas   77029
(Address of principal executive offices)   (Zip Code)

 

(713) 378-2000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

As of January 5, 2005, the number of shares outstanding of the registrant’s common stock, par value $.001 per share, was 14,851,568.

 



Table of Contents

Table of Contents

 

Report of Independent Registered Public Accounting Firm

   3

PART I— FINANCIAL INFORMATION

    

Item 1.

   Financial Statements.    4
     Consolidated Balance Sheets as of November 30, 2004 and August 31, 2004    4
     Consolidated Statements of Operations for the three months ended November 30, 2004 and 2003    6
     Consolidated Statements of Cash Flows for the three months ended November 30, 2004 and 2003    7
     Notes to Consolidated Financial Statements    8

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations.    14

Item 3.

   Quantitative and Qualitative Disclosure About Market Risk.    17

Item 4.

   Controls and Procedures.    17

PART II– OTHER INFORMATION

    

Item 1.

   Legal Proceedings.    18

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds.    19

Item 3.

   Defaults Upon Senior Securities.    19

Item 4.

   Submission of Matter to a Vote of Security Holders.    19

Item 5.

   Other Information.    19

Item 6.

   Exhibits.    19

Signatures

   20

Index of Exhibits

   21

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To: The Stockholders and Board of Directors

       Dynacq Healthcare, Inc.

       Houston, Texas

 

We have reviewed the consolidated balance sheet of Dynacq Healthcare, Inc., as of November 30, 2004, and the related consolidated statements of operations and cash flows for the three-month periods ended November 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with United States generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Dynacq Healthcare, Inc., as of August 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated October 30, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of August 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Killman, Murrell & Company, P.C.

Killman, Murrell & Company, P.C.

Houston, Texas

January 5, 2005

 

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PART I - FINANCIAL INFORMATION

 

ITEM I - FINANCIAL STATEMENTS

 

Dynacq Healthcare, Inc.

Consolidated Balance Sheets

 

     November 30,
2004


   August 31,
2004


     (Reviewed)    (Audited)

Assets

             

Current assets:

             

Cash

   $ 7,723,074    $ 5,537,776

Current portion of accounts receivable, net of contractual allowances of approximately $73,890,000 and $76,736,000 and allowances for uncollectible accounts of approximately $744,000 and $719,000 at November 30, 2004 and August 31, 2004, respectively

     15,475,191      16,629,780

Accounts receivable - other

     332,929      152,525

Inventories

     2,545,705      2,576,067

Prepaid expenses

     540,655      668,270

Deferred tax assets

     1,335,326      1,294,555

Income taxes receivable

     3,833,298      5,523,248
    

  

Total current assets

     31,786,178      32,382,221

Property and equipment, net

     37,687,498      38,004,680

Long-term portion of accounts receivable, net of contractual allowances of approximately $56,765,000 and $51,445,000 and allowances for uncollectible accounts of approximately $572,000 and $482,000 at November 30, 2004 and August 31, 2004, respectively

     11,888,584      11,148,789

Goodwill

     582,547      582,547

Other assets

     1,043,183      1,023,595
    

  

Total assets

   $ 82,987,990    $ 83,141,832
    

  

 

See accompanying notes.

 

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Dynacq Healthcare, Inc.

Consolidated Balance Sheets (continued)

 

     November 30,
2004


    August 31,
2004


 
     (Reviewed)     (Audited)  

Liabilities and stockholders’ equity

                

Current liabilities:

                

Cash overdraft

   $ —       $ 622,375  

Accounts payable

     4,379,827       4,741,992  

Accrued liabilities

     6,110,232       4,912,816  

Notes payable

     6,466,683       6,590,004  

Current taxes payable

     454,016       379,094  

Current portion of capital lease obligations

     141,225       127,087  
    


 


Total current liabilities

     17,551,983       17,373,368  

Non-current liabilities:

                

Deferred tax liabilities

     1,499,698       1,600,705  

Long-term portion of capital lease obligations

     242,231       290,308  
    


 


Total liabilities

     19,293,912       19,264,381  
    


 


Minority interests

     717,386       666,794  
    


 


Commitments and contingencies

     —         —    

Stockholders’ equity:

                

Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding

     —         —    

Common stock, $.001 par value; 100,000,000 shares authorized, 16,399,843 shares issued at November 30, 2004 and at August 31, 2004

     16,400       16,400  

Treasury stock, 1,548,275 shares at November 30, 2004 and at August 31, 2004, at cost

     (7,424,449 )     (7,424,449 )

Additional paid-in capital

     18,980,710       18,982,951  

Retained earnings

     51,835,852       52,113,026  

Deferred compensation

     (431,821 )     (477,271 )
    


 


Total stockholders’ equity

     62,976,692       63,210,657  
    


 


Total liabilities and stockholders’ equity

   $ 82,987,990     $ 83,141,832  
    


 


 

See accompanying notes.

 

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Dynacq Healthcare, Inc.

