UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
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(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number)
The number of shares outstanding of the issuer's common stock, no par value, as
of February 10, 2003 is 8,842,355.
Transitional Small Business Disclosure Format (Check one): Yes No X
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DYNATRONICS CORPORATION
FORM 10-QSB
DECEMBER 31, 2003
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Unaudited Balance Sheets
December 31, 2003 and June 30, 2003............................................1
Unaudited Statements of Income
Three Months Ended December 31, 2003 and 2002..................................2
Unaudited Statements of Cash Flows
Six Months Ended December 31, 2003 and 2002....................................3
Notes to Unaudited Financial Statements........................................4
Item 2. Management's Discussion and Analysis or Plan of Operation..............9
Item 3. Controls and Procedures...............................................15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 6. Exhibits and Report on Form 8-K......................................16
PART I. FINANCIAL INFORMATION
DYNATRONICS CORPORATION
Balance Sheets
December 31, June 30,
2003 2003
Assets (Unaudited) (Audited)
-------------- --------------
Current assets:
Cash $ 325,341 404,276
Trade accounts receivable, less allowance
for doubtful accounts of $192,540
December 31, 2003 and $145,130 at
June 30, 2003 3,944,771 2,283,071
Other receivables 121,456 193,713
Inventories 4,335,260 4,644,489
Prepaid expenses 443,897 480,697
Prepaid income taxes - 105,804
Deferred tax asset-current 312,547 312,547
-------------- -------------
Total current assets 9,483,272 8,424,597
Property and equipment, net 3,065,419 3,202,553
Goodwill, net of accumulated amortization of
$649,792 at December 31, 2003 and at
June 30, 2003 789,422 789,422
Other assets 303,715 296,457
-------------- -------------
$ 13,641,828 12,713,029
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 211,800 198,606
Line of credit 1,390,526 1,382,095
Accounts payable 905,449 597,111
Accrued expenses 643,734 540,258
Accrued payroll and benefit expenses 347,062 189,807
Income tax payable 71,550 -
-------------- -------------
Total current liabilities 3,570,121 2,907,877
Long-term debt, excluding current installments 1,652,574 1,754,066
Deferred compensation 318,338 305,654
Deferred tax liability - noncurrent 144,059 144,059
-------------- -------------
Total liabilities 5,685,092 5,111,656
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Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 8,819,079
shares at December 31, 2003 and
8,869,335 shares at June 30, 2003 2,418,987 2,478,981
Retained earnings 5,537,749 5,122,392
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Total stockholders' equity 7,956,736 7,601,373
-------------- -------------
$ 13,641,828 12,713,029
============== =============
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2003 2002 2003 2002
------------- ------------ ------------ -----------
Net sales $ 5,283,460 4,344,631 10,316,875 8,640,351
Cost of sales 3,199,056 2,753,683 6,304,740 5,383,802
------------- ------------ ------------ -----------
Gross profit 2,084,404 1,590,948 4,012,135 3,256,549
Selling, general, and administrative expenses 1,358,883 1,227,316 2,700,318 2,461,732
Research and development expenses 273,147 242,023 561,118 454,083
------------- ------------ ------------ -----------
Operating income 452,374 121,609 750,699 340,734
------------- ------------ ------------ -----------
Other income (expense):
Interest income 3,641 856 7,957 866
Interest expense (44,648) (43,794) (87,999) (89,670)
Other income, net 1,349 1,827 3,154 4,610
------------- ------------ ------------ -----------
Total other income (expense) (39,658) (41,111) (76,888) (84,194)
------------- ------------ ------------ -----------
Income before income taxes 412,716 80,498 673,811 256,540
Income tax expense 157,932 30,992 258,454 98,768
------------- ------------ ------------ -----------
Net income $ 254,784 49,506 415,357 157,772
============= ============ ============ ===========
Basic and diluted net income
per common share $ 0.03 .01 0.05 0.02
============= ============ ============ ===========
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,805,369 8,869,335 8,831,140 8,869,335
Diluted 9,121,419 8,869,335 9,013,129 8,869,335
2
See accompanying notes to condensed financial statements.
