UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended June 30, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________.
Commission file number 0-12697
DYNATRONICS CORPORATION
(Name of small business issuer in its charter)
Utah 87-0398434
------------------------ ----------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7030 Park Centre Drive
Salt Lake City, Utah 84121-6618
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(Address of principal executive offices, Zip Code)
Issuer's telephone number (801) 568-7000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ x ]
Indicate by check mark whether or not the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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The issuer's revenues for the fiscal year ended June 30, 2005 were $20.4
million. The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the issuer was approximately $13.7 million as of
September 20, 2005, based on the average bid and asked price on that date.
As of September 20, 2005, there were 9,020,339 shares of the issuer's common
stock outstanding.
Documents Incorporated by Reference
The issuer hereby incorporates information required by Part III (Items 9, 10, 11
and 14) of this report by reference to the issuer's definitive proxy statement
to be filed pursuant to Regulation14A and provided to shareholders subsequent to
the filing of this report.
Transitional Small Business Disclosure Format (Check one): Yes No X
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TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................1
Item 2. Description of Property............................................8
Item 3. Legal Proceedings..................................................8
Item 4. Submission of Matters to a Vote of Security Holders................8
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.....................8
Item 6. Management's Discussion and Analysis or Plan of Operation..........9
Item 7. Financial Statements.............................................F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................18
Item 8A. Controls and Procedures...........................................18
Item 8B. Other Information.................................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................18
Item 10. Executive Compensation............................................18
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................18
Item 12. Certain Relationships and Related Transactions....................18
Item 13. Exhibits..........................................................18
Item 14. Principal Accountants Fees and Services...........................19
Signatures ................................................................20
Certifications .........................................................Exhibit
Unless the context otherwise requires, all references in this report to "we,"
"us," "our," "Dynatronics" or the "Company" include Dynatronics Corporation, a
Utah corporation.
ii
PART I
Item 1. Description of the Business
---------------------------
Dynatronics was organized as a Utah corporation on April 29, 1983. The
principal business of the Company is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products.
Dynatronics currently sells approximately 2,000 physical medicine and
aesthetic products. We manufacture approximately 20% of the physical medicine
products and 16% of the aesthetic products in our product line. The remainder of
the products are manufactured by third parties for whom Dynatronics acts as a
distributor.
Sales of manufactured physical medicine products in both fiscal years
2005 and 2004 represented approximately 75% of the Company's physical medicine
product sales with the balance each year sold by the Company as a distributor.
Sales of manufactured aesthetic products in fiscal years 2005 and 2004
represented approximately 96% and 97%, respectively of the Company's aesthetic
product sales with the balance each year sold by the Company as a distributor.
We primarily distribute our products in three ways: 1) through a
network of independent dealers nationwide and internationally, 2) through direct
relationships with certain national accounts, and 3) through a full-line
catalog. Some of our aesthetic products are also sold through manufacturer
representatives or direct to the practitioner by Company representatives.
In 1996, the Company acquired the assets of Superior Orthopaedics
Supplies, Inc. ("Superior"), a manufacturer and distributor of medical soft
goods, supplies, wood therapy tables and rehabilitation products for the
physical medicine market. The Company retained the former location of Superior
in Ooltewah, a suburb of Chattanooga, Tennessee. The addition of Superior's
products to our existing line of capital equipment significantly broadened our
product offerings and strengthened channels of distribution, allowing for
greater market penetration both domestically and internationally.
In 1998, the Company expanded into the aesthetic products market with
the introduction of the Synergie(TM) AMS device. This product utilizes
therapeutic massage technology to achieve, among other things, a temporary
reduction in the appearance of cellulite - a claim cleared by the U.S. Food and
Drug Administration ("FDA") during fiscal year 1999. This claim is supported by
a Company-sponsored research study in which 91% of participants reported
favorable reductions in the appearance of cellulite. In addition, this product
is indicated for the temporary reduction in circumferential body measurements of
treated areas. This benefit was also validated in the research study as
participants reported cumulative reductions of six inches in girth in treated
areas.
In 2000, the Company expanded its offering of aesthetic products with
the introduction of the Synergie Peel(TM) microdermabrasion device. The Synergie
Peel device reduces fine lines, wrinkles, and other superficial skin damage by
gently peeling away the top layers of skin, exposing smoother, softer skin. In
conjunction with the Synergie Peel device, during fiscal year 2000 Dynatronics
introduced Calisse(TM) - a unique line of skin care products designed to enhance
the effects of the Synergie Peel treatments.
In September 2003, the Company introduced the Dynatron Solaris(TM)
Series, a line of combination therapy devices. The Solaris product line consists
of five combination devices, four of which were part of the initial release with
the fifth device introduced in June 2004. The devices offer varying combinations
of electrotherapy modalities and ultrasound with the option of adding
Dynatronics' infrared light therapy technology. Various forms of infrared and
visible light therapy have been used for decades in Europe and Asia for treating
pain as well as a wide variety of soft tissue conditions. Light therapy has also
been used in tissue regeneration applications and in accelerating healing of
chronic wounds. During fiscal 2004, the Company received marketing clearance
from FDA for its low-power laser probe. This laser probe was introduced to the
market in August 2004 and provides 625mW of output at a wavelength of 875
nanometers ("nm"). The probe is 600 times more powerful than our first laser
probes introduced in the 1980's. The increased power allows treatment times to
be dramatically reduced. The Solaris Series devices are engineered to
accommodate future Dynatronics' laser or light therapy probes.
In July 2005, we announced the introduction of eight new products over
the coming months. The products we expect to introduce first will be the
Dynatron Xp Infrared Light Pad and Dynatron XpB (Booster Box). With the
introduction of the Dynatron Xp and XpB, we believe practitioners will gain a
tool that will allow unattended therapy of large segments of the body such as
1
the back, thigh or shoulder. Another new product that is expected to be
introduced early in the second quarter of fiscal year 2006 is the Dynatron
Solaris X3, a stand-alone light therapy unit. The X3 is designed to have the
ability to operate two Xp Infrared Light Pads or two infrared light therapy
probes simultaneously. Two new probes are being developed for the X3 - one with
a much more powerful infrared output and the other with a combination infrared
and blue wavelength output.
In the second quarter of fiscal year 2006, the Company anticipates
introducing the DX2 combination traction and light therapy device. We believe
that combining the pain relieving characteristics of infrared light therapy as
offered through our new Xp Light Pad, with the traditional benefits of
decompression therapy through traction will make our DX2 traction device one of
the most unique devices of its kind on the market. It is designed to provide
practitioners a more efficacious way to relieve pain using combination therapy.
To support this product, we also plan to introduce a new traction therapy table,
the Dynatron T4.
Lastly, we will be introducing the Dynatron iBox, a new drug delivery
device for iontophoresis that we believe is the most technologically advanced
product of its kind on the market. We intend to use this device to leverage
sales of our iontophoresis electrodes.
Description of Products Manufactured and/or Distributed by Dynatronics
Dynatronics manufactures and distributes a broad line of medical
equipment including therapy devices, medical supplies and soft goods, treatment
tables and rehabilitation equipment. In addition, we manufacture and distribute
a line of aesthetic equipment including aesthetic massage and microdermabrasion
devices as well as skin care products. Our products are used primarily by
physical therapists, chiropractors, sports medicine practitioners, podiatrists,
plastic surgeons, dermatologists, aestheticians and other aesthetic services
providers.
Physical Medicine Products
--------------------------
Electrotherapy - The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over four decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies for patient comfort and for success in the treatment
of pain and related physical ailments. Medium frequency alternating currents,
which are used primarily in the Company's electrotherapy devices, are believed
to be the most effective and comfortable for patients. Electrotherapy is
effective in treating chronic intractable pain and/or acute post-traumatic pain,
increasing local blood circulation, relaxation of muscle spasms, prevention or
retardation of disuse atrophy, and muscle re-education.
Therapeutic Ultrasound - Ultrasound therapy is a process of providing
therapeutic deep heat to soft tissues through the introduction of sound waves
into the body. It is one of the most common modalities used in physical therapy
today for treating pain, muscle spasms and joint contractures.
Dynatronics markets twelve devices that include electrotherapy,
ultrasound or a combination of both modalities in a single device. The Dynatron
125 ultrasound device and the Dynatron 525 electrotherapy device target the
low-priced segment of the market. The "50 Series Plus" products offer
combinations of electrotherapy and ultrasound modalities at a reasonable cost to
the practitioner. The Solaris products provide our most advanced technology in
combination therapy devices by adding infrared light therapy capabilities to
enhanced electrotherapy and ultrasound combination devices. (See "Schedule of
Therapy Products" below.) Dynatronics intends to continue development of its
electrotherapy and ultrasound technology and remain a leader in the design,
manufacture and sale of therapy devices.
Infrared Light Therapy - The Company's five Dynatron Solaris units
feature infrared light therapy technology. These units are capable of powering a
cluster probe containing 32 infrared superluminous diodes ("SLD") at 880 nm
wavelength along with four red spectrum SLD's in the 640 to 660 nm wavelength
range. A laser probe was introduced in August 2004. It contains a laser diode
generating 625mW of output at 875nm wavelength. Two new light probes and a light
pad are currently being developed by the Company. These products are being
engineered to work with current Solaris devices and are scheduled to be
introduced in fiscal year 2006. The benefits of light therapy have been
documented by hundreds of research studies published over the past two decades.
STS Therapy - STS Therapy is a patented method of administering
therapeutic electrical current via peripheral nerves that are accessed through
the lower legs and feet as well as the arms and hands, creating a unique form of
stimulation of the autonomic or sympathetic nervous system. It is an effective,
non-invasive and non-addictive treatment for many chronic pain conditions.