Consolidated Statements of Operations

(Reviewed)

 

    

Three months ended

November 30,


 
     2004

    2003

 

Net patient service revenue

   $ 15,011,711     $ 18,098,825  
    


 


Costs and expenses:

                

Compensation and benefits

     4,686,560       5,656,185  

Medical services and supplies

     2,694,195       2,489,292  

Other operating expenses

     6,895,445       6,115,683  

Provision for uncollectible accounts

     114,516       130,639  

Depreciation and amortization

     1,056,936       871,066  
    


 


Total costs and expenses

     15,447,652       15,262,865  
    


 


Income (loss) from operations

     (435,941 )     2,835,960  
    


 


Other income (expense):

                

Rent and other income

     132,975       90,632  

Interest income

     10,136       1,920  

Interest expense

     (76,646 )     (63,104 )
    


 


Total other income, net

     66,465       29,448  
    


 


Income (loss) before income tax, minority interests and extraordinary gain

     (369,476 )     2,865,408  

Benefit (provision) for income taxes

     27,644       (1,391,625 )

Minority interest in loss (earnings)

     64,658       (197,044 )
    


 


Income (loss) before extraordinary gain

     (277,174 )     1,276,739  

Extraordinary gain, net of $114,170 of income tax expense in 2003

     —         186,870  
    


 


Net income (loss)

   $ (277,174 )   $ 1,463,609  
    


 


Basic earnings (loss) per common share:

                

Income (loss) before extraordinary gain

   $ (0.02 )   $ 0.09  

Extraordinary gain, net of tax

     —         0.01  
    


 


Net income (loss)

   $ (0.02 )   $ 0.10  
    


 


Diluted earnings (loss) per common share:

                

Income (loss) before extraordinary gain

   $ (0.02 )   $ 0.08  

Extraordinary gain, net of tax

     —         0.01  
    


 


Net income (loss)

   $ (0.02 )   $ 0.09  
    


 


Weighted average common shares—basic

     14,851,568       14,865,932  
    


 


Weighted average common shares—diluted

     14,851,568       15,538,938  
    


 


 

See accompanying notes.

 

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Dynacq Healthcare, Inc.

Consolidated Statements of Cash Flows

(Reviewed)

 

     Three months ended
November 30,


 
     2004

    2003

 

Cash flows from operating activities

                

Net income (loss)

   $ (277,174 )   $ 1,463,609  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                

Extraordinary gain, net of tax

     —         (186,870 )

Depreciation and amortization

     1,056,936       871,066  

Provision for uncollectible accounts

     114,516       130,639  

Deferred income taxes

     (141,778 )     265,395  

Minority interests in earnings (loss)

     (64,658 )     197,044  

Stock options issued for compensation

     (2,241 )     913,648  

Deferred stock compensation amortization

     45,450       45,450  

Changes in operating assets and liabilities:

                

Accounts receivable

     300,278       2,755,699  

Inventories

     30,362       1,702  

Prepaid expenses

     127,615       146,494  

Income taxes receivable

     1,689,950       1,080,190  

Other assets

     (22,088 )     45,469  

Cash overdrafts

     (622,375 )     —    

Accounts payable

     (362,165 )     (174,037 )

Accrued liabilities

     504,651       (292,304 )

Income taxes payable

     74,922       (10,449 )
    


 


Net cash provided by operating activities

     2,452,201       7,252,745  
    


 


Cash flows from investing activities

                

Purchase of property and equipment

     (737,254 )     (2,497,833 )

Accrued liabilities related to purchase of property and equipment

     692,765       1,729,902  

Purchase of accounts receivable - other

     (244,000 )     —    

Collections on purchased accounts receivable - other

     63,596       —    

Payment of accrued liabilities related to purchase of property and equipment

     —         (1,650,000 )
    


 


Net cash used in investing activities

     (224,893 )     (2,417,931 )
    


 


Cash flows from financing activities

                

Payment on notes payable

     (123,321 )     (5,359,860 )

Deposit for proposed sale of accounts receivable

     —         3,360,000  

Payments on capital leases

     (33,939 )     (42,360 )

Proceeds from exercise of stock options

     —         140,481  

Distributions to minority interest holders

     (84,750 )     (715,000 )

Sale (purchase) of minority interests

     200,000       (400,000 )
    


 


Net cash used in financing activities

     (42,010 )     (3,016,739 )
    


 


Net increase in cash

     2,185,298       1,818,075  

Cash at beginning of period

     5,537,776       1,883,833  
    


 


Cash at end of period

   $ 7,723,074     $ 3,701,908  
    


 


Supplemental cash flow disclosures

                

Cash paid during the period for:

                

Interest

   $ 64,870     $ 101,101  
    


 


Income taxes

   $ 4,488     $ 56,759  
    


 


 

See accompanying notes.

 

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Dynacq Healthcare, Inc.

 

Notes to Consolidated Financial Statements

 

November 30, 2004

(reviewed)

 

Basis of Presentation

 

The accompanying reviewed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature. The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative by the Company would include the corporate office costs, including advertising and marketing expenses, which were approximately $4.1 million and $3.4 million for the quarters ended November 30, 2004 and 2003, respectively. These consolidated financial statements also include the accounts of Vista Hospital of Baton Rouge, LLC, an indirect majority-owned subsidiary of the Company that operates the Baton Rouge Facility, which is currently in Chapter 11 bankruptcy proceedings. These reviewed financial statements should be read in conjunction with the audited financial statements at August 31, 2004. Operating results for the quarter ended November 30, 2004 are not necessarily indicative of the results that may be expected for the year ending August 31, 2005.

 

The Company operates in one line of business and its strategy is to develop and operate general acute care hospitals designed to handle specialized general surgeries such as bariatric, orthopedic and neuro spine surgeries. The Company manages these hospitals on an individual basis. The hospitals’ economic characteristics, nature of their operations, regulatory environment in which they operate and the manner in which they are managed are all similar. Accordingly, the Company aggregates its hospitals into a single reportable segment as that term is defined by SFAS No. 131 “Disclosures About Segments of an Enterprise and Related Information.”