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2003 2002
------------- ------------
Cash flows from operating activities:
Net income $ 415,357 157,772
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization of property
and equipment 157,052 167,023
Other amortization 3,662 3,662
Provision for doubtful accounts 48,000 36,000
Provision for inventory obsolescence 138,000 120,000
Provision for warranty reserve 75,419 105,664
Provision for deferred compensation 12,684 11,712
Change in operating assets and liabilities:
Receivables (1,637,443) (52,722)
Inventories 171,229 (368,901)
Prepaid expenses and other assets 25,880 (118,529)
Accounts payable and accrued expenses 493,650 443,617
Income taxes payable 177,354 (5,799)
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Net cash provided by operating
activities 80,844 499,499
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Cash flows from investing activities:
Capital expenditures (19,918) (140,620)
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Cash flows from financing activities:
Principal payments on long-term debt (88,298) (110,328)
Net change in line of credit 8,431 (432,300)
Purchase and retirement of common stock (89,000) -
Proceeds from sale of common stock 29,006 -
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Net cash used in financing activities (139,861) (542,628)
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Net decrease in cash and cash equivalents (78,935) (183,749)
Cash at beginning of period 404,276 396,803
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Cash at end of period $ 325,341 213,054
============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 87,434 94,091
Cash paid for income taxes 181,100 104,500
3
See accompanying notes to financial statements.
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 2003 and for the three and six
months ended December 31, 2003 and 2002 were prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all necessary adjustments, which consist only of normal recurring adjustments,
to the financial statements have been made to present fairly the financial
position and results of operations and cash flows. The results of operations for
the respective periods presented are not necessarily indicative of the results
for the respective complete years. The Company has previously filed with the SEC
an annual report on Form 10-KSB which included audited financial statements for
the years ended June 30, 2003 and 2002. It is suggested that the financial
statements contained in this filing be read in conjunction with the statements
and notes thereto contained in the Company's 10-KSB.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three and six months
ended December 31, 2003 and 2002 is summarized as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------- ------------ ------------- -------------
Basic weighted average number of common shares
outstanding during the period 8,805,369 8,869,335 8,831,140 8,869,335
Weighted average number of dilutive common stock
options outstanding during the period 316,050 - 181,989 -
------------- ------------ ------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during the
period 9,121,419 8,869,335 9,013,129 8,869,335
============= ============ ============= =============
4
NOTE 3. EMPLOYEE STOCK COMPENSATION
The Company employs the footnote disclosure provisions of Statement of Financial
Accounting Standard (" SFAS") No. 123, Accounting for Stock-Based Compensation
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS Statement No. 123. SFAS No. 123 encourages
entities to adopt a fair-value-based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to apply the provisions of APB 25, accordingly, no
compensation expense has been recognized for the stock option plan. Had
compensation expense for the company's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the company's results of operations would have been reduced to the
pro forma amounts indicated below:
Three months Three months
ended ended
December 31, December 31,
2003 2002
--------------- ---------------
Net income as reported $ 254,784 49,506
Less: pro forma adjustment for stock based
Compensation, net of income tax (29,493) (9,547)
--------------- ---------------
Pro forma net income $ 225,291 39,959
Basic net income per share:
As reported 0.03 0.01
Effect of pro forma adjustment - -
Pro forma 0.03 0.01
Diluted net income per share:
As reported 0.03 0.01
Effect of pro forma adjustment - -
Pro forma 0.03 0.01
Six months Six months
ended ended
December 31, December 31,
2003 2002
--------------- --------------
Net income as reported $ 415,357 157,772
Less: pro forma adjustment for stock based
Compensation, net of income tax (58,617) (19,310)
--------------- --------------
Pro forma net income $ 356,740 138,462
Basic net income per share:
As reported 0.05 0.02
Effect of pro forma adjustment (0.01) -
Pro forma 0.04 0.02
Diluted net income per share:
As reported 0.05 0.02
Effect of pro forma adjustment (0.01) -
Pro forma 0.04 0.02
The per share weighted-average fair value of stock options granted for the three
months ended December 31, 2003 and 2002 was $1.55 and $.62 per share, and for
the six months ended December 31, 2003 and 2002 was $.98 and $.65 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
5
Three months ended Three months ended
December 31, 2003 December 30, 2002
----------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.72% 3.58%
Expected volatility 86% 89%
Expected life 7 years 7 years
Six months ended Six months ended
December 31, 2003 December 30, 2002
----------------------------------------------
Expected dividend yield 0% 0%
Risk-free interest rate 3.40 - 3.72% 3.49 - 4.42%
Expected volatility 82-86% 89-91%
Expected life 5 & 7 years 5 & 7 years
NOTE 4. COMPREHENSIVE INCOME
For the periods ended December 31, 2003 and 2002, comprehensive income was equal
to the net income as presented in the accompanying condensed statements of
income.