Doctors theorize that STS Therapy has a modulating effect on the autonomic
nervous system, resulting in symptomatic relief of chronic intractable pain.
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Iontophoresis - Since 1997, we have distributed Life-Tech's line of
iontophoresis products which are used in physical medicine applications
primarily for treating inflammation. In September 2004, we were named a master
distributor by Naimco Corp. for their new line of "IontoPlus" iontophoresis
electrodes. Iontophoresis uses electrical current to transdermally deliver drugs
such as lidocaine for localized treatment of inflammation without the use of
needles. The Company is currently developing its own proprietary iontophoresis
device - the Dynatron iBox - which is scheduled for introduction in the first
half of fiscal year 2006.
The following chart lists the therapy device products manufactured
and/or distributed by the Company.
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
Product Name Description
------------ -----------
Dynatron(R) 125 Ultrasound
Dynatron(R) 525 Electrotherapy
Iontophor II(R) & Microphor(R) + Iontophoresis
Dynatron(R) 150 Plus** Ultrasound
Dynatron(R) 550 Plus** Multi-modality Electrotherapy
Dynatron(R) 650 Plus** Multi-modality Electrotherapy
Dynatron(R) 850 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) 950 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) STS STS Chronic Pain Therapy
Dynatron(R) STS Rx STS Chronic Pain Therapy
Dynatron(R) STSi Combination Electrotherapy/STS Chronic
Pain Therapy
Dynatron Solaris(TM) 701 Ultrasound with Light Therapy
Dynatron Solaris(TM) 705 Electrotherapy with Light Therapy
Dynatron Solaris(TM) 706 Electrotherapy with Light Therapy
Dynatron Solaris(TM) 708 Combination Electrotherapy/Ultrasound with
Light Therapy
Dynatron Solaris(TM) 709 Combination Electrotherapy/Ultrasound with
Light Therapy
Dynatron Solaris(TM) 880 Accessory Infrared Light Probe
Dynatron Solaris(TM) 890 Accessory Infrared Laser Light Probe
---------------------
Dynatron(R) is a registered trademark (#1280629) owned by Dynatronics
Iontophor II(R) and Microphor(R) are registered trademarks owned by Life-Tech,
Inc.
** "50 Series Plus" Product Line
+ Both manufactured by Life-Tech
Medical Supplies and Soft Goods - We currently manufacture the
following medical supplies and soft goods: hot packs, cold packs, therapy wraps,
wrist splints, ankle weights, lumbar supports, cervical collars, slings,
cervical pillows, back cushions, weight racks, and parallel bars. We also
distribute products such as: hot and cold therapy products, exercise balls,
lotions and gels, paper products, athletic tape, canes and crutches, reflex
hammers, stethoscopes, splints, elastic wraps, exercise weights, Thera-Band(R)
(a registered mark of Hygenic Corp.) tubing, walkers, treadmills, stair
climbers, heating units for hot packs, whirlpools, gloves, electrodes, TENS
devices, and traction equipment.
Dynatronics markets its products through independent dealers and
through a product catalog. In April 2004, we introduced our latest catalog
featuring approximately 2,000 products. We continually seek to update our line
of manufactured and distributed medical supplies and soft goods.
Treatment Tables and Rehabilitation Equipment - In January 1997,
Dynatronics acquired a metal treatment table manufacturing operation in
Columbia, South Carolina. In July 1999, we consolidated this operation into our
Chattanooga facilities to improve efficiencies. We now manufacture and
distribute motorized and manually operated physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products.
3
With the acquisition of Superior and the treatment table manufacturing
operation, Dynatronics became a broad-line supplier to the physical medicine
market which includes physical therapy, chiropractic, podiatry, sports medicine,
industrial and occupational medicine, family practice, long-term care
facilities, and the sub-groups of each of these specialties.
Aesthetic Products
------------------
In July 1998, Dynatronics began shipments of our Synergie Aesthetic
Massage System (AMS). The Synergie AMS device applies therapeutic vacuum massage
to skin and subcutaneous tissues to achieve a temporary reduction in the
appearance of cellulite as well as the circumferential body measurements of the
treated areas.
In December 1999, we released the results of a Company-sponsored study
reporting that 91% of participants experienced a reduction in the appearance of
cellulite. In addition, participants on average reported a cumulative reduction
of six-inches in girth around the hips, thighs, and waist.
In February 2000, we introduced the Synergie Peel microdermabrasion
device as a companion to the Synergie AMS device. The Synergie Peel device
gently exfoliates the upper layers of skin, exposing softer, smoother skin.
In January 2004, we introduced the Synergie LT device which provides
light therapy for aesthetic applications. Light therapy is becoming popular in
spas and health clubs for improving skin tone and appearance. Combining elements
of the AMS vacuum massage techniques with microdermabrasion and Synergie LT for
light therapy has provided aestheticians with the ability to provide an enhanced
"ultimate facial" available only with the use of Synergie devices.
Allocation of Sales Among Key Products
No product accounted for more than 10% of the Company's revenues during
fiscal years 2005 and 2004.
Patents and Trademarks
Dynatronics holds a patent on the "Target" feature of its
electrotherapy products that will remain in effect until April 4, 2008, a patent
on the multi-frequency ultrasound technology that will remain in effect until
June 2013, and a patent on the microdermabrasion device that will remain in
effect until February 2020. In addition, we hold a patent on the STS technology
for treating chronic pain that will remain in effect until July 17, 2021 and a
patent on the combination of our aesthetic massage and microdermabrasion
technologies that will remain in effect until May 11, 2019. We also hold two
design patents on the microdermabrasion device that will remain in effect until
November 2015. An additional patent application pertaining to the Company's
Solaris light therapy technology has been filed with the U.S. Patent and
Trademark Office and is currently pending. Dynatronics owns the exclusive,
worldwide rights (under a license agreement) to a second existing patent on the
STS technology for the treatment of chronic pain.
The trademark "Dynatron" has been registered with the United States
Patent and Trademark Office. In addition, U.S. trademark registrations have been
obtained for the trademarks: "Synergie," "Synergie Peel," "Sympathetic Therapy,"
and "Dynatron Solaris," and trademark registration has been obtained or is now
pending for various other product trademarks. Company materials are also
protected under copyright laws, both in the United States and internationally.
Warranty Service
The Company warrants all products it manufactures for time periods
ranging in length from 90 days to five years from the date of sale. Warranty
service is provided from the Company's Salt Lake City and Chattanooga facilities
according to the service required. These warranty policies are comparable to
warranties generally available in the industry. Warranty claims as a percentage
of gross sales were not material in fiscal years 2005 and 2004.
Products distributed by Dynatronics carry warranties provided by the
manufacturers of those products. We do not generally supplement these warranties
or provide warranty services for distributed products. We also sell accessory
items for our manufactured products that are supplied by other manufacturers.
These accessory products carry warranties from their original manufacturers
without supplement from Dynatronics.
4
Customers and Markets
Dynatronics products are sold to a network of over 300 independent
dealers throughout the United States and internationally. These dealers are the
Company's primary customers. The dealers purchase and take title to the
products, which they then sell to licensed practitioners such as physical
therapists, chiropractors, podiatrists, sports medicine specialists, medical
doctors, physiatrists, hospitals, plastic surgeons, dermatologists and
aestheticians.
The Company has entered into direct sales relationships with national
and regional chains of physical therapy clinics and hospitals. We sell our
products directly to these clinics and hospitals pursuant to preferred pricing
arrangements. We also have preferred pricing arrangements with key dealers who
commit to purchase certain volumes and varieties of products. No single dealer
or national account or group of related accounts was responsible for 10% or more
of total sales in fiscal years 2005 or 2004.
Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) increased 63% to
approximately $1,035,686 in fiscal year 2005 compared to approximately $633,800
in fiscal year 2004. The Company is making progress in establishing effective
distribution for its products in international markets. Our Salt Lake City
facility is certified to the ISO 13485 quality standard for medical device
manufacturing. Many of the Company's therapy devices carry the CE Mark, a
designation required for marketing products in the European community that
signifies the device or product was manufactured pursuant to a certified quality
system. The Company has no foreign manufacturing operations. However, we do
purchase certain products and components from foreign manufacturers.
Competition
Despite significant competition, Dynatronics has distinguished key
products by using the latest technology, such as its patented Target feature,
patented multi-frequency ultrasound technology, and patented STS technology. We
believe that these features, along with integration of advanced technology in
the design of each product, have distinguished Dynatronics' products in a
competitive market. Dynatronics was the first company to integrate light therapy
as part of a combination therapy device. The Company has applied for a patent on
its Solaris light therapy technology. In addition, by manufacturing many of the
medical supplies, soft goods and tables it sells, the Company can focus on
quality manufacturing at competitive prices. We believe these factors give
Dynatronics an edge over many competitors who are solely distributors of such
products.
Electrotherapy/Ultrasound Competition. Competition in the clinical
market for electrotherapy and ultrasound devices comes from both domestic and
foreign companies. No fewer than a dozen companies produce electrotherapy and/or
ultrasound devices. Some of these competitors are larger and better established,
and have greater resources than the Company. Few companies, domestic or foreign,
provide multiple-modality devices. Furthermore, we believe no competitor offers
a true Target feature or the ultrasound feature of three frequencies on
multiple-sized soundheads for which Dynatronics holds patents. The Company's
primary domestic competitors in the sale of electrotherapy and ultrasound
products include: Encore Medical (Chattanooga Group division), Rich-Mar
Corporation and Mettler Electronics.
