UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
-----------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------
(Address of principal executive offices)
(801) 568-7000
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period 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 ___
The number of shares outstanding of the issuer's common stock, no par value, as
of November 11, 2004 is 8,958,938.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ------
DYNATRONICS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Unaudited Balance Sheets
September 30, 2004 and June 30, 2004..........................................1
Unaudited Statements of Income
Three Months Ended September 30, 2004 and 2003................................2
Unaudited Statements of Cash Flows
Three Months Ended September 30, 2004 and 2003................................3
Notes to Unaudited Financial Statements.......................................4
Item 2. Management's Discussion and Analysis or Plan of Operation.............8
Item 3. Controls and Procedures..............................................14
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........15
Item 6. Exhibits............................................................15
ii
PART I. FINANCIAL INFORMATION
DYNATRONICS CORPORATION
Balance Sheets
September 30, 2004 June 30, 2004
Assets (Unaudited) (Audited)
------------------ ---------------
Current assets:
Cash $ 455,657 573,027
Trade accounts receivable, less allowance for doubtful accounts
of $205,163 September 30, 2004 and $182,941 at June 30, 2004 3,858,095 3,737,420
Other receivables 13,019 76,213
Inventories, net 4,522,673 4,687,797
Prepaid expenses 314,548 452,754
Deferred tax asset-current 335,000 335,000
------------------ ---------------
Total current assets 9,498,992 9,862,211
Property and equipment, net 3,332,664 3,310,083
Goodwill, net of accumulated amortization of $649,792 at
September 30, 2004 and at June 30, 2004 789,422 789,422
Other assets 560,235 310,863
------------------ ---------------
$ 14,181,313 14,272,579
================== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 207,019 207,019
Line of credit 1,251,888 1,604,535
Accounts payable 775,521 681,335
Accrued expenses 634,746 444,474
Accrued payroll and benefit expenses 395,961 423,972
Income tax payable 98,718 200,294
------------------ ---------------
Total current liabilities 3,363,853 3,561,629
Long-term debt, excluding current installments 1,500,987 1,553,832
Deferred compensation 338,396 331,022
Deferred tax liability - noncurrent 150,000 150,000
------------------ ---------------
Total liabilities 5,353,236 5,596,483
------------------ ---------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 8,958,938 shares at September 30, 2004 and
8,956,688 shares at June 30, 2004 2,673,037 2,670,404
Retained earnings 6,155,040 6,005,692
------------------ ---------------
Total stockholders' equity 8,828,077 8,676,096
------------------ ---------------
$ 14,181,313 14,272,579
================== ===============
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended
September 30
2004 2003
------------------- ------------------
Net sales $ 4,918,884 5,033,415
Cost of sales 2,907,405 3,105,685
------------------- ------------------
Gross profit 2,011,479 1,927,730
Selling, general, and administrative expenses 1,487,314 1,341,435
Research and development expenses 253,792 287,971
------------------- ------------------
Operating income 270,373 298,324
------------------- ------------------
Other income (expense):
Interest income 976 4,316
Interest expense (35,789) (43,350)
Other income, net 7,283 1,805
------------------- ------------------
Total other income (expense) (27,530) (37,229)
------------------- ------------------
Income before income taxes 242,843 261,095
Income tax expense 93,495 100,522
------------------- ------------------
Net income 149,348 160,573
=================== ==================
Basic and diluted net income per common share 0.02 0.02
=================== ==================
Weighted average basic and diluted common
shares outstanding (note 2)
Basic 8,957,876 8,856,911
Diluted 9,181,387 8,920,653
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2004 2003
----------------- ----------------
Cash flows from operating activities:
Net income $ 149,348 160,573
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 86,026 77,891
Other amortization 1,831 1,831
Provision for doubtful accounts 24,000 24,000
Provision for inventory obsolescence 69,000 69,000
Provision for warranty reserve 35,472 32,417
Provision for deferred compensation 7,374 6,342
Change in operating assets and liabilities:
Receivables (81,481) (1,175,541)
Inventories 96,124 201,693
Prepaid expenses and other assets (112,997) (152,541)
Accounts payable and accrued expenses 220,975 278,610
Prepaid income taxes (101,576) 100,522
----------------- ----------------
Net cash provided by (used in) operating
activities 394,096 (375,203)
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (108,607) (5,511)