NOTE 5. INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2003 2003
------------------- -----------------
Raw Material $ 2,952,002 $ 2,487,435
Finished Goods 1,812,170 2,446,990
Inventory Reserve (428,912) (289,936)
---------------- ------------------
$ 4,335,260 $ 4,644,489
================ ==================
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, 2003 June 30, 2003
----------------- ------------------
Land $ 354,743 $ 354,743
Buildings 2,898,819 2,897,447
Machinery and equipment 1,737,053 1,728,106
Office equipment 424,948 415,349
Vehicles 65,487 65,487
---------------- ------------------
5,481,050 5,461,132
Less accumulated depreciation
and amortization (2,415,631) (2,258,579)
---------------- ------------------
$ 3,065,419 $ 3,202,553
================ ==================
6
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of
July 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. Management is primarily responsible for the SFAS No.
142 valuation determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation including:
transaction value, market value, and income value methods to arrive at a
reasonable estimate of the fair value of the Company in comparison to its book
value. The Company has determined it has one reporting unit. As of July 1, 2002,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was not an indication of impairment upon adoption of SFAS No. 142.
Management performed its annual impairment assessment during the Company's
fourth quarter ending June 30, 2003 and determined there was not an indication
of impairment. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Goodwill. As of December 31, 2003, the Company had goodwill, net, of $789,422
from the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and
the exchange of Dynatronics Laser Corporation common stock for a minority
interest in Dynatronics Marketing Corporation on June 30, 1983. Through June 30,
2002, goodwill from these transactions was amortized over a period of 15 and 30
years, respectively, on a straight-line basis.
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
December 31, 2003 June 30, 2003
--------------------- ---------------------
Gross carrying amount $ 73,240 $ 73,240
Accumulated amortization (24,414) (20,752)
--------------------- ---------------------
Net carrying amount $ 48,826 $ 52,488
===================== =====================
Amortization expense associated with the license agreement was $1,831 and
$3,662, respectively, for the three and six months ended for both December 31,
2003 and 2002. Estimated amortization expense for the existing license agreement
is expected to be $7,324 for each of the fiscal years ending June 30, 2004
through June 30, 2010. The license agreement is included in other assets.
NOTE 8. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, as of December 31, 2002. The Company
accrues the estimated costs to be incurred in connection with its product
warranty programs as products are sold based on historical warranty rates.
Product warranty periods range from ninety days to five years. A reconciliation
of the changes in the warranty liability is as follows:
Three months Three months
ended ended
December 31, December 31,
2003 2002
------------------ -------------
Beginning product warranty reserve balance $ 166,000 $ 142,000
Warranty repairs (37,003) (46,254)
Warranties issued 54,945 59,722
Changes in estimated warranty costs (11,942) (7,468)
---------------- -------------
Ending product warranty liability balance $ 172,000 $ 148,000
================ =============
7
Six months Six months
ended ended
December 31, December 31,
2003 2002
--------------- ---------------
Beginning product warranty reserve balance $ 160,000 $ 136,000
Warranty repairs (63,419) (93,664)
Warranties issued 107,289 118,771
Changes in estimated warranty costs (31,870) (13,107)
---------------- ----------------
Ending product warranty liability balance $ 172,000 $ 148,000
================ ================
NOTE 9. COMMON STOCK.
During the six months ended December 31, 2003 the Company redeemed 77,400 shares
of common stock at a cost of $89,000.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
---------------------
The Company's fiscal year ends on June 30th. This report covers the
second quarter and six months ended December 31, 2003, for the Company's fiscal
year ending June 30, 2004.
Net Sales and Net Income
During the quarter ended December 31, 2003, net sales increased 22% to
$5,283,460 compared to $4,344,631 during the same quarter of the previous year.
Net income for the quarter ended December 31, 2003, increased 415% to $254,784,
compared to $49,506 in the same quarter in 2002. Net sales for the six months
ended December 31, 2003, increased 19% to $10,316,875 compared to $8,640,351
during the same period of the previous year. Net income for the six months ended
December 31, 2003, increased 163% to $415,357, compared to $157,772 in the same
quarter in 2002.