 

General

 

As of November 30, 2004, the Company operated two facilities in the Houston metropolitan area (Pasadena and West Houston Facilities), and one each in the Dallas-Fort Worth area (Garland Facility) and in Baton Rouge (Baton Rouge Facility). The Garland Facility was acquired in August 2003, and surgical procedures started at this facility at the end of November 2003.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant of the Company’s estimates is the determination of revenue to recognize for the services the Company provides and the determination of the contractual allowance. See “Revenue Recognition” below for further discussion. Actual results could differ materially from those estimates used in preparation of these financial statements.

 

Reclassification

 

Accounts receivable-other of $152,525 has been stated separately out of other assets as of August 31, 2004 to be consistent with the current presentation.

 

Stock Based Compensation

 

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock compensation. As required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has

 

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determined pro forma net income and earnings per share, as if compensation cost for the employees stock options had been determined based upon fair values at the grant dates. These pro forma amounts are as follows:

 

     Three months ended
November 30,


 
     2004

    2003

 

Net income (loss) as reported

   $ (277,174 )   $ 1,463,609  

Add: stock-based compensation costs included in reported net income, net of taxes

     29,543       29,543  

Deduct: stock based compensation costs, net of taxes under SFAS 123

     (141,834 )     (141,834 )
    


 


Pro forma net income (loss)

   $ (389,465 )   $ 1,351,318  
    


 


Per share information:

                

Basic, as reported

   $ (0.02 )   $ 0.10  

Basic, pro forma

     (0.03 )     0.09  

Diluted, as reported

     (0.02 )     0.09  

Diluted, pro forma

     (0.03 )     0.09  

 

The fair value of the stock-based awards was estimated using the Black-Scholes model with the following weighted average assumptions:

 

    

Three months ended

November 30,


 
     2004

    2003

 

Estimated fair value

   $ 7.25     $ 7.25  

Expected life (years)

     4.62       4.62  

Risk free interest rate

     4.20 %     4.20 %

Volatility

     60.00 %     60.00 %

Dividend yield

     —   %     —   %

 

Revenue Recognition

 

Background

 

The Company’s revenue recognition policy is significant because net patient service revenue is a primary component of its results of operations. Revenue is recognized as services are delivered. The determination of the amount of revenue to be recognized in connection with the Company’s services is subject to significant judgments and estimates, which are discussed below.

 

Revenue Recognition Policy

 

The Company is normally not a party to any managed care contracts. The Company records revenue pursuant to the following policy. The Company has established billing rates for its medical services that it bills as gross revenue as services are delivered. Gross billed revenues are then reduced by the Company’s estimate of the discount (contractual allowance) to arrive at net patient service revenues. Net patient service revenues are based on historical cash collections as discussed below and may not represent amounts ultimately expected to be collected. At such time as the Company can determine that ultimate collections exceeded or have been less than the revenue recorded on a group of accounts, additional revenue or reduction in revenue is recorded.

 

Contractual Allowance

 

The Company computes its contractual allowance based on the ratio of the Company’s historical cash collections during the trailing twelve months on a case-by-case basis to gross billed revenue on a case-by-case basis

 

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by operating facility. This ratio of cash collections to billed services is then applied to the gross billed services by operating facility. The following table shows gross revenues and contractual allowances for the three months ended November 30, 2004 and 2003:

 

     2004

    2003

 

Gross billed charges

   $ 32,913,501     $ 32,097,545  

Contractual allowance

     17,901,790       13,998,720  
    


 


Net revenue

   $ 15,011,711     $ 18,098,825  
    


 


Contractual allowance percentage

     54 %     44 %
    


 


 

Accounts Receivable

 

Accounts receivable represent net receivables for services provided by the Company. The estimated accounts receivable not expected to be collected within twelve months of the balance sheet date have been shown as long-term receivables and represent receivables in the Medical Dispute Resolution (“MDR”) and legal third party financial class. The contractual allowance is provided as revenue is recognized. At each balance sheet date management reviews the accounts receivables for collectibility. If after the review management believes certain receivables would be uncollectible, the receivable would be written down to the expected collectable amount. Management has not written down any receivables during the quarters ended November 30, 2004 and 2003 as a result of the collectibility test.

 

The contractual allowance stated as a percentage of gross receivables at the balance sheet dates is larger than the contractual allowance percentage used to reduce gross billed charges due to the application of partial cash collections to the outstanding gross receivable balances without any adjustment being made to the contractual allowance. The contractual allowance amounts netted against gross receivables are not adjusted until such time as the final collections on the receivables is recognized.

 

Collections for services provided are generally settled or written off as uncollectible against the contractual allowance within six months of the date of service except for services provided to injured workers in Texas. Collections for services provided to injured workers in Texas may take up to three years or longer to be completely adjudicated. Because the Company has in recent years focused on providing services to injured workers in Texas, accounts receivable in the workers compensation and MDR financial classes have increased.

 

The MDR process is an established reimbursement resolution process available to providers of healthcare services under the regulations guiding reimbursement for services provided to injured workers in the State of Texas. Accounts generally do not become subject to the MDR process prior to being outstanding for at least 90 days subsequent to patient discharge. For medical services provided to injured workers’ in the state of Texas, the MDR process is specifically based upon the administrative and statutory regulations promulgated by the Texas Labor Code and Texas Administrative Code provisions.

 

Due to a number of factors outside the Company’s control, including a change in the Company’s reimbursement collection experience associated with potential changes in the reimbursement environment in which the Company operates, it is possible that management’s estimates of patient service revenues could change, which could have a material impact on the Company’s revenue and profitability in the future.