----------------- ----------------
Cash flows from financing activities:
Principal payments on long-term debt (52,845) (48,639)
Net change in line of credit (352,647) 291,729
Proceeds from issuance of common stock 2,633 -
Redemption of common stock - (87,468)
----------------- ----------------
Net cash provided by (used in) financing
activities (402,859) 155,622
----------------- ----------------
Net change in cash and cash equivalents (117,370) (225,092)
Cash at beginning of period 573,027 404,276
----------------- ----------------
Cash at end of period $ 455,657 179,184
================= ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 36,879 42,715
Cash paid for income taxes $ 195,070 -
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of September 30, 2004 (unaudited) and June 30, 2004
(audited) and for the three months ended September 30, 2004 and 2003 were
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all necessary adjustments, which consist only of normal
recurring adjustments, to the financial statements have been made to present
fairly the financial position and results of operations and cash flows. The
results of operations for the respective periods presented are not necessarily
indicative of the results for the respective complete years. The Company has
previously filed with the SEC an annual report on Form 10-KSB which included
audited financial statements for the two years ended June 30, 2004 and 2003. It
is suggested that the financial statements contained in this filing be read in
conjunction with the statements and notes thereto contained in the Company's
10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three months ended
September 30, 2004 and 2003 is summarized as follows:
(Unaudited)
Three Months Ended
September 30,
2004 2003
----------- -------------
Basic weighted average number
of common shares outstanding
during the period 8,957,876 8,856,911
Weighted average number of dilutive
common stock options outstanding
during the period 223,511 63,742
---------- -----------
Diluted weighted average number
of common and common equivalent
shares outstanding during the period 9,181,387 8,920,653
========== ===========
NOTE 3. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard (" SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages
4
entities to adopt a fair-value-based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to apply the provisions of APB 25; accordingly, no
compensation expense has been recognized for the stock option plan. Had
compensation expense for the Company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
Three months Three months
ended ended
September 30, September 30,
2004 2003
Net income as reported $ 149,348 160,573
Less: pro forma adjustment for stock based
Compensation, net of income tax (8,752) (29,124)
------------- ------------
Pro forma net income $ 140,596 131,449
Basic net income per share:
As reported 0.02 0.02
Effect of pro forma adjustment - (0.01)
------------- ------------
Pro forma 0.02 0.01
Diluted net income per share:
As reported 0.02 0.02
Effect of pro forma adjustment - (0.01)
------------- ------------
Pro forma 0.02 0.01
The per share weighted-average fair value of stock options granted for the three
months ended September 30, 2004 and 2003 was $1.30 and $.81 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
Three months ended Three months ended
September 30, 2004 September 30, 2003
---------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.66-3.68% 3.40-3.72%
Expected volatility 87-88% 82-83%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended September 30, 2004 and 2003, comprehensive income was
equal to the net income as presented in the accompanying condensed statements of
income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
September 30, 2004 June 30, 2004
Raw Material $ 2,669,422 2,906,721
Finished Goods 2,272,640 2,115,469
Inventory Reserve (419,389) (334,393)
------------- --------------
$ 4,522,673 4,687,797
============= ==============
5
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30, 2004 June 30, 2004
------------------ -----------------
Land $ 354,744 354,743
Buildings 2,908,288 2,899,729
Machinery and equipment 1,756,815 1,753,220
Office equipment 897,749 801,297
Vehicles 80,680 80,680
---------------- -----------------
5,998,276 5,889,669
Less accumulated depreciation
and amortization 2,665,612 2,579,586
---------------- -----------------
$ 3,332,664 3,310,083
================ =================
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of
July 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 2004 and determined there was not an indication
of impairment. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Goodwill. As of September 30, 2004, the Company had goodwill, net, of $789,422
from the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and
the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983. Through June 30,
2002, goodwill from these transactions was amortized over a period of 15 and 30
years, respectively, on a straight-line basis.