Light Therapy. - Competitors that manufacture and market light therapy
devices include: Encore Medical, Microlight Corp., Erchonia, Thor Laser,
Rich-Mar and Medex, among others. These competitors offer units that are priced
significantly higher than our units or are not as powerful. We are aware of only
one other competitor, Encore Medical, offers a combination light therapy device
that includes electrotherapy and ultrasound capabilities.
STS Therapy. The STS technology for treating chronic pain is protected
by two U.S. patents. The Company is not aware of any competitor that offers a
non-invasive, chronic pain treatment similar to the STS technology. Other
treatments for chronic pain include prescription narcotic drugs and invasive
procedures such as spinal cord stimulators, nerve block injections and implanted
drug pumps.
Medical Supplies & Soft Goods. The Company competes against various
manufacturers and distributors of medical supplies and soft goods, some of which
are larger, more established and have greater resources than Dynatronics.
Excellent customer service along with providing value to customers is of key
importance in this market. While there are many specialized manufacturers in
this area such as Encore Medical and Fabrication Enterprises, most competitors
are primarily distributors such as North Coast Medical, Ability-One (a division
of Patterson Dental), and Meyer Distributing.
Iontophoresis. Competition in the iontophoresis market includes Iomed,
Inc., Encore Medical (EMPI division), Birch Point Medical and Naimco. Iomed and
Encore Medical enjoy the largest market share. While Naimco has named
5
Dynatronics a master distributor, it also distributes directly to the
iontophoresis market and is a competitor in some situations. We have distributed
the Life-Tech products since 1996, but are not an exclusive distributor of those
products. We believe that our strong distribution network is important to our
continued ability to compete in this increasingly competitive market. In
addition, our products target a lower selling price than the products of Iomed,
Encore Medical and Birch Point. We anticipate that the introduction of our new
Dynatron iBox iontophoresis device in fiscal year 2006 will allow us to gain
market share, while, at the same time, increasing profit margins on these
products.
Treatment Tables. The primary competition in the treatment table market
is from domestic manufacturers including Hill Laboratories Company, Hausmann
Industries, Ability-One (a division of Patterson Dental), Bailey Manufacturing,
Tri-W-G, Encore Medical, Armedica, and Clinton Industries. We believe we compete
based on our industry experience and product quality. In addition, certain
components of the treatment tables are manufactured overseas, which allows for
pricing advantages over competitors.
Aesthetic Products. The Company's two primary competitors in the
therapeutic massage industry are LPG Systems, and Silhouette Tone. The Synergie
AMS device utilizes proprietary technology that has been proven effective in a
research study. In addition, we provide a comprehensive training and
certification program for aestheticians. Dynatronics is developing a network of
domestic and international distributors and national accounts, which is expected
to provide another competitive advantage in the marketplace for these products.
There are a number of competitors in the microdermabrasion market
including: Mega Peel, Diamond Peel, DermaGenesis, DermaMed, E-Med, Integremed,
Medical Alliance, Palomar, Slimtone USA and Soundskin Corp. The Synergie Peel
device incorporates a patented anti-clogging design for the crystals, which sets
it apart from competitors' units. In addition, the system has an innovative
disposable system for the abrasive material, which prevents unwanted contact
with the spent crystals following treatment.
Many of the competitors in the light therapy segment of the aesthetic
market are relatively new to this segment of the industry and smaller in size
than Dynatronics. Competitors include Revitalite, Silhouette Tone, Photo Actif,
and DermaPulse. The Synergie LT device is the most powerful of all the units on
the market and features a computerized dosage calculation system. The Synergie
LT is also the least expensive of the table model units on the market.
Information necessary to determine or reasonably estimate the market
share of Dynatronics or any competitor in any of these markets is not readily
available.
Manufacturing and Quality Assurance
Dynatronics manufactures therapy devices, soft goods and other medical
products at its facilities in Salt Lake City, Utah and Chattanooga, Tennessee.
The Company purchases some components for its manufactured products from
third-party suppliers. All parts and components purchased from these suppliers
meet specifications set by Dynatronics. Trained staff perform all sub-assembly,
final assembly and quality assurance procedures. All component parts used in
Dynatronics' device designs and all raw materials for medical supplies and soft
goods manufacturing are presently readily available from suppliers.
Dynatronics conforms to Good Manufacturing Practices as outlined by the
FDA. This includes a comprehensive program for processing customer feedback and
analyzing product performance trends. By insuring prompt processing of timely
information, we are better able to respond to customer needs and insure proper
operation of the products.
The Company established the Quality First Program, a concept for total
quality management designed to involve each employee in the quality assurance
process. Under this program, employees are not only expected to inspect for
quality, but they are empowered to stop any process and make any changes
necessary to insure that quality is not compromised. An incentive program is
established to insure the continual flow of ideas and to reward those who show
extraordinary commitment to the Quality First concept. Quality First has not
only become the Company motto, but it is the standard by which all decisions are
made. We believe the Quality First Program reinforces employee pride, increases
customer satisfaction, and improves overall operations of Dynatronics.
Dynatronics is certified to ISO 13485 standards for medical products.
ISO 13485 is an internationally recognized standard for quality systems and
manufacturing processes adopted by over 90 countries. In addition, the Company
has qualified for the CE Mark Certification on its electrotherapy, ultrasound,
light therapy and Synergie products. With the CE Mark Certification, we are able
to market these products throughout the European Union and in other countries
where CE Mark Certification and ISO 13485 certification are recognized.
6
Research and Development
In fiscal years 2004 and 2005, Dynatronics focused its resources on an
aggressive R&D campaign to develop eight new products which are scheduled to
begin shipping in the first half of fiscal year 2006. Total R&D expenditures for
2005 were $1,302,722, compared to $1,146,715 in 2004. R&D expenses represented
approximately 6.4% and 5.6% of the revenues of the Company in 2005 and 2004,
respectively. Substantially all of the research and development expenditures
during 2004 and 2005 were for the development of new products, or the upgrading
of existing products.
Regulatory Matters
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by numerous
national and local governmental agencies in the United States and other
countries. In the United States, the FDA regulates our products pursuant to the
Medical Device Amendment of the Food, Drug, and Cosmetic Act ("FDC Act") and
regulations promulgated thereunder. Advertising and other forms of promotion and
methods of marketing of the products are subject to regulation by the Federal
Trade Commission ("FTC") under the Federal Trade Commission Act ("FTC Act").
All of our therapeutic and aesthetic treatment devices as currently
designed are cleared for marketing under section 510(k) of the Medical Device
Amendment to the FDC Act or are considered 510(k) exempt. If a device is subject
to section 510(k), the FDA must receive premarket notification from the
manufacturer of its intent to market the device. The FDA must find that the
device is substantially equivalent to a legally marketed predicate device before
the agency will clear the new device for marketing. In addition, certain
modifications to the Company's marketed devices may require a premarket
notification and clearance under section 510(k) before the changed device may be
marketed, if the change or modification could significantly affect safety or
effectiveness. All of the Company's devices, unless specifically exempted by
regulation, are subject to the FDC Act's general controls, which include, among
other things, registration and listing, adherence to the Quality System
Regulation requirements for manufacturing, Medical Device Reporting and the
potential for voluntary and mandatory recalls.
During fiscal year 2003, Congress enacted the Medical Device User Fee
and Modernization Act (MDUFMA). Among other things, this act imposes for the
first time a user fee on medical device manufacturers. Under the provisions of
MDUFMA, manufacturers seeking clearance to market a new device must pay a fee to
the FDA in order to have their applications reviewed. Dynatronics primarily
submits new products for clearance under section 510(k) of the Medical Device
Amendment of the FDC Act. The fee per 510(k) submission in fiscal year 2005 was
$2,802. The fee per submission for new products in fiscal year 2006 will be
approximately $3,066.
Failure to comply with applicable FDA regulatory requirements may
result in, among other things, injunctions, product withdrawals, recalls,
product seizures, fines, and criminal prosecutions. Any such action by the FDA
could materially adversely affect the Company's ability to successfully market
its products.
Advertising of our products is subject to regulation by the FTC under
the FTC Act. Section 5 of the FTC Act prohibits unfair methods of competition
and unfair or deceptive acts or practices in or affecting commerce. Section 12
of the FTC Act provides that the dissemination or the causing to be disseminated
of any false advertisement pertaining to, among other things, drugs, cosmetics,
devices or foods, is an unfair or deceptive act or practice. Pursuant to this
FTC requirement, the Company is required to have adequate substantiation for all
advertising claims made about its products. The type of substantiation required
depends upon the product claims made.
If the FTC has reason to believe the law is being violated (e.g., the
manufacturer or distributor does not possess adequate substantiation for product
claims), it can initiate an enforcement action. The FTC has a variety of
processes and remedies available to it for enforcement, both administratively
and judicially, including compulsory process authority, cease and desist orders,
and injunctions. FTC enforcement could result in orders requiring, among other
things, limits on advertising, consumer redress, divestiture of assets,
rescission of contracts, and such other relief as may be deemed necessary.
Violation of such orders could result in substantial financial or other
penalties. Any such action by the FTC could materially adversely affect the
Company's ability to successfully market its products.
We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. They could include, however,
requirements for the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products, additional record keeping,
expanded documentation of the properties of certain products, expanded or
different labeling, and additional scientific substantiation. Any or all such
requirements could have a material adverse effect on the Company.
7
Environment
Environmental regulations are not material to our business. Dynatronics
does not discharge into the environment any pollutants that are regulated by a
governmental agency with the exception of the requirement to provide proper
filtering of discharges into the air from the painting processes at our
Tennessee location.