 

Allowance for Uncollectible Accounts

 

The Company has estimated uncollectible accounts expense as 1% of gross outpatient revenue. The Company normally makes no charge offs against allowance for uncollectible accounts, as historically all charge offs have been against the contractual allowance. However, during the quarter ended November 30, 2003, the Company charged $200,254 against the allowance for uncollectible accounts.

 

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Minority Interests

 

The equity of minority investors (generally physician groups and other healthcare providers that perform surgeries at the Company’s facilities) in certain subsidiaries of the Company is reported on the consolidated balance sheets as minority interests. Minority interests reported in the consolidated income statements reflect the respective interests in the income or loss of the limited partnerships or limited liability companies attributable to the minority investors (equity interests ranged from 2.14% to 10.0% at November 30, 2004). During the quarter ended November 30, 2003, the Company purchased minority interest from certain minority interest holders at an amount that was $301,040 less than the net book value of the minority interest liability on the date of purchase. The $301,040 less applicable income taxes of $114,170 has been recorded as an extraordinary gain during the quarter ended November 30, 2003. The partnership agreement provided a means for the minority interest holders to be cashed out at the net book value. The amounts paid to the minority interest holders were less than the buy out amount that was called for in the partnership agreements. Legal counsel has advised the Company that the acquisitions were negotiated transactions occurring outside the partnership agreement.

 

Bankruptcy Filing by Subsidiary

 

On October 8, 2004, Vista Hospital of Baton Rouge, LLC (“VHBR”), an indirect majority-owned subsidiary of the Company that operates the Baton Rouge Facility, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. VHBR continues to operate its business and manage its property as a “debtor in possession” under the jurisdiction of the bankruptcy court.

 

VHBR filed for bankruptcy protection because, among other reasons, VHBR is unable to pay the alleged damages sought by, and the costs of defending against, a lawsuit, Liljeberg Enterprises International, L.L.C. v. Vista Hospital of Baton Rouge, LLC, d/b/a Vista Surgical Hospital, filed by Liljeberg Enterprises International, L.L.C. in September 2003 against both the Company and VHBR in the Twenty Fourth Judicial District Court for the Parish of Jefferson, State of Louisiana (case number 598-564).

 

On December 7, 2004, the Bankruptcy Court denied Liljeberg’s motion to dismiss and motion for relief from stay. VHBR intends to file a plan of reorganization to fully pay all creditors as soon as possible. Dynacq cannot predict the outcome of the Chapter 11 proceeding or the lawsuit.

 

Debtor-in-Possession financial statements. Under the Bankruptcy Code, VHBR is required to periodically file with the bankruptcy court various documents, including financial statements of the VHBR as a Debtor-in-Possession. These financial statements are prepared according to requirements of the Bankruptcy Code. While these financial statements accurately provide information required by the Bankruptcy Code, which is not wholly in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), they are unconsolidated, unaudited, and prepared in a format different from that used in our consolidated financial statements filed under the securities laws and from that used in the consolidated financial statements, which are prepared in accordance with U.S. GAAP. Accordingly, we believe the substance and format of the financial statements prepared for the bankruptcy court do not allow meaningful comparison with the following financial statements.

 

Basis of presentation. We continue to consolidate VHBR as the Debtor in our consolidated financial statements. While generally it is appropriate to deconsolidate a subsidiary during its Chapter 11 proceedings on the basis that control no longer rests with the parent, the facts and circumstances particular to our situation support the continued consolidation of the subsidiary. Specifically:

 

  the entire duration of the Chapter 11 proceedings is likely to be short, anticipated to be less than one year, excluding any potential appeals;

 

  the Debtor filed Chapter 11 proceedings because, among other reasons, VHBR is unable to pay the alleged damages sought by, and the costs of defending against, the Liljeberg lawsuit; and

 

  we anticipate that we will continue to own a majority of the equity of the Debtor upon completion of a plan of reorganization. As such, we do not believe a plan of reorganization will impact our equity ownership of the Debtor.

 

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VHBR as Debtor-in-Possession

Condensed Statement of Operations

(Unaudited)

 

     Three Months Ended
November 30, 2004


 

Net patient service revenues

   $ 4,102,324  

Costs and expenses

     4,940,342  
    


Loss from operations

     (838,018 )

Other income (expense)

     24,053  
    


Net loss

   $ (813,965 )
    


VHBR as Debtor-in-Possession

Condensed Balance Sheet

(Unaudited)

 
    

November 30,

2004


 

Assets

        

Current assets:

        

Cash

   $ 2,436,643  

Accounts receivable, net

     4,114,492  

Inventories

     614,096  

Prepaid expenses

     209,009  

Amounts receivable from related parties

     3,970,833  
    


Total current assets

     11,345,073  

Other assets

     147,654  
    


Total assets

   $ 11,492,727  
    


Liabilities and members’ deficit

        

Current liabilities:

        

Accounts payable

   $ 942,970  

Accrued liabilities

     485,032  

Amounts due to related parties

     10,531,403  
    


Total current liabilities

     11,959,405  

Members’ deficit

     (466,678 )
    


Total liabilities and members’ deficit

   $ 11,492,727  
    


VHBR as Debtor-in-Possession

Condensed Statement of Cash Flows

(Unaudited)

 
     Three Months Ended
November 30, 2004


 

Total cash flows used in operating activities

   $ (207,645 )

Total cash flows from financing activities

     1,838,930  
    


Increase in cash

     1,631,285  

Cash at beginning of period

     805,358  
    


Cash at end of period

   $ 2,436,643  
    


 

There can be no assurance that we will obtain the required judicial approval of a proposed plan of reorganization or any revised plan of reorganization acceptable to us. In such event, a prolonged Chapter 11 proceeding could adversely affect the Debtor’s relationships with customers, suppliers, and employees, which in turn could adversely affect the Debtor’s competitive position, financial condition, and results of operations. In

 

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addition, if the Debtor is unsuccessful in obtaining confirmation of a plan of reorganization, the assets of the Debtor could be liquidated in the Chapter 11 proceedings. Dynacq cannot predict the outcome of the Chapter 11 proceedings.