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
September 30, 2004 June 30, 2004
------------------- ------------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization 29,907 28,076
------------------- ------------------
Net carrying amount $ 43,333 $ 45,164
=================== ==================
Amortization expense associated with the license agreement was $1,831 for both
the three months ended September 30, 2004 and 2003. Estimated amortization
expense for the existing license agreement is expected to be $7,324 for each of
the fiscal years ending June 30, 2005 through June 30, 2010. The license
agreement is included in other assets.
6
NOTE 8. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, for the quarter ended September 30, 2003.
The Company accrues the estimated costs to be incurred in connection with its
product warranty programs as products are sold based on historical warranty
rates. The product warranty reserve is included in accrued expenses at September
30, 2004 and June 30, 2004. A reconciliation of the changes in the warranty
liability is as follows:
Three months ended Three months ended
September 30, 2004 September 30, 2003
------------------ ------------------
Beginning product warranty reserve balance $ 184,000 $ 160,000
Warranty repairs (29,472) (26,417)
Warranties issued 51,153 52,344
Changes in estimated warranty costs (15,681) (19,927)
------------------ ------------------
Ending product warranty liability balance $ 190,000 $ 166,000
================== ==================
NOTE 9. COMMON STOCK.
The Company received proceeds of $2,633 during the three months ended September
30, 2004 for 2,250 shares of common stock that were issued upon the exercise of
options by employees. During the three months ended September 30, 2003 the
Company acquired and retired 76,200 shares of common at a cost of $87,468 under
the Company's open-market share repurchase program that was approved July 15,
2003.
7
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the first
quarter ended September 30, 2004, for the Company's fiscal year ending June 30,
2005.
Net Sales
During the quarter ended September 30, 2004, net sales were $4,918,884, compared
to $5,033,415 during the quarter ended September 30, 2003. The Solaris line of
light therapy products was introduced one year ago in the quarter ended
September 30, 2003. Typically there is a spike in sales with any new product
introduction as we fill the distribution pipeline. That spike is usually
followed by a leveling off in subsequent quarters. The performance this quarter
shows that the demand for Solaris products has remained consistent one year
after their introduction.
Synergie sales during the quarter ended September 30, 2004 were also strong,
with product sales more than double the same period last year. The increase is
due in part to the addition of an aesthetic light therapy device to the Synergie
line of spa and beauty products and increasing international demand.
The success of the Solaris products caused an expected decrease in the demand
for 50 Series Plus electrotherapy devices. We also experienced a decline in the
sales of treatment tables and electrotherapy accessories during the quarter
ended September 30, 2004. Management believes the decline in sales of tables and
accessories is transitory and does not represent a trend.
During the quarter ended September 30, 2004, we introduced two new products. The
first was the Dynatron 890 laser probe for the therapy and rehabilitation
market. Low-power lasers have been popular for decades throughout Europe. Only
recently has FDA granted marketing clearance for these devices in the United
States. The Dynatron 890 laser probes are designed to be compatible with all
Solaris devices. We also introduced the Synergie 470 blue light probe for the
aesthetic market. The Synergie 470 light probes are compatible with the Synergie
LT units.
The Solaris family of advanced technology combination therapy devices
incorporates seven electrotherapy waveforms and/or ultrasound therapy in
combination with an optional infrared light therapy probe. Infrared light
therapy is commonly used for treating muscle and joint pain as well as arthritis
pain and stiffness. Hundreds of independent research studies have proven the
efficacy of light therapy in clinics around the world.