Employees
On June 30, 2005, we had a total of 132 full-time employees and six
part-time employees, compared to 136 full-time and 11 part-time employees at
June 30, 2004.
Item 2. Description of Property
-----------------------
The Company's headquarters and principal place of business are located
at 7030 Park Centre Drive, Salt Lake City, Utah, 84121. The headquarters consist
of a single facility housing administrative offices and manufacturing space
totaling approximately 36,000 square feet. The Company owns the land and
building, subject to mortgages requiring a monthly payment of approximately
$15,729. The mortgages mature in 2008 and 2013. The Company also owns a 43,200
sq. ft. manufacturing facility in Ooltewah, Tennessee, and accompanying
undeveloped acreage for future expansion subject to a mortgage requiring monthly
payments of $5,641 and maturing in 2017. During fiscal year 2006, the Company
plans to build a 10,000 sq. ft. addition next to its Tennessee facility due to
the anticipated expansion of its manufacturing operations at this location.
We believe the facilities described above are adequate to accommodate
presently expected growth and needs of the Company for its operations. As
Dynatronics continues to grow, additional facilities or the expansion of
existing facilities will likely be required.
The Company owns equipment used in the manufacture and assembly of its
products. The nature of this equipment is not specialized and replacements may
be readily obtained from any of a number of suppliers. The Company also owns
computer equipment and engineering and design equipment used in its research and
development programs.
Item 3. Legal Proceedings.
-----------------
There are no pending legal proceedings of a material nature to which
Dynatronics is a party or of which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report. The Company's annual meeting of shareholders will
be held in November 2005.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
---------------------------------------------------------------
Business Issuer Purchases of Equity Securities.
----------------------------------------------
Market Information. The common stock of the Company is listed on the
Nasdaq SmallCap Market (symbol: DYNT). The following table shows the range of
high and low sale prices for the common stock as quoted on the Nasdaq system for
the quarterly periods indicated.
Year Ended June 30,
2004 2005
---- ----
High Low High Low
---- --- ---- ---
1st Quarter (July-September) $1.59 $ .73 $2.42 $1.30
2nd Quarter (October-December) $2.41 $1.25 $2.15 $1.40
3rd Quarter (January-March) $4.08 $1.55 $2.82 $1.59
4th Quarter (April-June) $3.35 $1.90 $2.24 $1.53
8
Holders. As of September 20, 2005, the approximate number of common
stock shareholders of record was 444. This number does not include beneficial
owners of shares held in "nominee" or "street" name. Including beneficial
owners, we estimate that the total number of shareholders exceeds 2,000.
Dividends. The Company has never paid cash dividends on its common
stock. Our anticipated capital requirements are such that we intend to follow a
policy of retaining earnings in order to finance the development of the
business.
Sale of Unregistered Securities. The Company has not sold any
securities during the past three years in an unregistered offer and sale.
Stock Options. In fiscal year 2005, Dynatronics granted options to
employees, officers and directors pursuant to stock option plans. The total
number of shares of common stock issuable under such options is 564,924 shares
with an average exercise price of $1.70 per share. In fiscal year 2004,
Dynatronics granted 118,712 stock options for shares of common stock at an
average exercise price of $1.81 per share.
Stock Repurchase. 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 77,400 shares for approximately $89,000, leaving over $400,000
of authorized funds for future stock repurchases. No shares were repurchased
during fiscal year 2005. 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. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Overview
--------
Our principal business is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products. We currently
sell approximately 2,000 physical medicine and aesthetic products through a
network of national and international independent dealers, direct relationships
with certain national accounts, and a full-line catalog.
Sales of all physical medicine products represented 85% of total
revenues in 2005 compared to 88% in 2004, while sales of aesthetic products
accounted for 9% of total revenues in 2005 and 6% of total revenues in 2004.
Chargeable repairs, billable freight revenue and other miscellaneous revenue
accounted for 6% of total revenues in both 2005 and 2004.
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are regulated by numerous national and
local governmental agencies in the United States and other countries, including
the FDA. In addition, the FTC regulates our advertising and other forms of
product promotion and marketing. Failure to comply with applicable FDA, FTC or
other regulatory requirements may result in, among other things, injunctions,
product withdrawals, recalls, product seizures, fines, criminal prosecutions,
limits on advertising, consumer redress, divestiture of assets, and rescission
of contracts.
Selected Financial Data
-----------------------
The table below summarizes selected financial data contained in the
Company's audited financial statements for the past six fiscal years. The
financial statements for the fiscal years ended June 30, 2005 and 2004 are
included with this report.
Selected Financial Data
Fiscal Year Ended June 30
2005 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------
Net Sales $ 20,404,368 $ 20,587,273 $ 16,896,992 $ 17,133,953 $ 17,460,789 $ 15,779,748
Net Income $ 728,816 $ 883,300 $ 24,799 $ 316,101 $ 334,179 $ 35,910
Net Income
per share (diluted) $ .08 $ .10 $ .00 $ .04 $ .04 $ .00
Working Capital $ 7,043,854 $ 6,300,582 $ 5,516,720 $ 5,484,167 $ 4,971,946 $ 4,550,747
Total Assets $ 13,459,723 $ 14,272,579 $ 12,713,029 $ 12,508,202 $ 13,560,347 $ 12,595,581
Long-term Obligations $ 1,914,490 $ 2,034,854 $ 2,203,779 $ 2,331,698 $ 2,174,348 $ 2,330,501
9
Fiscal Year 2005 Compared to Fiscal Year 2004
---------------------------------------------
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Audited Financial
Statements and Notes thereto appearing elsewhere in this report.
Net Sales
For the second consecutive year, net sales for the Company exceeded $20
million. Total net sales for the year ended June 30, 2005 were $20,404,368,
compared to $20,587,273 during fiscal year 2004. Our ability to maintain sales
at this level reflects the popularity and staying power of the Solaris line of
products introduced in fiscal year 2004. The Dynatron Solaris Series is a family
of advanced technology combination therapy devices incorporating seven
electrotherapy waveforms and/or ultrasound therapy in combination with optional
infrared light therapy probes. 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. Over the course of fiscal year 2005, we saw sales of
our legacy 50 Series products decline while sales of our Solaris products
increased. Sales of aesthetic products also continued to improve and experienced
a 42% increase in sales over last year.
Gross Profit
While sales for fiscal year 2005 were consistent with last year, our
gross profit actually improved over fiscal year 2004. During fiscal year 2005,
gross profit was $8,299,289 or 40.7% of net sales compared to $8,200,295 or
39.8% of net sales in 2004. The improvement in gross margin in 2005 reflects the
42% increase in sales of high-margin Synergie devices and related products,
which carry an average gross margin in excess of 50%.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the year ended
June 30, 2005 were $5,748,529 or 28.2% of net sales compared to $5,528,835 or
26.9% of net sales in 2004. Total SG&A expenses in 2005 increased by $219,694 or
4.0% compared to 2004. Much of the added expense incurred during fiscal year
2005 was directed at enhancing the Company's infrastructure. For example, during
fiscal year 2005, we installed a new enterprise-wide software system to manage
sales orders, accounting functions, manufacturing processes and reporting. This
upgrade benefited every process, procedure, and major function in the Company
and required many overtime hours in the first few months of the fiscal year to
effectively implement this system. Even though the process was difficult and
expensive, we believe that migrating to a more powerful platform will support
future operations of the Company.
The cost of the new enterprise-wide software system and the added
manpower to support this new system increased SG&A expenses during fiscal year
2005 and will continue to be an added expense in future years. We believe this
new system is improving manufacturing efficiencies due to better information
management offered by the new system.
The three primary components affecting SG&A expenses in fiscal year
2005 compared to 2004 were:
o Approximately $191,500 in additional costs to install and support
the new enterprise-wide software system including additional
production labor expenses.
o Approximately $107,000 in increased Synergie advertising and
tradeshow activities as well as higher labor expenses to support
the higher sales of Synergie aesthetic products.
o Partially offsetting the increased SG&A expenses were $100,500 in
lower incentive compensation expenses.
Research and Development
The Company continues to pursue an aggressive R&D strategy. During
fiscal year 2005, we increased the size of our engineering department adding
capabilities in both mechanical and electrical engineering. Increasing our staff
of engineers has enabled us to develop new products at a more rapid pace. A
record number of new products are currently under development and are scheduled
to be introduced in the first half of fiscal year 2006. While this effort has
increased costs for fiscal year 2005, it has also positioned us to generate
growth in both sales and profitability in the near future. R&D expenses during
fiscal 2005 increased $156,007 to $1,302,722 compared to $1,146,715 in fiscal
2004. R&D expenses represented approximately 6.4% and 5.6% of the net sales of
the Company in the 2005 and 2004 periods, respectively. R&D costs are expensed
as incurred.
10
Pre-tax profit
Pre-tax profit for the year ended June 30, 2005 was $1,150,856 compared
to $1,377,444 in 2004. Higher gross profit generated during fiscal year 2005 was
offset by higher costs related to the installation and operation of the new
enterprise-wide software system, together with higher selling and R&D costs.
Income Tax
Income tax expense for the year ended June 30, 2005 was $422,040
compared to $494,144 in 2004. The effective tax rate for the year ended June 30,
2005 was 36.7% compared to 35.9% in 2004.
Net Income
Net income for the year ended June 30, 2005 was $728,816 (approximately
$.08 per share), compared to $883,300 (approximately $.10 per share) in 2004.
The implementation of our new enterprise-wide software system, the addition of
new personnel, and the ramp up in new product development have all added cost to
the past year, but have provided a launching pad for future growth in sales and
profits.