Strong demand for the Company's new Solaris product line gave a boost to sales
and profits for the quarter and six months ended December 31, 2003. The Dynatron
Solaris Series is a family of advanced technology combination therapy devices
incorporating seven electrotherapy waveforms, ultrasound therapy or a
combination of both. In addition, each Solaris device offers an optional
infrared light therapy probe. Infrared light therapy is commonly used for
treating muscle and joint pain as well as arthritis pain and stiffness. More
than twenty years of international and domestic clinical studies using various
forms of infrared light therapy makes it one of the most researched applications
in physical medicine. As the only line of combination therapy devices on the
market that includes infrared light therapy, our new Solaris Series products are
rapidly gaining acceptance and popularity in the physical medicine market.
Light therapy is enjoying strong interest not only in the rehabilitation market,
but also in the aesthetic market. In January 2004, the Company introduced a new
light therapy device called Synergie LT for the spa and beauty market. The
Company plans to develop and introduce additional light therapy probes this
summer for both the aesthetic as well as the medical rehabilitation market.
Sales of physical medicine products represented 91% and 86% of total revenues
for the quarters ended December 31, 2003 and 2002, respectively while sales of
aesthetic products accounted for 3% and 7% of total revenues for the quarters
ended December 31, 2003 and 2002, respectively. Chargeable repairs, billable
freight revenue and other miscellaneous revenue accounted for 6% and 7% of total
revenues for each of the quarters ended December 31, 2003 and 2002. The new
Solaris Series products accounted for the majority of the sales increases
reported for the first and second fiscal quarters of 2004.
Gross Profit
During the quarter ended December 31, 2003 total gross profit was $2,084,404 or
39.5% of net sales compared to $1,590,948 or 36.6% of net sales in the quarter
ended December 31, 2002. Gross profit for the six months ended December 31, 2003
was $4,012,135 or 38.9% of net sales compared to $3,256,549 or 37.7% of net
sales in the six months ended December 31, 2002.
The increase in gross margin in both the quarter and six months ended December
31, 2003 reflects the added sales of the new Solaris products which carry an
average combined gross margin in excess of 50%, which is more favorable to the
Company. Due to these higher margins, gross margins as a percentage of net sales
for the quarter ended December 31, 2003, increased by 8% or almost three full
percentage points compared to the prior year period.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the quarter ended
December 31, 2003, were $1,358,883 or 25.7% of net sales compared to $1,227,316
or 28.2% of net sales in the quarter ended December 31, 2002. SG&A expenses for
the six months ended December 31, 2003, were $2,700,318 or 26.2% of net sales
compared to $2,461,732 or 28.5% of net sales in the quarter ended December 31,
2002. SG&A expense as a percentage of total sales decreased 2.5% and 2.3% for
the quarter and six months ended December 31, 2003. Total SG&A expenses for the
9
quarter ended December 31, 2003 increased by $131,567 or 10.7%. The material
components of this increase were approximately $117,000 in selling expenses and
bonuses related to higher sales and profits and $29,800 in higher health
insurance and workers compensation insurance premiums. The increased expenses
were partially offset by lower audit and legal fees.
Research and Development
In order to maintain our leadership role in the physical medicine market, we
recognize the importance of developing state-of-the-art products such as the new
Solaris Series line of therapy devices. Research and development expenses
increased 13% to $273,147 during the quarter ended December 31, 2003, compared
to $242,023 in the quarter ended December 31, 2002. R&D expenses represented
approximately 5.2% and 5.6% of the revenues of the Company in the 2003 and 2002
periods, respectively. Research and development expenses increased 24% to
$561,118 during the six months ended December 31, 2003, compared to $454,083 in
the similar period ended December 31, 2002. R&D costs are expensed as incurred.
Despite completing the initial phase of the Solaris product line, R&D expenses
are expected to continue at approximately their current level through the
remainder of fiscal year 2004 as we continue to work on additional new products
for the future.
Income Tax
Pre-tax profit for the quarter ended December 31, 2003 increased 413% to
$412,716 compared to $80,498 during the same period of the prior year. Pre-tax
profit for the six months ended December 31, 2003 increased 163% to $673,811
compared to $256,540 during the same period of the prior year. Increased sales
and gross margins attributable to the new Solaris line, combined with SG&A costs
increasing only marginally were the primary reasons for increased profits for
the quarter and six months ended December 31, 2003.
Income tax expense for the three months ended December 31, 2003 was $157,932
compared to $30,992 in the three months ended December 31, 2002. The effective
tax rates were 38.3% and 38.5% for the quarters ended December 31, 2003 and
2002, respectively. Income tax expense for the six months ended December 31,
2003 was $258,454 compared to $98,768 in the six months ended December 31, 2002.