In January 2004, the Company introduced the Synergie LT, a light therapy device
for the spa and beauty market. The Company plans to develop and introduce
additional light therapy probes for both the aesthetic and the medical
rehabilitation markets. In addition, we are exploring new applications for light
therapy beyond our current markets. For example, excellent results are being
reported using light therapy for relief of dental pain and in accelerating wound
healing. This type of success provides an opportunity to develop light therapy
products specifically for new markets.
Gross Profit
During the quarter ended September 30, 2004, total gross profit was $2,011,479
or 40.9% of net sales compared to $1,927,730 or 38.3% of net sales in the
quarter ended September 30, 2003. The increase in gross margin in 2004 reflects
a shift in product mix toward sales of high-margin Solaris and Synergie devices,
which carry above average margins. This shift resulted in gross margins as a
percentage of net sales increasing 2.6 percentage points during the quarter
ended September 30, 2004 compared to the prior year period.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the quarter ended
September 30, 2004, were $1,487,314 or 30.2% of net sales compared to $1,341,435
or 26.7% of net sales in the quarter ended September 30, 2003. Total SG&A
expenses for the quarter ended September 30, 2004 increased by $145,879 or 11%
over the prior year period. There were two material components which increased
SG&A expenses during the quarter:
8
o Approximately $94,000 in increased selling expenses primarily
related to heavy advertising and trade show activity
o Approximately $42,000 in increased health insurance and worker's
compensation insurance premiums; the costs of health and dental
insurance continue to be one of the fastest growing costs for the
Company
Research and Development
The Company places great emphasis on developing innovative products such as the
new Solaris Series line of therapy devices in order to fuel future growth.
Several new light therapy products as well as other medical and aesthetic
products are currently under development. New products allow the Company to
maintain its leadership position in the physical medicine market.
Research and development expenses were $253,792 during the quarter ended
September 30, 2004 compared to $287,971 for the quarter ended September 30,
2003. R&D expenses represented approximately 5.2% and 5.7% of the net sales of
the Company in the 2004 and 2003 periods, respectively. Final costs associated
with the introduction of the Solaris line of products accounted for the higher
R&D expenses during the comparative quarter last year. R&D costs are expensed as
incurred.
Pre-tax profit
Pre-tax profit for the quarter ended September 30, 2004 was $242,843 compared to
$261,095 in the quarter ended September 30, 2003. Pre-tax profit as a percent of
net sales was 4.9% and 5.2% for the quarters ended September 30, 2004 and 2003,
respectively.
Income Tax
Income tax expense for the quarter ended September 30, 2004 was $93,495 compared
to $100,522 for the quarter ended September 30, 2003. The effective tax rate was
unchanged at 38.5% for both quarters ended September 30, 2004 and 2003.
Net Income
Net income for the quarter ended September 30, 2004 was $149,348 (approximately
$.02 per share) compared to $160,573 (approximately $.02 per share) for the
quarter ended September 30, 2003. Higher gross profits in the current reporting
period were offset by increased selling expenses related to heavy advertising
and trade show activity as well as higher health care insurance premiums
resulting in the decrease in net income for the quarter ended September 30,
2004.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its line of credit, and from cash provided by operations. The
Company had working capital of $6,135,139 at September 30, 2004, inclusive of
the current portion of long-term obligations and credit facilities, as compared
to working capital of $6,300,582 at June 30, 2004.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$120,675 to $3,858,095 at September 30, 2004 compared to $3,737,420 at June 30,
2004. Management anticipates accounts receivable will likely remain at current
levels in future periods due to continuing demand for the Company's new Solaris
Series products and other new products anticipated for future release which are
expected to contribute to sustaining sales at current levels and above.
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the terms extended.
9
Inventories
Inventories, net of reserves, at September 30, 2004 decreased $165,124 to
$4,522,673 compared to $4,687,797 at June 30, 2004. Management expects that
inventories will fluctuate somewhat over the course of this fiscal year, as
optimum inventory levels are determined based on ongoing sales demand for the
Solaris Series and other new products.