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 $7,043,854 at June 30, 2005,
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,
decreased $731,105 to $3,006,315 at June 30, 2005 compared to $3,737,420 at June
30, 2004. Management anticipates accounts receivable could increase in future
periods due to the planned introduction of eight new products in fiscal year
2006 which are expected to increase sales.
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 agreed terms.
Inventories
Inventories, net of reserves, at June 30, 2005 remained relatively
constant at $4,712,523 compared to $4,687,797 at June 30, 2004. Management
expects that inventories will likely increase over the course of the next fiscal
year based on the Company's planned new product introductions.
Prepaid Expenses
Prepaid expenses decreased $65,819 to $386,935 at June 30, 2005
compared to $452,754 at June 30, 2004 due primarily to a reduction in advances
made to suppliers for various component parts.
Goodwill
Goodwill at June 30, 2005 and June 30, 2004 was $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, 2005,
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, 2005. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter.
11
Accounts Payable
Accounts payable decreased by $75,547 to $605,788 at June 30, 2005
compared to $681,335 at June 30, 2004. The decrease in accounts payable is a
result of the timing of our weekly 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.
Accrued Expenses
Accrued expenses increased by $127,466 to $571,940 at June 30, 2005
compared to $444,474 at June 30, 2004. The increase in accrued expenses is
related primarily to the timing of our June 2005 national dealer meeting and
accrued expenses for sales incentive programs. In 2004, the sales incentive
programs were completed earlier in the year.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $55,805 to $368,167 at
June 30, 2005 compared to $423,972 at June 30, 2004. The decrease in accrued
payroll & benefit expenses is related to lower accrued bonuses for employees,
officers, and directors for fiscal year 2005 compared to 2004.
Income Taxes Payable
Income taxes payable was -0- at June 30, 2005, compared to $200,294 at
June 30, 2004. As of June 30, 2005, the Company had paid all estimated income
taxes expected for its fiscal year 2005.
Cash
The Company's cash position was $472,899 at June 30, 2005 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 was
$264,761 at June 30, 2005 compared to $1,604,535 at June 30, 2004. The $1.3
million reduction in the outstanding balance of the line of credit was
attributable primarily to improved collections of trade accounts receivable and
profits generated during the year. Interest on the line of credit is based on
the bank's prime rate, which at June 30, 2005, equaled 6.25%. 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 June 30, 2005, the maximum borrowing base was calculated to be
$3.6 million. The line of credit is renewable annually on December 1st and
includes covenants requiring the Company to maintain certain financial ratios.
As of June 30, 2005, the Company was in compliance with all loan covenants.
The current ratio was 4.5 to 1 at June 30, 2005 compared to 2.8 to 1 at
June 30, 2004. Current assets represent 67% of total assets at June 30, 2005.
Debt
Long-term debt excluding current installments totaled $1,330,325 at
June 30, 2005 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
$21,370.
12
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 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. No shares were repurchased during fiscal year 2005.
Inflation and Seasonality
The Company's revenues and net income from continuing operations have
not been unusually affected by inflation or price increases for raw materials
and parts from vendors.
The Company's business operations are not materially affected by
seasonality factors.
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 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 this annual report. 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 annual report requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses reported in our Audited Financial Statements. 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
June 30, 2005 and 2004, our inventory valuation reserve balance, which
established a new cost basis, was $368,167 and $334,393, respectively, and our
inventory balance was $4,712,523 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,
typically 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.
13
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 $3,006,315 and $3,737,420, net of allowance for doubtful accounts of
$252,509 and $182,941, at June 30, 2005 and June 30, 2004, respectively.
Business Plan and Outlook
-------------------------
Over the past seven years, annual net sales have grown from $12.6
million in fiscal year 1998 to $20.4 million in 2005. During fiscal year 2005,
we continued to focus our efforts on fueling and sustaining 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 initially
manifest in September 2004 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.
In July 2005, we announced that we would be introducing eight new
products over the coming months. The first of those products will be the
Dynatron Xp Infrared Light Pad and Dynatron XpB, or Booster Box. With the
introduction of the Dynatron Xp and XpB, we are providing practitioners with a
tool that will allow unattended therapy of large segments of the body such as
the back, thigh or shoulder. We believe it will allow us to leapfrog competitors
who are just now catching up to the Solaris technology we introduced two years
ago.
The Dynatron XpB is an accessory that will allow users of the thousands
of Solaris units sold over the last two years to add the new Xp Infrared Light
Pad as an accessory to their existing Solaris device. This compatibility of
technology not only opens a significant market segment for the new Xp Infrared
Light Pad, but assures users of Dynatronics products that we are working to make
these technologies affordable for them.
Another new product that is expected to be introduced early in the
second quarter of fiscal year 2006 is the Dynatron Solaris X3, a unit that
offers only light therapy applications. The original Solaris series devices
offered light therapy as an added accessory to our popular combination
electrotherapy/ultrasound technology. However, there has been increasing market
demand for a stand-alone unit. The X3 has been designed to provide the ability
to operate two Xp Infrared Light Pads or two light therapy probes
simultaneously.
The probes being offered with the X3 include not only the existing
Dynatron 880 and 890 probes but also two new probes - one with a much higher
infrared wavelength output and the other a combination infrared and blue
wavelength output.
In the second quarter of fiscal year 2006, we also anticipate
introducing the DX2 combination traction and light therapy device. We believe
that combining the pain relieving characteristics of infrared light therapy as
offered through our new Xp Light Pad, with the traditional benefits of
decompression therapy through traction will make our DX2 traction device one of
the most unique devices of its kind on the market. It is designed to provide
practitioners a more efficacious way to relieve pain using combination therapy.
We anticipate this unique combination of modalities together with the benefits
of touch screen technology will create significant demand for this product.
To support this product, we also plan to introduce a new traction
therapy table, the Dynatron T4, which we expect to be one of the best value
tables on the market for traction and decompression therapy. The T4 and DX2 will
typically be sold together as a package.
Lastly, we have seen declining iontophoresis sales over the past two
years. To combat that trend, we will be introducing the Dynatron iBox, a new
drug delivery device for iontophoresis that we believe is the most
technologically advanced product of its kind on the market. We intend to use
this device to leverage sales of the iontophoresis electrodes we carry.
14
Another important part of our strategic plan is the expansion of
worldwide marketing efforts. Over the past two years, international sales have
more than doubled and we continue to press forward seeking additional
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
and other foreign countries.
We continue efforts to promote our line of aesthetic products. During
fiscal year 2005, sales of aesthetic products increased 42% over 2004, due in
part to strong interest in the international market for these products. In
January 2004, we introduced the Synergie LT device, an infrared light therapy
unit designed specifically for aesthetic applications. The introduction of the
Synergie LT device is positioning Dynatronics to compete more fully in the spa
and beauty market. We plan to develop and introduce additional light therapy
probes for the aesthetic market using different wavelengths of light. Recent
interest by medical spas in the use of other physical therapy modalities such as
electrotherapy, ultrasound and light therapy in aesthetic applications has
opened new potential for crossover of physical medicine modalities into the
aesthetics market. This presents a unique opportunity for us to grow sales of
new aesthetic products with little additional R&D effort since the products have
already been developed for the physical medicine markets.
Based on our defined strategic initiatives, we are focusing our
resources in the following areas:
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of eight new products, both high tech and
commodity, in fiscal year 2006.
o Increasing sales of Solaris devices through introduction of new
light therapy accessories and by developing new markets for light
therapy applications.
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 and versions of our physical therapy modalities 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.
Forward-Looking Statements
--------------------------
When used in this report, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements within the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. Risks and circumstances that may cause actual results to
vary from the Company's expectations include, among others, the following:
Technological Obsolescence. The business of designing and manufacturing
medical and aesthetic products is characterized by rapid technological change.
Although Dynatronics has obtained patents on certain aspects of its technology,
there can be no assurance that our competitors will not develop or manufacture
products technologically superior to those of the Company.
Extensive Government Regulation. The manufacture, packaging, labeling,
advertising, promotion, distribution and sale of our products are subject to
regulation by numerous national and local governmental agencies in the United
States and other countries which adds to the expense of doing business and, if
violated, could adversely affect the Company's financial condition and results
of operations.
15
Health Care Reform. Governments are continually reviewing and
considering expansive legislation that may lead to significant reforms in health
care delivery systems. The pressure for reform stems largely from the rising
cost of health care in recent years. We cannot predict whether or when new or
proposed legislation will be enacted and there can be no assurance that such
legislation, when enacted, will not impose additional restrictions on part or
all of the Company's business or its intended business, which might adversely
affect such business.
Product Liability. Manufacturers and distributors of products used in
the medical device, aesthetics and related industries are from time to time
subject to lawsuits alleging product liability, negligence or related theories
of recovery, which have become an increasingly frequent risk of doing business
in these industries. Although from time to time lawsuits may arise or claims
asserted based on product liability matters, all such actions have been insured
against. Although we maintain product liability insurance coverage which we deem
to be adequate based on historical experience, there can be no assurance that
such coverage will be available for such risks in the future or that, if
available, it would prove sufficient to cover potential claims or that the
present amount of insurance can be maintained in force at an acceptable cost.
Furthermore, the assertion of such claims, regardless of their merit or eventual
outcome, also may have a material adverse effect on the Company, its business
reputation and its operations.
Risks Associated with Manufacturing. The Company's results of
operations are dependent upon the continued operation of its manufacturing
facilities in Utah and Tennessee. The operation of a manufacturing facility
involves many risks, including power failures, the breakdown, failure or
substandard performance of equipment, failure to perform by key suppliers, the
improper installation or operation of equipment, natural or other disasters and
the need to comply with the requirements or directives of government agencies,
including the FDA. There can be no assurance that the occurrence of these or any
other operational problems at our facilities would not have a material adverse
effect on the Company's business, financial condition and results of operations.