 

Contingencies

 

The Company maintains various insurance policies that cover each of its facilities. Specifically, the Company has claims-made malpractice coverage for its West Houston Facility and has occurrence coverage for its Pasadena and Garland Facilities. The Company previously had claims-made malpractice coverage for its Pasadena Facility until August 12, 2002, at which time the Company converted to the occurrence coverage. The Company purchased tail coverage through August 12, 2004 (the applicable statute of limitations expiration date). In Louisiana, the Company is a member of the Louisiana Patient Compensation Fund and purchases insurance through the Louisiana Patient Compensation Fund for medical malpractice. In addition, all physicians granted privileges at the Company’s facilities are required to maintain medical malpractice insurance coverage. The Company also maintains general liability and property insurance coverage for each facility and flood coverage for the Baton Rouge Facility. The Company maintains workers’ compensation coverage for the Baton Rouge Facility, but does not currently maintain worker’s compensation coverage in Texas. In regard to the Employee Health Insurance Plan, the Company is self insured with specific and aggregate re-insurance with stop-loss levels appropriate for the Company’s group size. Coverages are maintained in amounts management deems adequate.

 

A shareholder derivative action alleging breach of fiduciary duty, abuse of control, gross mismanagement and unjust enrichment, Flory v. Chan, et al., H-02-3123, was brought in U.S. District Court for the Southern District of Texas in August 2002, but was stayed on November 12, 2002 by the district court pending the outcome of a previously filed shareholder class action Hamilton v. Dynacq International, et. al., in the same court. Given the plaintiff’s dismissal of the appeal in the Hamilton shareholder class action and given the state court’s dismissal of the same or similar claims in the previously filed shareholder derivative action Brill v. Chan, et. al., filed in the 295th District Court of Harris County, Texas, the Company moved in the fourth quarter of fiscal 2004 to dismiss this derivative action. The court dismissed the action in October 2004 with prejudice against refiling, such dismissal being subject to the right of the plaintiffs to appeal. The plaintiffs appealed the dismissal to the United States Fifth Circuit Court of Appeals on November 22, 2004.

 

In September 2003, a lawsuit, case number 598-564, was filed in the Twenty Fourth Judicial District Court for the Parish of Jefferson, State of Louisiana, by Liljeberg Enterprises International, L.L.C. against Vista Hospital of Baton Rouge, LLC, d/b/a Vista Surgical Hospital, Dynacq International, Inc., and Chiu M. Chan alleging that the plaintiff is owed damages in excess of $1,000,000 for costs of goods and services rendered for pharmacy operations at the Baton Rouge Facility. The plaintiff has asserted claims for breach of contract, fraud, negligence, fraudulent misrepresentation, negligent misrepresentation, civil conspiracy and gross negligence. On August 6, 2004, the plaintiff filed a Motion for Partial Summary Judgment claiming damages in the breach of contract claim in the amount of approximately $725,000 plus accounting fees. On October 8, 2004, Vista Hospital of Baton Rouge, an indirect majority-owned subsidiary of Dynacq, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. During the proceeding, Vista Hospital of Baton Rouge continues to operate the Baton Rouge Facility and manage its property as a “debtor in possession” under the jurisdiction of the bankruptcy court. Vista Hospital of Baton Rouge filed for bankruptcy protection because, among other reasons, it is unable to pay the alleged damages sought by, and the costs of defending against, the lawsuit. On the date of Vista Hospital of Baton Rouge’s bankruptcy filing, the lawsuit was removed to the United States District Court for the Eastern District of Louisiana. On December 7, 2004, the Bankruptcy Court denied Liljeberg’s motion to dismiss and motion for relief from stay. Vista Hospital of Baton Rouge intends to file a plan of reorganization to fully pay all creditors as soon as possible. Dynacq cannot predict the outcome of the Chapter 11 proceeding or the lawsuit.

 

From time to time, the Company is involved in litigation and administrative proceedings that are incidental to its business. The Company cannot predict whether any litigation to which it is currently a party will have a material adverse effect on the Company’s results of operations, cash flows, or financial condition. See “Item 3. Legal Proceedings” on our Annual Report on Form 10-K for the fiscal year ended August 31, 2004.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This quarterly report on Form 10-Q contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Such forward-looking statements relate to future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including the risks and uncertainties described in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended August 31, 2004. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You must read the following discussion of the results of our business and our operations and financial condition in conjunction with our reviewed consolidated financial statements, including the notes, included in this quarterly report on Form 10-Q and our audited consolidated financial statements, including the notes, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2004.

 

Executive Summary

 

Bankruptcy Filing by Subsidiary

 

On October 8, 2004, Vista Hospital of Baton Rouge, LLC (“VHBR”), an indirect majority-owned subsidiary of the Company that operates the Baton Rouge Facility, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. VHBR continues to operate its business and manage its property as a “debtor in possession” under the jurisdiction of the bankruptcy court.