Prepaid Expenses
Prepaid expenses decreased $138,206 to $314,548 at September 30, 2004 compared
to $452,754 at June 30, 2004 due to a reduction in packaging supplies and
freight prepayments.
Goodwill
Goodwill at June 30, 2004 and June 30, 2003 totaled $789,422. Beginning July 1,
2002, the Company adopted the provisions of SFAS No. 142 Goodwill and other
Intangible Assets. In compliance with SFAS 142, management utilized standard
principles of financial analysis and valuation including: transaction value,
market value and income value methods to arrive at a reasonable estimate of the
fair value of the Company in comparison to its book value. The Company has
determined it has one reporting unit. As of July 1, 2002 and June 30, 2004, the
fair value of the Company exceeded the book value of the Company. Therefore,
there was no indication of impairment upon adoption of SFAS No. 142 or at June
30, 2004. Management is primarily responsible for the FAS 142 valuation
determination and performs the annual impairment assessment each year during the
Company's fourth quarter.
Accounts Payable
Accounts payable increased by $94,186 to $775,521 at September 30, 2004 compared
to $681,335 at June 30, 2004. The increase in accounts payable is a result of
the timing of our weekly invoice payments to suppliers and the timing of
purchases of product components. All accounts payable are within term. We
continue to take advantage of available early payment discounts when offered.
Cash
The Company's cash position at September 30, 2004 was $455,657 compared to
$573,027 at June 30, 2004. The Company believes that its current cash balances,
amounts available under its line of credit and cash provided by operations will
be sufficient to cover its operating needs in the ordinary course of business
for the next twelve months. If we experience an adverse operating environment or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on favorable terms.
Line of Credit
The Company maintains a revolving line of credit with a commercial bank in the
amount of $4,500,000. The outstanding balance on our line of credit decreased
$352,647 to $1,251,888 at September 30, 2004 compared to $1,604,535 at June 30,
2004. Interest on the line of credit is based on the bank's prime rate, which at
September 30, 2004, was 4.75%. The line of credit is collateralized by accounts
receivable and inventories. Borrowing limitations are based on 30% of eligible
inventory and up to 80% of eligible accounts receivable. At September 30, 2004,
the maximum borrowing base was calculated to be $3.7 million. The line of credit
is renewable annually on December 1st and includes covenants requiring the
Company to maintain certain financial ratios. As of September 30, 2004, the
Company was in compliance with all loan covenants.
The current ratio at September 30, 2004 and at June 30, 2004 was 2.8 to 1.
Current assets represent 67% of total assets at September 30, 2004.
Debt
Long-term debt excluding current installments totaled $1,500,987 at September
30, 2004 compared to $1,553,832 at June 30, 2004. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.6 million with monthly principal and interest payments of $21,345.
10
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. During fiscal year 2004, the Company purchased
$89,000 of stock, leaving over $400,000 of authorized funds for future stock
repurchases. The stock repurchase program is conducted pursuant to safe harbor
regulations under Rule 10b-18 of the Exchange Act for the repurchase by an
issuer of its own shares.
Critical Accounting Policies
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and risks related to
these policies on our business operations are discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results. For a detailed
discussion of the application of these and other accounting policies, see Notes
to the Audited Financial Statements contained in the Company's 10-KSB report for
the year ended June 30, 2004. In all material respects, management believes that
the accounting principles that are utilized conform to accounting principles
generally accepted in the United States of America.
The preparation of this quarterly report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. By their nature, these judgments are subject to an
inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are recorded at the lower of cost
(first-in, first-out), or market. Inventory valuation reserves are maintained
for the estimated impairment of the inventory. Impairment may be a result of
slow moving or excess inventory, product obsolescence or changes in the
valuation of the inventory. In determining the adequacy of reserves, we analyze
the following, among other things:
o Current inventory quantities on hand.
o Product acceptance in the marketplace.
o Customer demand.
o Historical sales.
o Forecast sales.
o Product obsolescence.
o Technological innovations.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At September
30, 2004 and June 30, 2004, our inventory valuation reserve balance, which
established a new cost basis, was $419,389 and $334,393, respectively, and our
inventory balance was $4,522,673 and $4,687,797 net of reserves, respectively.