Reliance on Information Technology. The Company's success is dependent
in large part on the accuracy, reliability and proper use of sophisticated and
dependable information processing systems and management information technology.
Our information technology systems are designed and selected in order to
facilitate order entry and customer billing, maintain records, accurately track
purchases, accounts receivable and accounts payable, manage accounting, finance
and manufacturing operations, generate reports and provide customer service and
technical support. Any interruption in these systems could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. Our industry is highly competitive. Numerous
manufacturers, distributors and retailers compete actively for consumers and
customers. The Company competes directly with other entities that manufacture,
market and distribute products in each of its product lines. Many of these
competitors are substantially larger than the Company and have greater financial
resources and broader name recognition. The market is highly sensitive to the
introduction of new products that may rapidly capture a significant share of the
market. There can be no assurance that the Company will be able to compete in
this intensely competitive environment.
Dependence on Patents and Proprietary Rights. The Company has seven
patents issued and one patent pending relating to its products. In addition, we
have obtained by license the worldwide rights to the STS patent. The Company's
trademarks have also been registered in the United States and in other
countries. There can be no assurance that patents owned by or licensed to us
will not be challenged or circumvented or will provide us with any competitive
advantages or that a patent will issue from any pending patent application. We
also rely upon copyright protection for our proprietary software and other
property. There can be no assurance that any copyright obtained will not be
circumvented or challenged. In addition, we rely on trade secrets that we seek
to protect, in part, through confidentiality agreements with employees and other
parties. There can be no assurance that these agreements will not be breached,
that the Company would have adequate remedies for any breach or that the our
trade secrets will not otherwise become known to or independently developed by
competitors. The Company may become involved from time to time in litigation to
determine the enforceability, scope and validity of proprietary rights. Any such
litigation could result in substantial cost to the Company and divert the
efforts of its management and technical personnel.
Foreign Duties and Import Restrictions. Some of the Company's products
are exported to the countries in which they ultimately are sold. The countries
in which we sell products may impose various legal restrictions on imports,
impose duties of varying amounts, or enact regulatory requirements, adverse to
the Company's products. There can be no assurance that changes in legal
restrictions, increased duties or taxes, or stricter health and safety
requirements would not have a material adverse effect in the Company's ability
to market its products in a given country.
16
Effect of Exchange Rate Fluctuations. Exchange rate fluctuations may
have a significant effect on the Company's sales and gross margins in a given
foreign country. If exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries. Differences in the exchange rates may also create a marketing
advantage for foreign competitors, making the purchase price of their products
lower than prices originally denominated in U.S. dollars. As the Company's
business expands outside the United States, an increasing share of its revenues
and expenses will be transacted in currencies other than the U.S. dollar.
Consequently, the reported earnings of the Company in future periods may be
significantly affected by fluctuations in currency exchange rates, with earnings
generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar.
Item 7. Financial Statements
--------------------
The consolidated financial statements and accompanying report of the
Company's auditors follow immediately and form a part of this report.
17
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Dynatronics Corporation
We have audited the balance sheet of Dynatronics Corporation, as of June 30,
2005 and 2004, and the related statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dynatronics Corporation as of
June 30, 2005 and 2004, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Tanner LC
Salt Lake City, Utah
August 30, 2005
F-1
DYNATRONICS CORPORATION
Balance Sheets
June 30, 2005 and 2004
Assets 2005 2004
-------------- ----------------
Current assets:
Cash $ 472,899 573,027
Trade accounts receivable, less allowance for
doubtful accounts of $252,509 June 30, 2005
and $182,941 at June 30, 2004 3,006,315 3,737,420
Other receivables 91,129 76,213
Inventories 4,712,523 4,687,797
Prepaid expenses 386,935 452,754
Prepaid income taxes 21,701 -
Deferred tax asset-current 384,077 335,000
-------------- ----------------
Total current assets 9,075,579 9,862,211
Property and equipment, net 3,221,944 3,310,083
Goodwill, net of accumulated amortization of $649,792
at June 30, 2005 and at June 30, 2004 789,422 789,422
Other assets 372,778 310,863
-------------- ----------------
$ 13,459,723 14,272,579
============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 221,069 207,019
Line of credit 264,761 1,604,535
Accounts payable 605,788 681,335
Accrued expenses 571,940 444,474
Accrued payroll and benefit expenses 368,167 423,972
Income tax payable - 200,294
-------------- ----------------
Total current liabilities 2,031,725 3,561,629
Long-term debt, excluding current installments 1,330,325 1,553,832
Deferred compensation 360,518 331,022
Deferred tax liability - noncurrent 223,647 150,000
-------------- ----------------
Total liabilities 3,946,215 5,596,483
-------------- ----------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued 9,015,128 shares at June 30, 2005 and
8,956,688 shares at June 30, 2004 2,779,000 2,670,404
Retained earnings 6,734,508 6,005,692
-------------- ----------------
Total stockholders' equity 9,513,508 8,676,096
-------------- ----------------
Commitments
$ 13,459,723 14,272,579
============== ================
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Statements of Income
Years Ended June 30, 2005 and 2004
2005 2004
-------------- ----------------
Net sales $ 20,404,368 20,587,273
Cost of sales 12,105,079 12,386,978
-------------- ----------------
Gross profit 8,299,289 8,200,295
Selling, general, and administrative expenses 5,748,529 5,528,835
Research and development expenses 1,302,722 1,146,715
-------------- ----------------
Operating income 1,248,038 1,524,745
-------------- ----------------
Other income (expense):
Interest income 9,377 12,818
Interest expense (139,482) (169,433)
Other income, net 32,923 9,314
-------------- ----------------
Total other income (expense) (97,182) (147,301)
-------------- ----------------
Income before income taxes 1,150,856 1,377,444
Income tax expense 422,040 494,144
-------------- ----------------
Net income $ 728,816 883,300
============== ================
Basic net income per common share $ 0.08 0.10
============== ================
Diluted net income per common share $ 0.08 0.10
============== ================
Weighted average basic and diluted common shares outstanding
Basic 8,973,911 8,871,214
Diluted 9,213,808 9,213,219
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Statements of Stockholders' Equity
Years Ended June 30, 2005 and 2004
Common Redeemed Retained Stockholders'
stock stock earnings equity
-------------- ------------- ------------ --------------
Balances at June 30, 2003 $ 2,478,981 - 5,122,392 7,601,373
Redeemed 77,400 shares of common stock - (89,000) - (89,000)
Retired 77,400 shares of redeemed stock (89,000) 89,000 - -
Issuance of 164,753 shares of common stock
upon exercise of employee stock options 193,451 - - 193,451
Income tax benefit disqualifying disposition
of employee stock options 86,972 - - 86,972
Net income - - 883,300 883,300
-------------- ------------- ------------ --------------
Balances at June 30, 2004 2,670,404 - 6,005,692 8,676,096
Issuance of 58,440 shares of common stock
upon exercise of employee stock options 53,801 - - 53,801
Issuance of 25,000 common stock options for
services 29,700 - - 29,700
Income tax benefit disqualifying disposition
of employee stock options 25,095 - - 25,095
Net income - - 728,816 728,816
-------------- ------------- ------------ --------------
Balances at June 30, 2005 $ 2,779,000 - 6,734,508 9,513,508
============== ============= =========== ==============
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Statements of Cash Flows
Years Ended June 30, 2005 and 2004
2005 2004
-------------- ----------------
Cash flows from operating activities:
Net income $ 728,816 883,300
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment 372,332 321,007
Other amortization 7,324 7,324
Provision for doubtful accounts 96,000 96,000
Provision for inventory obsolescence 276,000 276,000
Provision for warranty reserve 169,321 164,574
Provision for deferred compensation 29,496 25,368
Compensation expense on stock options 29,700 -
Change in operating assets and liabilities:
Receivables 620,189 (1,432,848)
Inventories (300,726) (319,308)
Prepaid expenses and other assets (3,420) 6,213
Deferred tax asset 24,570 (16,512)
Income tax receivable 21,701 105,804
Accounts payable and accrued expenses (173,207) 58,031
Income tax Payable (218,601) 287,266
-------------- ----------------
Net cash provided by operating
activities 1,679,495 462,219
-------------- ----------------
Cash flows from investing activities:
Capital expenditures (284,162) (428,537)
Proceeds from sale of assets (31) -
-------------- ----------------
Net cash used in investing activities (284,193) (428,537)
-------------- ----------------
Cash flows from financing activities:
Principal payments on long-term debt (209,457) (191,822)
Net change in line of credit (1,339,774) 222,440
Proceeds from issuance of common stock 53,801 193,451
Redemption of common stock - (89,000)
-------------- ----------------
Net cash (used in) provided by financing
activities (1,495,430) 135,069
-------------- ----------------
Net change in cash and cash
equivalents (100,128) 168,751
Cash at beginning of year 573,027 404,276
-------------- ----------------
Cash at end of year $ 472,899 573,027
============== ================
F-5
2005 2004
-------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 138,304 169,012
Cash paid for income taxes 594,370 236,800
Supplemental disclosure of non-cash investing and
financing activities:
Income tax benefit from non-employee exercise
of stock options 25,095 86,972
See accompanying notes to financial statements.