 

VHBR filed for bankruptcy protection because, among other reasons, VHBR is unable to pay the alleged damages sought by, and the costs of defending against, a lawsuit, Liljeberg Enterprises International, L.L.C. v. Vista Hospital of Baton Rouge, LLC, d/b/a Vista Surgical Hospital, filed by Liljeberg Enterprises International, L.L.C. in September 2003 against both the Company and VHBR in the Twenty Fourth Judicial District Court for the Parish of Jefferson, State of Louisiana (case number 598-564).

 

On December 7, 2004, the Bankruptcy Court denied Liljeberg’s motion to dismiss and motion for relief from stay. VHBR intends to file a plan of reorganization to fully pay all creditors as soon as possible. Dynacq cannot predict the outcome of the Chapter 11 proceeding.

 

Update on Critical Accounting Policies and Estimates

 

There have been no changes to the critical accounting policies used in our reporting of results of operations and financial position for the quarter ended November 30, 2004. For a discussion of our critical accounting policies see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended August 31, 2004.

 

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Results of Operations

 

     Three months ended November 30,

 
     2004

          2003

       

Net patient service revenue

   $ 15,011,711     100 %   $ 18,098,825     100 %
    


 

 


 

Costs and expenses:

                            

Compensation and benefits

     4,686,560     31       5,656,185     31  

Medical services and supplies

     2,694,195     18       2,489,292     14  

Other operating expenses

     6,895,445     46       6,115,683     34  

Provision for uncollectible accounts

     114,516     1       130,639     1  

Depreciation and amortization

     1,056,936     7       871,066     5  
    


 

 


 

Total costs and expenses

     15,447,652     103       15,262,865     84  
    


 

 


 

Income (loss) from operations

     (435,941 )   (3 )     2,835,960     16  
    


 

 


 

Income (loss) before income tax, minority interests and extraordinary gain

     (369,476 )   (2 )     2,865,408     16  

Benefit (provision) for income taxes

     27,644     —         (1,391,625 )   (8 )

Minority interest in loss (earnings)

     64,658     —         (197,044 )   (1 )
    


 

 


 

Income (loss) before extraordinary gain

     (277,174 )   (2 )     1,276,739     7  
    


 

 


 

Net income (loss)

   $ (277,174 )   (2 )%   $ 1,463,609     8 %
    


 

 


 

Operational statistics (Number of medical procedures):

                            

Inpatient:

                            

Bariatrics

     104             168        

Orthopedics

     224             100        

Other

     71             26        
    


       


     

Total inpatient procedures

     399             294        

Outpatient:

                            

Orthopedics

     140             175        

Other

     644             642        
    


       


     

Total outpatient procedures

     784             817        
    


       


     

Total procedures

     1,183             1,111        
    


       


     

 

Three Months Ended November 30, 2004 Compared to the Three Months Ended November 30, 2003

 

Net patient service revenue decreased by $3,087,114 or 17% from $18,098,825 to $15,011,711 and total surgical cases increased by 6% from 1,111 cases to 1,183 cases for the quarters ended November 30, 2003 and 2004, respectively. For the hospital facilities that were in operations in each of the quarters ended November 30, 2003 and 2004, the net patient service revenues and cases declined as follows:

 

     Percentage decline from 2003 to 2004

Facility


   Net patient revenue

   Cases

Pasadena

   36%    40%

West Houston

   53         7   

Baton Rouge

   20       37   

Overall

   33       33   

 

These declines in net patient revenue and cases were partially offset by the $2,832,000 of revenue and 444 cases reported by the Garland Facility in the quarter ended November 30, 2004. This facility had started operations towards the end of November 2003.

 

                The net patient revenue per case declined $3,600 or 22% from $16,290 in 2003 to $12,690 in 2004. The decline in net patient revenue per case was the result of a 38% decline in bariatric cases, such cases having a significantly higher average rate, and by a change in the mix of orthopedic cases. The low insurance reimbursement rate for the bariatric cases at the Baton Rouge Facility caused the Company to de-emphasize these surgery cases. The decline in the number of cases at the Pasadena Facility was the result of the loss of doctors practicing at the facility in fiscal year 2004.

 

We are actively engaged in efforts to recruit new physicians to the staff. While we have added several new physicians to the staffs of our facilities, we do not currently expect our financial results to significantly improve in the near future. If we were unable to attract and retain physicians on the staffs of our facilities, our financial situation could be adversely impacted.

 

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Total costs and expenses increased by $184,787 or 1% from $15,262,865 in 2003 to $15,447,652 in 2004. The following discusses the various changes in costs and expenses:

 

Compensation and benefits declined $969,625 or 17%, however, compensation and benefits expenses remained constant as a percentage of net patient revenues. The Company made a concerted effort to reduce employee costs and expenses to match the decline in revenue.

 

Medical services and supplies expenses increased $204,903 or 8% while the number of surgery cases increased 6%. The increase in expenses was the direct result of the increase in the number of cases and higher prices paid for medical supplies.

 

Other operating expenses did not decline proportionately with the decline in revenue but increased by $779,762 or 13%. The inverse relationship was caused by the operations of the Garland Facility in the first quarter of 2005 and increased legal, accounting and marketing expenses. The other operating expenses at the Garland Facility aggregated $801,971 for the quarter ended November 30, 2004. The other operating expenses at the Company’s other facilities that were in operations during the quarters ended November 30, 2004 and 2003 did not change appreciably, as declines in facility operating expenses were offset by increases in general and administrative expenses.

 

Depreciation and amortization expense increased $185,870 or 21% primarily due to the addition of the Baton Rouge and Garland Facilities.