Revenue Recognition
Our products are sold primarily to customers who are independent distributors
and equipment dealers. These distributors resell the products to end users
including physical therapists, professional trainers, athletic trainers,
chiropractors, medical doctors and aestheticians. Sales revenues are recorded
when products are shipped FOB shipping point under an agreement with a customer,
risk of loss and title have passed to the customer, and collection of any
resulting receivable is reasonably assured. Amounts billed for shipping and
handling of products are recorded as sales revenue. Costs for shipping and
handling of products to customers are recorded as cost of sales.
11
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze historical bad debt trends, customer credit-worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
was $3,858,095 and $3,737,420, net of allowance for doubtful accounts of
$205,163 and $182,941, at September 30, 2004 and June 30, 2004, respectively.
Business Plan and Outlook
-------------------------
Over the past six years, annual net sales have grown from $12.6 million in
fiscal year 1998 to a $20.6 million in 2004. During fiscal year 2005, we will
continue to focus our efforts on fueling and sustaining future growth through
the development of new products for the rehabilitation and aesthetics markets
while, at the same time, strengthening our channels of distribution and
improving operating efficiencies.
The fruits of our focused R&D campaign begun in 2002 were manifest in September
2003 when we introduced the Solaris Series, a new product line of advanced
technology electrotherapy/ultrasound products featuring an infrared light
therapy probe. This new family of products has quickly become our top selling
line, due largely to the popularity of light therapy. Light therapy is becoming
widely recognized for its successful treatment of painful conditions. The
Solaris product line is designed to accommodate additional light therapy probes
that will be introduced in the future. This design insures that practitioners
can, over time, economically accumulate multiple light therapy probes for
various therapeutic purposes - all powered by the same Solaris device.
Consistent with that design, in June 2004 the Company received FDA marketing
clearance for the Dynatron 890, a low-power laser accessory probe for the
Solaris Series products. Laser technology takes the Company back to its origin
25 years ago when the Company first attempted to gain FDA approval for a laser
therapy device. However, the Dynatron 890 is 500 times more powerful than the
original devices 25 years ago, which enhances efficacy and significantly reduces
treatment times for patients. Shipment of the new Dynatron 890 probe began in
August, 2004.
The Company's R&D efforts are not limited to developing just high-tech products.
A number of other new products, including a new line of metal treatment tables,
are currently under development and targeted for introduction in the next 12-18
months.
In April 2004, we introduced our new product catalog featuring over 2,000
products. Over the years, our product catalog has been an important sales tool
for our nationwide network of dealers. It provides important information about
the new Solaris product line as well as many other products that we manufacture
and/or distribute.
Going forward, we intend to continue to strengthen our manufacturing
capabilities with the goal of improving margins and gaining greater pricing
advantages over competitors. To that end, some products previously purchased
from other manufacturers are being converted to in-house manufacturing. Other
products are being sourced from overseas manufacturers or moved to more
competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. Similar efforts over the past few years have had limited
success. Despite this experience, we continue to press forward seeking
opportunities for international expansion. The Company's Salt Lake City
operation, where all electrotherapy, ultrasound, STS devices, light therapy and
Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European
Union. It is expected that the attractive features of the Solaris Series will
make foreign distribution channels more accessible. Interest in Synergie
products is presently leading the way for international expansion with the
recent establishment of new distributors in Japan, South Africa, Europe and
Southeast Asia.