The effective tax rates were 38.4% and 38.5% for the six month periods ended
December 31, 2003 and 2002, respectively.
Net Income
Net income for the quarter ended December 31, 2003, increased 415% to $254,784
(approximately $.03 per share), compared to $49,506 (approximately $.01 per
share) in the same quarter in 2002. Net income for the six months ended December
31, 2003, increased 163% to $415,357 (approximately $.05 per share), compared to
$157,772 (approximately $.02 per share) in the same period in 2002. As already
stated, improved sales and margin associated with the new Solaris line were the
primary contributors to the increased profitability. Additionally, the
containment in growth of SG&A and R&D expenses as compared to the growth in
sales also contributed to the increases in net income for the quarter and six
months ended December 31, 2003 over the prior year periods.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves, available
borrowings under its credit line facility, and from cash provided by operations.
The Company had working capital of $5,913,151 at December 31, 2003, inclusive of
the current portion of long-term obligations and credit facilities, as compared
to working capital of $5,516,720 at June 30, 2003.
Accounts Receivable
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the terms extended.
With the introduction of the Solaris product line and the associated increase in
sales of these products, trade accounts receivable, net of allowance for
doubtful accounts, increased over $1,661,700 to $3,944,771 at December 31, 2003
compared to $2,283,071 June 30, 2003. Management anticipates accounts receivable
will likely remain at current levels in future periods due to continuing demand
for the Company's new Solaris Series products and other new products anticipated
for future release.
10
Inventories
Inventories, net of reserves, decreased by $309,229 to $4,335,260 at
December 31, 2003, compared to $4,644,489 at June 30, 2003. This decrease was
primarily the result of increased sales volume during the six months ended
December 31, 2003. Management expects that inventories will fluctuate somewhat
over the course of the current fiscal year as optimum inventory levels are
determined based on ongoing sales demand for Solaris and other new products.
Prepaid Expenses
Prepaid expenses decreased by $36,800 to $443,897 at December 31, 2003 compared
to $480,697 at June 30, 2003 due to a reduction in packaging and freight
prepayments.
Goodwill
Goodwill at December 31, 2003 and June 30, 2003 totaled $789,422. Beginning July
1, 2002, the Company adopted the provisions of SFAS No. 142. In compliance with
FAS 142 Goodwill and other Intangible Assets, 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. As of July 1, 2002
and June 30, 2003, 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, 2003. Management is primarily responsible for the FAS 142
valuation determination and performed the annual impairment assessment during
the Company's fourth quarter.
Accounts Payable
Accounts payable increased by $308,338 to $905,449 at December 31, 2003 compared
to $597,111 at June 30, 2003. The fluctuation in accounts payable is a result of
the timing of our weekly payments to suppliers and the timing of purchases for
Solaris components. All accounts payable are within term. We continue to take
advantage of available early payment discounts when offered.
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program. The
Board of Directors authorized the expenditure of up to $500,000 to purchase the
Company's common stock on the open market pursuant to regulatory restrictions
governing such repurchases. The decision to initiate the program was based on
management's confidence in the Company's future growth - a confidence bolstered
in part by the introduction of the Solaris line - combined with a languishing
stock price deemed to be undervalued. The Company has purchased $89,000 of stock
thus far leaving over $400,000 of authorized funds for future stock repurchases.
During the six months ended December 31, 2003, the company repurchased 77,400
shares; 1,200 shares were purchased in the quarter then ended at an average
price of $1.28 per share. 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.
Cash
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 facility with a commercial bank
in the amount of $4,500,000. The outstanding balance on our line of credit
facility was approximately $1.39 million at December 31, 2003 compared to $1.38
million at June 30, 2003. Interest on the line of credit is based on the bank's
prime rate, which at December 31, 2003, equaled 4.00%. 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. The line of credit agreement is renewable annually on December 1st
and includes covenants requiring the Company to maintain certain financial
ratios. As of December 31, 2003, we were in compliance with all loan covenants.
The line of credit agreement was renewed in December 2003 on these same terms.
11
The current ratio at December 31, 2003 was 2.7 to 1 compared to 2.9 to 1 at June
30, 2003. Current assets represent 70% of total assets at December 31, 2003.