F-6
DYNATRONICS CORPORATION
Notes to Financial Statements
June 30, 2005 and 2004
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures, markets, and
distributes a broad line of therapeutic, diagnostic, and
rehabilitation equipment, medical supplies and soft goods,
treatment tables and aesthetic medical devices to an expanding
market of physical therapists, podiatrists, orthopedists,
chiropractors, plastic surgeons, dermatologists, and other medical
professionals. The products are distributed primarily through
dealers in the United States and Canada, with increasing
distribution in foreign countries.
(b) Cash Equivalents
For purposes of the combined statements of cash flows, all highly
liquid investments with maturities of three months or less are
considered to be cash equivalents. There were no significant cash
equivalents as of June 30, 2005 and 2004.
(c) Inventories
Finished goods inventories are stated at the lower of standard
cost, which approximates actual cost (first-in, first-out), or
market. Raw materials are stated at the lower of cost (first-in,
first-out), or market.
(d) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in
the Company's existing accounts receivable. The Company determines
the allowance based on historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. All
account balances are reviewed on an individual basis. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet
credit exposure related to its customers.
(e) Property and Equipment
Property and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of
related assets. The building and its component parts are being
depreciated over their estimated useful lives that range from 5 to
31.5 years. Estimated lives for all other depreciable assets range
from 3 to 7 years.
(f) Goodwill and Long-Lived 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 of fiscal year 2005
and 2004 and has determined there is 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.
In accordance with SFAS No. 144, long-lived assets, such as
property, plant, and equipment, and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be
F-7
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of
would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the
balance sheet.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over 15 and 30 years.
(g) Revenue Recognition
Sales are generally 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.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Product Warranty Reserve
Costs estimated to be incurred in connection with the Company's
product warranty programs are charged to expense as products are
sold based on historical warranty rates.
(j) Earnings per Common Share
Basic earnings per common share is the amount of earnings for the
period available to each share of common stock outstanding during
the reporting period. Diluted earnings per common share is the
amount of earnings 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.
A reconciliation between the basic and diluted weighted average
number of common shares for 2005 and 2004 is summarized as
follows:
2005 2004
--------- ---------
Basic weighted average number of
common shares outstanding during
the period 8,973,911 8,871,214
Weighted average number of dilutive
common stock options outstanding
during the period 239,897 342,005
--------- ---------
Diluted weighted average number of
common and common equivalent shares
outstanding during the period 9,213,808 9,213,219
========= =========
Outstanding options not included in the computation of diluted net
income per share total 188,092 and 172,332 as of June 30, 2005 and
2004, respectively, because to do so would have been antidilutive.
(k) Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred
tax assets and deferred tax liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-8
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
(l) Stock-Based Compensation
The Company employs the footnote disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS No. 123 encourages 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 and provide pro forma footnote disclosures
required by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plan. (See note 11). Had
compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date 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:
Year ended Year ended
June 30, June 30,
2005 2004
----------- -----------
Net income as reported $ 728,816 883,300
Less: pro forma adjustment for stock based
compensation, net of income tax (44,042) (114,656)
----------- -----------
Pro forma net income $ 684,774 768,644
=========== ===========
Basic net income per share:
As reported $ 0.08 0.10
Effect of pro forma adjustment - (0.01)
----------- -----------
Pro forma 0.08 0.09
Diluted net income per share:
As reported 0.08 0.10
Effect of pro forma adjustment (0.01) (0.02)
----------- -----------
Pro forma $ 0.07 0.08
=========== ===========
The Company has no employee stock-based compensation expense since
stock options have exercise prices at least equal to the market
price of the Company's stock on the grant date.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions:
June 30
-------------------------------
2005 2004
-------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 86-89% 82-89%
Risk-free interest rate 3.68 - 4.45% 3.31 - 4.34%
Expected life of options 1 & 7 years 5 & 7 years
F-9
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
The weighted average fair value of options granted during 2005 and
2004 was $1.31 and $1.40, respectively.
(m) Concentration of Risk
In the normal course of business, the Company provides unsecured
credit terms to its customers. Most of the Company's customers are
involved in the medical industry. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range
of management's expectations.
(n) Operating Segments
The Company operates in one line of business, the development,
marketing, and distribution of a broad line of medical products
for the physical therapy and aesthetics markets. As such, the
Company has only one reportable operating segment as defined by
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
The Company groups their sales into physical medicine products and
aesthetic products. Physical medicine products consisted of 85% of
net sales for the year ended June 30, 2005 and 88% for the year
ended June 30, 2004. Aesthetics products consisted of 9% and 6% of
net sales for years ended June 30, 2005 and 2004, respectively.
Chargeable repairs, billable freight and other miscellaneous
revenue account for the remaining 6% of total revenues in both
years ended June 30, 2005 and 2004, respectively.
(o) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues, and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity
with accounting principles generally accepted in the United States
of America. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant, and
equipment; valuation allowances for receivables and inventories;
accrued product warranty reserve; and estimated recoverability of
goodwill. Actual results could differ from those estimates.
(p) Fair Value Disclosure
The carrying value of accounts receivable, accounts payable,
accrued expenses, and line of credit approximates their estimated
fair value due to the relative short maturity of these
instruments. The carrying value of long-term debt approximates its
estimated fair value due to recent issuance of the debt or the
existence of interest rate reset provisions.
(q) Advertising Cost
Advertising costs are expensed as incurred except for catalogs.
Catalogs are recorded as prepaid supplies until they are no longer
owned or expected to be used, at which time they are recorded as
advertising expense. Advertising expense for the years ended June
30, 2005 and 2004 was approximately $232,000 and $189,000,
respectively. No prepaid supplies consisted of catalogs as of June
30, 2005 and 2004.
(2) Inventories
Inventories consist of the following:
2005 2004
-------------- --------------
Raw materials $ 2,653,005 2,906,721
Finished goods 2,409,435 2,115,469
Inventory reserve (368,167) (334,393)
-------------- --------------
$ 4,712,523 4,687,797
============== ==============
F-10
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
(3) Property and Equipment
Property and equipment consist of the following:
2005 2004
--------------- --------------
Land $ 354,743 354,743
Buildings 2,921,127 2,899,729
Machinery and equipment 1,560,010 1,753,220
Office equipment 1,011,101 801,297
Vehicles 94,290 80,680
--------------- --------------
5,941,271 5,889,669
Less accumulated depreciation and
amortization 2,719,327 2,579,586
--------------- --------------
$ 3,221,944 3,310,083
=============== ==============
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve, which is
include in accrued expenses, consists of the following:
2005 2004
--------------- --------------
Beginning product warranty
reserve balance $ 184,000 160,000
Warranty repairs (145,322) (140,573)
Warranties issued 139,324 296,457
Changes in estimated warranty costs 29,998 (131,884)
--------------- --------------
Ending product warranty
reserve balance $ 208,000 184,000
=============== ==============
(5) Line of Credit
The Company has a revolving line of credit facility with a commercial
bank in the amount of $4.5 million. Borrowing limitations are based on
30% of eligible inventory and up to 80% of eligible accounts receivable.
At June 30, 2005 and 2004, the outstanding balance was approximately
$265,000 and $1.60 million, respectively. The line of credit is
collateralized by inventory and accounts receivable and bears interest at
the bank's "prime rate," (6.25% and 4.25% at June 30, 2005 and 2004,
respectively). This line is subject to annual renewal and matures on
December 1, 2005. Accrued interest is payable monthly.
(6) Long-Term Debt
Long-term debt consists of the following:
2005 2004
------------ -----------
6.75% promissory note secured by building, maturing May 2017,
payable in monthly installments beginning at $5,641 $ 594,227 $ 628,653
6.21% promissory note secured by a trust deed on real
property, maturing November 2013, payable in decreasing
installments beginning at $7,545 monthly ($7,060 during
2003 and 2002) 550,191 599,099
5.84% promissory note secured by a trust deed on real 50
property, payable in monthly installments of $8,669
through November 2008 320,791 403,150
8.87% promissory note secured by fixed assets, payable in
monthly installments of $3,901 through May 2007 83,683 123,053
Other notes payable 2,502 6,896
------------ -----------
Total long-term debt 1,551,394 1,760,851
Less current installments 221,069 207,019
------------ -----------
Long-term debt, excluding current installments $ 1,330,325 $ 1,553,832
============ ===========
F-11
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
The aggregate maturities of long-term debt for each of the years
subsequent to 2005 are as follow: 2006, $221,069; 2007, $229,370; 2008,
$198,632; 2009, $147,980; 2010, $112,502 and thereafter $641,841.
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Rent expense for the years ended June 30, 2005 and 2004 was
$23,664 and $24,379, respectively. Future minimum rental payments
required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year as of 2005 are as follows:
2006, $20,440; 2007, $14,269 and 2008, $8,118.
(8) Goodwill and Other Intangible Assets
Goodwill. The cost of acquired companies in excess of the fair value of
the net assets and purchased intangible assets at acquisition date is
recorded as goodwill. As of June 30, 2002, the Company had goodwill, net
of $789,422 arising 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.
License Agreement. Identifiable intangible assets, included in other
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
June 30, 2005 June 30, 2004
-------------------------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 35,400 28,076
-------------------------------
Net carrying amount $ 37,840 45,164
===============================
Amortization expense associated with the license agreement was $7,325 for
2005 and 2004. Estimated amortization expense for the existing license
agreement is expected to be $7,325 for each of the fiscal years ending
June 30, 2006 through June 30, 2010.