In January 2004, we introduced the Synergie LT device, an infrared light therapy
unit designed specifically for aesthetic applications. Interest in light therapy
applications among aestheticians has been an important factor in increasing
sales of our Synergie products over the past three quarters. The introduction of
the Synergie LT device is positioning Dynatronics to compete more fully in the
spa and beauty market, both domestically and internationally. We plan to develop
and introduce additional light therapy probes for the aesthetic market using
different wavelengths of light. For instance, in September 2004, we introduced
the Synergie 470 probe, a therapy probe compatible with the Synergie LT base
unit that emits light in the blue spectrum.
12
Based on our defined strategic initiatives, we are focusing our resources in the
following areas:
o Increasing sales of Solaris devices through the introduction of
new light therapy accessories and by developing new markets for
light therapy applications.
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of more new products, both high tech and
commodity, over the coming two years.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices into the aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly the
foregoing discussion in Item 2. Management's Discussion and Analysis, that are
not purely historical are "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act. These statements refer to our
expectations, hopes, beliefs, anticipations, commitments, intentions and
strategies regarding the future. They may be identified by the use of the words
or phrases "believes," "expects," "anticipates," "should," "plans," "estimates,"
"intends," and "potential," among others. Forward-looking statements include,
but are not limited to, statements contained in Management's Discussion and
Analysis or Plan of Operation regarding product development, clinical results,
market acceptance, financial performance, revenue and expense levels in the
future and the sufficiency of its existing assets to fund future operations and
capital spending needs. Actual results could differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements for the reasons detailed in our Annual Report on Form 10-KSB under
the headings "Description of Business" and "Risk Factors." The fact that some of
the risk factors may be the same or similar to past reports filed with the
Securities and Exchange Commission means only that the risks are present in
multiple periods. We believe that many of the risks detailed here and in our
other SEC filings are part of doing business in the industry in which we operate
and compete and will likely be present in all periods reported. The fact that
certain risks are endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, Dynatron STS
products, and the new Solaris infrared light therapy products;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
13
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The potential continued spread of the SARS outbreak which may
affect overseas sales as well as overseas manufacturing;
o Continued terrorist attacks on U.S. interests and businesses;
o The ability to obtain required financing to meet changes or other
risks; and
o Escalating costs of raw materials, particularly steel and
petroleum based materials.
Item 3. Controls and Procedures
Based on evaluation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by
this Report, our principal executive and principal financial officer has
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There have been no significant changes in internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
14
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. The Company has purchased 77,400 shares for
approximately $89,000, leaving over $400,000 of authorized funds for future
stock repurchases. No shares were repurchased during the quarter ended September
30, 2004. The stock repurchase program is conducted pursuant to safe harbor
regulations under Rule 10b-18 of the Exchange Act for the repurchase by an
issuer of its own shares.
Item 6. Exhibits
(a) Exhibits
--------
3.1 Articles of Incorporation and Bylaws of Dynatronics
Laser Corporation. Incorporated by reference to a
Registration Statement on Form S-1 (No. 2-85045)
filed with the Securities and Exchange Commission and
effective November 2, 1984, as amended by Articles of
Amendment dated November 18, 1993.
3.2 Articles of Amendment dated November 21, 1988
(previously filed).
10.1 Employment contract with Kelvyn H. Cullimore, Jr.
(previously filed)
10.2 Employment contract with Larry K. Beardall
(previously filed)
10.3 Loan Agreement with Zion Bank (previously filed)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn
Cullimore, Sr. (previously filed)
10.5 Amended Loan Agreement with Zions Bank (December
2003)
31 Certification under Rule 13a-14(a)/15d-14(a) of
principal executive officer and principal financial
officer
32 Certification under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. SECTION 1350)
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
------------------------
Registrant
Date 11/15/04 /s/ Kelvyn H. Cullimore, Jr.
--------- ------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive
Officer and Chief Financial Officer
(Duly Authorized Officer)
Date 11/15/04 /s/ Terry M. Atkinson, CPA
-------- ------------------------------------
Terry M. Atkinson
Controller
16