Debt
Long-term debt excluding current installments totaled $1,652,574 at December 31,
2003, compared to $1,754,066 at June 30, 2003. 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
$1.7 million with monthly principal and interest payments of $21,409.
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 any risks related
to these policies on our business operations are discussed in Management's
Discussion and Analysis or Plan of Operations where such policies affect our
reported and expected financial results. For a detailed discussion of the
application of these and other accounting policies, see Notes to the Financial
Statements contained in the 10-KSB report for the period ended June 30, 2003. In
all material respects, management believes that the accounting principles that
are utilized conform to generally accepted accounting principles in the United
States of America.
The preparation of this quarterly report on Form 10-QSB requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are stated 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; and
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 December 31,
2003 and June 30, 2003, our inventory valuation reserve balance, which
established a new cost basis, was $428,912 and $289,936, respectively and our
inventory balance was $4,335,260 and $4,644,489 net of reserves, respectively.
12
Revenue Recognition
Our products are sold primarily through a network of independent distributors.
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.
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 $3,944,771 and $2,283,071, net of allowance for doubtful accounts of
$192,540 and $145,130, at December 31, 2003 and June 30, 2003, respectively.
Business Plan
-------------
Over the past five years, annual net sales have grown from $12.6 million in
fiscal year 1998 to $16.9 million in fiscal year 2003. During fiscal year 2004,
we will continue to focus our efforts on fueling and sustaining future growth
through the development of new products for the rehabilitation and aesthetics
markets while, at the same time, strengthening our channels of distribution and
improving operating efficiencies.
As part of our ongoing R&D campaign, in September 2003 we introduced the new
Solaris Series line of advanced technology electrotherapy/ultrasound products
featuring an infrared light therapy probe. This new product line has quickly
become our top selling line. During fiscal year 2004, we expect to submit an
application to FDA for clearance of a low-power laser accessory probe to the
Solaris Series products. Other light probes will be developed for Solaris in the
future as market needs are identified.
The Dynatron Solaris 701 device is scheduled to be introduced during the last
six months of fiscal year 2004. This device will complete the family of
combination therapy devices that make up the Solaris Series. The 701 will be a
combination device featuring ultrasound and infrared light therapy.
R&D efforts have not been limited to high tech products. During fiscal year
2003, Dynatronics introduced a new, more price-competitive powered treatment
table. Demand for this table has remained high since its introduction. At least
two more powered treatment table models are scheduled for introduction in the
next twelve months.
The introduction of a new product catalogue scheduled for March 2004, will
strongly support our strategic goal to increase penetration of the
rehabilitation market. It will be an important sales tool for our nationwide
network of dealers and will provide important information about the new Solaris
product line as well as many other new products from other manufacturers being
incorporated into the catalogue.
Going forward, we will continue to seek to strengthen our manufacturing
capabilities with the goal of improving margins and gaining greater pricing
advantages over competitors. To that end, some products previously purchased
from other manufacturers are being converted to in-house manufacturing. Other
products are being sourced from overseas manufacturers or moved to more
competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. In July 2002, our ISO 9001 certification was renewed for our
Salt Lake City operation, where all electrotherapy, ultrasound, STS devices,
light therapy and Synergie products are manufactured. With this designation, we
can market products manufactured in this facility in any country that recognizes
the CE Mark. We are now working to establish effective distribution of these
products in the European Community. The European version of the Solaris Series
products will include an additional electrotherapy waveform known as Diadynamic
that is popular in Europe. Combining this feature with the availability of light
therapy products in combination with traditional electrotherapy and ultrasound
modalities positions the Solaris devices for greater acceptance in the European
markets than its predecessor devices. It is expected that these attractive
features will make foreign distribution channels more accessible.
13
We continue efforts to promote our line of aesthetic products. In January 2004,
we introduced the Synergie LT device, an infrared light therapy unit designed
specifically for aesthetic applications. Interest in light therapy applications
is growing in the aesthetics market. The introduction of the Synergie LT device
is calculated to capitalize on that interest and to position 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 R&D
effort since the products have already been developed for the physical medicine
markets.
Over the past two years, we have undertaken to improve the appearance and
application of our corporate website and are researching ways to apply
electronic media and Internet solutions to better serve customer needs, access
new business opportunities, reduce cost of operations, and stay technologically
current in the way business is conducted. Our website may be viewed at
www.dynatronics.com. This reference to our website is not intended to
incorporate the contents of the website into or as a part of this report.