 

Minority interest in earnings decreased $261,702 or 133% as compared to the quarter ended November 30, 2003, primarily due to the decrease in earnings of those subsidiaries with minority owners.

 

Liquidity and Capital Resources

 

The Company maintained sufficient liquidity in the quarter ended November 30, 2004 to meet its business needs. As of November 30, 2004, its principal source of liquidity included $7,723,074 in cash.

 

Cash flow from operating activities

 

Total cash flow from operating activities was $2,452,201 during the period ended November 30, 2004, primarily due to the receipt of an income tax refund of $1,655,000.

 

Cash flow from investing activities

 

Total cash flow used in investing activities was $224,893 during the current period primarily due to the purchase of certain accounts receivable from a physician.

 

Cash flow from financing activities

 

Total cash flow used in financing activities was $42,010 during the current period. During the quarter ended November 30, 2004, the Company repaid its line of credit by $123,321. During the quarter ended November 30, 2004, the Company collected $200,000 towards sales of minority interest at its Garland Facility.

 

The Company had working capital of $14,234,195 as of November 30, 2004, and maintained a liquid position by a current ratio of approximately 1.8 to 1. The Company’s management believes that available cash and funds generated from operations will be sufficient for the Company to finance working capital requirements for the current fiscal year.

 

The Company has a reducing revolving line of credit with a financial institution. The line is reduced monthly by an amount equal to 1/180th of the original loan amount. The maturity date of the line of credit is February 28, 2005. The amount drawn under the line of credit at November 30, 2004 was approximately $5.8 million. The interest rate on the line of credit is based on the “dealer commercial paper” rate plus 2.3%. There can be no assurance that the Company will have sufficient funds available to meet all of its capital needs.

 

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The Company intends to refinance or repay such amounts prior to the maturity date. If the Company is unable to repay all outstanding balances by the maturity date, the lender may assess a late charge in the amount of 5% of the then outstanding obligations, immediately initiate legal proceedings and proceed against the Company’s assets to satisfy its obligations under the agreement. The Company’s obligations under the agreement are secured by substantially all of its assets.

 

Subsequent Events/Recent Developments

 

Grant of Stock Options to Employees

 

On December 16, 2004, the Compensation Committee of the Board of Directors granted stock options to full time employees (other than the executive officers) of the Company and its subsidiaries, such grants totaling 933,000 shares of common stock, vesting in each of the subsequent four (4) years on the anniversary date of the grant, and having an exercise price of $4.90 per share. On January 4, 2005, the Compensation Committee granted stock options to two full time employees (not executive officers) of the Company and its subsidiaries, such grants totaling 3,000 shares of common stock, vesting in each of the subsequent four (4) years on the anniversary date of the grant, and having an exercise price of $5.00 per share.

 

Changes in Directors and Executive Officers

 

On December 31, 2004, James N. Baxter, who had served as a Company’s Executive Vice President and Investor Relations Director since July 2003, resigned from the Company.

 

Election of Directors and Ratification of Engagement of Independent Auditors

 

On January 4, 2005, the Company held its Annual Meeting of Stockholders. Each of our directors were reelected to serve until our next annual meeting of shareholders or until their respective successors are elected and qualified. Messrs. Gerace, Chu and Huber were reappointed to the Audit Committee, and Messrs. Gerace, Chu and Votaw were reappointed to the Compensation Committee.

 

The stockholders also ratified the engagement of Killman, Murrell & Company, P.C. as the independent auditors for the fiscal year ending August 31, 2005.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Market risks relating to the Company’s operations result primarily from changes in interest rates as well as credit risk concentrations. Except for the refundable deposit made in the second fiscal quarter of 2003 of approximately $604,000 for the lease of land in Shanghai, China, which is in local currency, all of the Company’s contracts are denominated in US dollars and, therefore, the Company has no significant foreign currency risk.

 

The Company had $5.8 million drawn under the line of credit as of November 30, 2004. The total interest expense incurred by the Company during this quarter was approximately $60,000.

 

Other than as disclosed herein, there have been no material changes in the Company’s exposure to market risk from the disclosure included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.

 

Item 4. Controls and Procedures.

 

In connection with the audit of our financial statements for fiscal year ended August 31, 2004, our outside auditors identified and orally brought to the attention of the Audit Committee what they consider to be material weaknesses in our internal controls relating to:

 

  the non-compliance by various departments in submitting information in accordance with procedures to ensure proper and timely recording of accounts payable;

 

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  family relationships among certain of our officers and employees; and

 

  the failure to properly utilize the inventory software to track and report our inventory quantities on a real time basis.

 

Further, as stated in our annual report on Form 10-K for the fiscal year ended August 31, 2004, based on our review of the accounts payable process and inventory tracking system, we determined that our accounts payable process had failed to record certain liabilities on a timely basis and our inventory management system had failed to track inventory on a continuous basis. With respect to the first fiscal quarter of 2005 ended on November 30, 2004, we quantified this material weakness in internal controls relating to accounts payable recordation by reconciling our liabilities to our subsequent payments. We quantified the inventory process control weakness by taking complete physical inventories at the end of each quarter and reconciling the physical counts to our records.

 

Our management carried out an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2004. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that they cannot reasonably conclude that our disclosure controls and procedures were effective as of November 30, 2004 at the reasonable assurance level and designed to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the requisite time periods.