(9) Income Taxes
Income tax expense for the years ended June 30 consists of:
Current Deferred Total
-------------- --------------- -------------
2005:
U.S. federal $ 332,838 21,278 354,116
State and local 64,632 3,292 67,924
-------------- --------------- -------------
$ 397,470 24,570 422,040
============== =============== =============
2004:
U.S. federal $ 427,816 (14,298) 413,518
State and local 82,840 (2,214) 80,626
-------------- --------------- -------------
$ 510,656 (16,512) 494,144
============== =============== =============
F-12
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
Actual income tax expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34%
to income before income taxes) as follows:
2005 2004
------------- -------------
Expected tax expense $ 391,291 468,000
State taxes, net of federal tax benefit 64,632 53,778
Meals and entertainment 1,552 2,000
Officers' life insurance (3,239) (4,716)
Extraterritorial income exclusion (7,480) (5,000)
Other, net (24,716) (19,918)
------------- -------------
$ 422,040 494,144
============= =============
Deferred income tax assets and liabilities related to the tax effects of
temporary differences are as follows:
2005 2004
------------- --------------
Net deferred tax asset - current:
Inventory capitalization for income tax purposes $ 64,640 58,000
Inventory reserve 137,326 125,000
Vacation reserve -- 4,000
Warranty reserve 77,584 69,000
Accrued product liability 10,341 11,000
Allowance for doubtful accounts 94,186 68,000
------------- --------------
Total deferred tax asset - current $ 384,077 335,000
============= ==============
Net deferred tax asset (liability) - non-current:
Deferred compensation $ 134,473 123,000
Property and equipment, principally due to differences in
depreciation (361,409) (277,000)
Non-compete and goodwill 3,289 4,000
------------- --------------
Total deferred tax liability - non-current $ (223,647) (150,000)
============= ==============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences.
(10) Major Customers and Sales by Geographic Location
During the fiscal years ended June 30, 2005 and 2004, sales to any single
customer did not exceed 10% of total net sales.
Sales in the United States and other countries were 95 percent and 5
percent for the fiscal year ended June 30, 2005, respectively and were 97
percent and 3 percent for the fiscal year ended June 30, 2004,
respectively.
(11) Common Stock
On July 15, 2003, the Company approved an open-market share repurchase
program for up to $500,000 of the Company's common stock. During the year
ended June 30, 2004, the Company acquired and retired $89,000 of common
stock. There were no stock repurchases during fiscal year 2005.
The Company granted options to acquire common stock under its 1992
qualified stock option plan. The options are to be granted at not less
than 100% of the market price of the stock at the date of grant. Option
terms are determined by the board of directors, and exercise dates may
range from six months to five years from the date of grant.
F-13
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
A summary of activity follows:
2005 2004
------------------------------------ ------------------------------------
Weighted Weighted
Number average Number average
of shares exercise price of shares exercise price
-------------- ----------------- -------------- -----------------
Options outstanding at
beginning of year 723,884 $ 1.09 903,645 $ 1.09
Options granted 564,924 1.81 118,712 1.81
Options exercised 56,880 1.17 164,753 1.17
Options canceled or expired (76,089) 1.33 (133,720) 1.33
-------------- --------------
Options outstanding at end
of year 1,155,839 1.15 723,884 1.15
============== ==============
Options exercisable at end
of year 477,330 0.91 550,953 1.06
============== ==============
Range of exercise prices at
end of year $ 0.66 - 3.00 $ 0.66 - 3.00
At June 30, 2005, 429,109 shares of common stock were authorized and
reserved for issuance, but were not granted under the terms of the stock
option plan.
The Company has 80,000 options outstanding that were not issued under the
Company's stock option plan. The exercise price of the options ranges
from $1.08 to $4.00. The options expire during fiscal 2007 through fiscal
2010.
(12) Employee Benefit Plan
During 1991, the Company established a deferred savings plan which
qualifies under Internal Revenue Code Section 401(k). The plan covers all
employees of the Company who have at least six months of service and who
are age 20 or older. For 2005 and 2004, the Company made matching
contributions of 25% of the first $2,000 of each employee's contribution.
The Company's contributions to the plan for 2005 and 2004 were $30,204
and $26,530, respectively. Company matching contributions for future
years are at the discretion of the board of directors.
(13) Salary Continuation Agreements
As of June 30, 2005 the Company had salary continuation agreements with
two key employees. The agreements provide a pre-retirement salary
continuation income to the employee's designated beneficiary in the event
that the employee dies before reaching age 65. This death benefit amount
is the lesser of $75,000 per year or 50% of the employee's salary at the
time of death, and continues until the employee would have reached age
65. The agreements also provide the employee with a 15-year supplemental
retirement benefit if the employee remains in the employment of the
Company until age 65. Estimated amounts to be paid under the agreements
are being accrued over the period of the employees' active employment. As
of 2005 and 2004, the Company has accrued $360,518 and $331,022,
respectively, of deferred compensation under the terms of the agreements.
F-14
DYNATRONICS CORPORATION
Notes to Financial Statements - Continued
(14) Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised
2004), Share Based Payment ("SFAS 123R"). SFAS 123R requires that
compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions
within the scope of SFAS 123R include stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R are effective as of the
first interim period that begins after December 15, 2005. Accordingly,
the Company will implement the revised standard in the third quarter of
fiscal year 2006. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not
necessarily require the recognition of compensation cost in the financial
statements. Management is assessing the implications of this revised
standard and the effect of the adoption of SFAS 123R will have on our
financial position, results of operations, or cash flow.
In November of 2004, the FASB issued SFAS No. 151, Inventory Costs - An
Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies
treatment of abnormal amounts of idle facility expense, freight, handling
costs and spoilage, specifying that such costs should be expensed as
incurred and not included in overhead. The new statement also requires
that allocation of fixed production overheads to conversion costs should
be based on normal capacity of the production facilities. The provisions
in SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Companies must apply the standard
prospectively. The Company does not believe that the impact of this new
standard will have a material effect on our financial statements or
results of operations.
F-15
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 8A. Controls and Procedures
-----------------------
Based on their 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 Chief Executive Officer and Chief Financial Officer
have 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.
Item 8B. Other Information
-----------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
------------------------------------------------------------------------
With Section 16(a) of the Exchange Act
--------------------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the headings
"Executive Officers and Directors," "Compliance with Section 16(a) of the
Securities Exchange Act of 1934," "Committees and Meetings of the Board of
Directors," "Audit Committee Financial Expert" and "Code of Ethics" contained in
the Company's definitive proxy statement for its 2005 Annual Meeting of
Shareholders, to be sent to shareholders of the Company subsequent to the filing
of this report on Form 10-KSB.
Item 10. Executive Compensation.
----------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading
"Executive Compensation and other Matters" and "Remuneration of Directors"
contained in the Company's definitive proxy statement for its 2005 Annual
Meeting of Shareholders, to be sent to shareholders of the Company subsequent to
the filing of this report on Form 10-KSB.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholders Matters.
-----------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Voting
Securities and Principal Shareholders" and "Equity Compensation Plan
Information" contained in the Company's definitive proxy statement for its 2005
Annual Meeting of Shareholders, to be sent to shareholders of the Company
subsequent to the filing of this report on Form 10-KSB.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
During the two years ended June 30, 2005, the Company was not a party
to any transaction in which any director, executive officer or shareholder
holding more than 5% of the Company's issued and outstanding common stock had a
direct or indirect material interest.
Item 13. Exhibits
--------
(a) Exhibits and documents required by Item 601 of Regulation S-B:
1. Financial Statements (included in Part II, Item 7):
Report of Independent Registered Public Accounting Firms..........F-1
Balance Sheets at June 30, 2005 and 2004..........................F-2
Statements of Income for years ended
June 30, 2005 and 2004............................................F-3
18
Statements of Stockholders'
Equity for years ended June 30, 2005
and 2004..........................................................F-4
Statements of Cash Flows for
years ended June 30, 2005 and 2004 ...............................F-5
Notes to Financial Statements.....................................F-7
Exhibits:
---------
Reg. S-B
Exhibit No. Description
----------- -----------
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.
3.2 Articles of Amendment dated November 21, 1988
(previously filed)
3.3 Articles of Amendment dated November 18, 1993
(previously filed)
4.1 Form of certificate representing Dynatronics Laser
Corporation common shares, no par value. 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.
4.2 Amended and Restated 1992 Stock Option Plan, effective
November 28, 1996 (previously filed)
10.2 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)
23.1 Consent of Tanner LC
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)
Item 14. Principal Accountants Fees and Services
---------------------------------------
The Company hereby incorporates by reference into and makes a part of
this report the information and disclosure set forth under the heading "Auditor
Fees" contained in the Company's definitive proxy statement for its 2005 Annual
Meeting of Shareholders, to be sent to shareholders of the Company subsequent to
the filing of this report on Form 10-KSB.
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNATRONICS CORPORATION
By /s/ Kelvyn H. Cullimore, Jr.
------------------------------------
Kelvyn H. Cullimore, Jr.
Chief Executive Officer and President
Date: September 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Kelvyn H. Cullimore, Jr. Chairman, President, CEO September 27, 2005
------------------------------- (Principal Executive
Kelvyn H. Cullimore, Jr. Officer)
/s/ Terry M. Atkinson, CPA Chief Financial Officer September 27, 2005
------------------------------- (Principal Financial
Terry M. Atkinson, CPA Officer and Principal
Accounting Officer)
/s/ Larry K. Beardall Director, Executive September 27, 2005
------------------------------- Vice President
Larry K. Beardall
/s/ E. Keith Hansen, MD Director September 27, 2005
-------------------------------
E. Keith Hansen, M.D.
/s/ Howard L. Edwards Director September 27, 2005
-------------------------------
Howard L. Edwards
Director September 27, 2005
-------------------------------
Val J. Christensen
/s/ Joseph H. Barton Director September 27, 2005
-------------------------------
Joseph H. Barton
20