Based on these strategic initiatives, we are focusing our resources in the
following areas:
o Increasing our share of the therapy device market by further
promoting and expanding the new line of Solaris products.
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of several more new products over the coming
year.
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 Applying e-commerce solutions to improving overall performance.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Cautionary Statement Concerning Forward-Looking Statements
----------------------------------------------------------
The statements contained in this report on Form 10-QSB, particularly this
Management's Discussion and Analysis, that are not purely historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act. These statements refer to our expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future. They
may be identified by the use of the words or phrases "believes," "expects,"
"anticipates," "should," "plans," "estimates," "intends," and "potential," among
others. Forward-looking statements include, but are not limited to, statements
contained in Management's Discussion and Analysis or Plan of Operation regarding
product development, clinical results, market acceptance, financial performance,
revenue and expense levels in the future and the sufficiency of its existing
assets to fund future operations and capital spending needs. Actual results
could differ materially from the anticipated results or other expectations
expressed in such forward-looking statements for the reasons detailed in our
Annual Report on Form 10-KSB under the headings "Description of Business" and
"Risk Factors." The fact that some of the risk factors may be the same or
similar to past reports filed with the Securities and Exchange Commission means
only that the risks are present in multiple periods. We believe that many of the
risks detailed here and in our other SEC filings are part of doing business in
the industry in which we operate and compete and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
14
o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line, Dynatron STS
products, and the new Solaris infrared light therapy products;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The potential continued spread of the SARS outbreak which may
affect overseas sales as well as overseas manufacturing;
o Continued terrorist attacks on U.S. interests and businesses; and
o The ability to obtain required financing to meet changes or other
risks described above.
Item 3. Controls and Procedures
Based on their evaluation, as of December 31, 2003, our Chief Executive Officer
and Controller have concluded that our disclosure controls and procedures (as
defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended) are effective. There have been no significant changes in
internal controls 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.
15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on November 25, 2003, the
shareholders of the Company voted on the following proposals:
Proposal 1 - To elect six directors, each to serve until the next
annual meeting of shareholders and until his successor is elected and shall have
qualified. Those nominated were all currently serving as directors of the
Company, i.e., Kelvyn H. Cullimore, Kelvyn H. Cullimore, Jr., Larry K. Beardall,
E. Keith Hansen MD, Howard L. Edwards and Val J. Christensen.
Proposal 2 - To approve the Audit Committee's selection of Tanner & Co.
as the company's independent auditors for the year ending June 30, 2004.
Each of the proposals was approved by the requisite majority of the
shares cast at the annual meeting. The following table summarizes the voting
results:
For Against Abstain
--- ------- -------
Proposal 1:
-----------
Mr. Cullimore 7,956,528 7,130 67,090
Mr. Cullimore, Jr. 7,959,028 4,630 67,090
Mr. Beardall 7,960,558 3,100 67,090
Dr. Hansen 7,962,658 1,000 67,090
Mr. Christensen 7,961,958 1,700 67,090
Mr. Edwards 7,962,058 1,600 67,090
For Against Abstain
--- ------- -------
Proposal 2:
-----------
7,941,688 6,700 15,270
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation and Bylaws of Dynatronics Laser Corporation.
Incorporated by reference to a Registration Statement on Form S-1 (No.
2-85045) filed with the Securities and Exchange Commission and effective
November 2, 1984, as amended by Articles of Amendment dated November 18,
1993.
3.2 Articles of Amendment dated November 21, 1988 (previously filed).
10.1 Employment contract with Kelvyn H. Cullimore, Jr. (previously filed)
10.2 Employment contract with Larry K. Beardall (previously filed)
10.3 Loan Agreement with Zion Bank (previously filed) 10.4 Settlement Agreement
dated March 29, 2000 with Kelvyn Cullimore, Sr. (previously filed)
10.5 Amended Loan Agreement with Zions Bank (December 2003)
31.1 Certification of President and Chief Executive Officer under Section 302
of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002
32 Certification under Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
-------------------
On October 10, 2003, the Company filed a Current Report on Form 8-K to report a
change of auditor under Item 4 of such form.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 2/17/04 /s/ Kelvyn H. Cullimore, Jr.
--------- --------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
and Chief Financial Officer
(Duly Authorized Officer)
Date 2/17/04 /s/ Terry M. Atkinson, CPA
--------- --------------------------------------
Terry M. Atkinson, CPA
Controller
17