 

Despite the material weaknesses in our internal controls identified as of such date, our Chief Executive Officer and Chief Financial Officer believe that there are no material inaccuracies or omissions of material facts necessary to make the statements included in this report not misleading in light of the circumstances under which they are made. To overcome the material weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer directed our internal accounting staff to provide additional substantive accounting information and data to our outside auditors, in conjunction with their review of the consolidated financial statements for the three months ended November 30, 2004.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

A shareholder derivative action alleging breach of fiduciary duty, abuse of control, gross mismanagement and unjust enrichment, Flory v. Chan, et al., H-02-3123, was brought in U.S. District Court for the Southern District of Texas in August 2002, but was stayed on November 12, 2002 by the district court pending the outcome of a previously filed shareholder class action Hamilton v. Dynacq International, et. al., in the same court. Given the plaintiff’s dismissal of the appeal in the Hamilton shareholder class action and given the state court’s dismissal of the same or similar claims in the previously filed shareholder derivative action Brill v. Chan, et. al., filed in the 295th District Court of Harris County, Texas, the Company moved in the fourth quarter of fiscal 2004 to dismiss this derivative action. The court dismissed the action in October 2004 with prejudice against refiling, such dismissal being subject to the right of the plaintiffs to appeal. The plaintiffs appealed the dismissal to the United States Fifth Circuit Court of Appeals on November 22, 2004.

 

In September 2003, a lawsuit, case number 598-564, was filed in the Twenty Fourth Judicial District Court for the Parish of Jefferson, State of Louisiana, by Liljeberg Enterprises International, L.L.C. against Vista Hospital of Baton Rouge, LLC, d/b/a Vista Surgical Hospital, Dynacq International, Inc., and Chiu M. Chan alleging that the plaintiff is owed damages in excess of $1,000,000 for costs of goods and services rendered for pharmacy operations at the Baton Rouge Facility. The plaintiff has asserted claims for breach of contract, fraud, negligence, fraudulent misrepresentation, negligent misrepresentation, civil conspiracy and gross negligence. On August 6, 2004, the plaintiff filed a Motion for Partial Summary Judgment claiming damages in the breach of contract claim in the amount of approximately $725,000 plus accounting fees. On October 8, 2004, Vista Hospital of Baton Rouge, an indirect majority-owned subsidiary of Dynacq, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. During the proceeding, Vista Hospital of Baton Rouge continues to operate the Baton Rouge Facility and manage its property as a “debtor

 

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in possession” under the jurisdiction of the bankruptcy court. Vista Hospital of Baton Rouge filed for bankruptcy protection because, among other reasons, it is unable to pay the alleged damages sought by, and the costs of defending against, the lawsuit. On the date of Vista Hospital of Baton Rouge’s bankruptcy filing, the lawsuit was removed to the United States District Court for the Eastern District of Louisiana. On December 7, 2004, the Bankruptcy Court denied Liljeberg’s motion to dismiss and motion for relief from stay. Vista Hospital of Baton Rouge intends to file a plan of reorganization to fully pay all creditors as soon as possible. Dynacq cannot predict the outcome of the Chapter 11 proceeding or the lawsuit.

 

From time to time, the Company is involved in litigation and administrative proceedings that are incidental to its business. The Company cannot predict whether any litigation to which it is currently a party will have a material adverse effect on the Company’s results of operations, cash flows, or financial condition. See “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2004.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Submission of Matter to a Vote of Security Holders.

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

      

EXHIBIT NO.


  

IDENTIFICATION OF EXHIBIT


*      Exhibit 3.1    Certificate of Incorporation, incorporated by reference to the Definitive Information Statement filed October 21, 2003, SEC File No. 000-21574.
*      Exhibit 3.2    Bylaws, incorporated by reference to the Definitive Information Statement filed October 21, 2003, SEC File No. 222-21574.
*      Exhibit 10.1    Amendment to Reducing Revolver and Other Loan Documents, dated October 29, 2004, between the Company and Merrill Lynch Business Financial Services, Inc., incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
*      Exhibit 10.2    Assumption Agreement, dated October 29, 2004, between the Company and Merrill Lynch Business Financial Services, Inc., incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
* *    Exhibit 15.1    Letter Regarding Review of Interim Financial Information.
* *    Exhibit 23.1    Auditor Consent.
* *    Exhibit 31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Previously filed and incorporated by reference.
** Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    DYNACQ HEALTHCARE, INC.
Date: January 7, 2005   By:  

/s/ Chiu M. Chan


        Chiu M. Chan
        Chief Executive Officer
        (duly authorized officer)
Date: January 7, 2005   By:  

/s/ Philip S. Chan


        Philip S. Chan
        Chief Financial Officer
        (principal financial and accounting officer)

 

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INDEX OF EXHIBITS

 

      

EXHIBIT NO.


  

IDENTIFICATION OF EXHIBIT


*      Exhibit 3.1    Certificate of Incorporation, incorporated by reference to the Definitive Information Statement filed October 21, 2003, SEC File No. 000-21574.
*      Exhibit 3.2    Bylaws, incorporated by reference to the Definitive Information Statement filed October 21, 2003, SEC File No. 222-21574.
*      Exhibit 10.1    Amendment to Reducing Revolver and Other Loan Documents, dated October 29, 2004, between the Company and Merrill Lynch Business Financial Services, Inc., incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
*      Exhibit 10.2    Assumption Agreement, dated October 29, 2004, between the Company and Merrill Lynch Business Financial Services, Inc., incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
* *    Exhibit 15.1    Letter Regarding Review of Interim Financial Information.
* *    Exhibit 23.1    Auditor Consent.
* *    Exhibit 31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* *    Exhibit 32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Previously filed and incorporated by reference.
** Filed herewith.

 

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