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, 2006.
[ ] 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
-------------------------------
(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
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
The issuer's revenues for the fiscal year ended June 30, 2006 were $19.5
million. The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the issuer was approximately $10.1 million as of
September 18, 2006, based on the average bid and ask price on that date.
As of September 18, 2005, there were 9,054,566 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
TABLE OF CONTENTS
PART I
Item 1. Description of Business..........................................1
Item 2. Description of Property..........................................7
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.............................17
Item 8A. Controls and Procedures.........................................17
Item 8B. Other Information...............................................17
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act.............................................17
Item 10. Executive Compensation..........................................17
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..................17
Item 12. Certain Relationships and Related Transactions..................17
Item 13. Exhibits........................................................18
Item 14. Principal Accountants Fees and Services.........................19
Signatures ................................................................20
Certifications ..............................................................
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
-----------------------------------
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.
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 15% 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
2006 and 2005 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 2006 and 2005
represented approximately 96% of the Company's aesthetic product sales each year
with the balance 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.
The Company's primary product line, the Dynatron Solaris(TM) Series,
consists of five combination therapy devices. 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. The light probes used with our current devices are
several hundred times more powerful than our first laser probes introduced in
the 1980s. The increased power allows treatment times to be dramatically
reduced.
During fiscal year 2006, the Company introduced the Dynatron Xp
Infrared Light Pad. With the introduction of the Dynatron Xp, practitioners
gained a tool that allows unattended therapy of large segments of the body such
as the back, thigh or shoulder. Two new probes were introduced during the year -
one with twice the power of our previous infrared light probe and the other with
a combination infrared and blue wavelength output. Other new products introduced
during fiscal year 2006 include the Dynatron 702 light therapy device, the
Dynatron XPb Booster Box, the iBox iontophoresis device and the DT4X motorized
therapy table.
In August 2006, the Company began shipping the Dynatron X3, a
stand-alone light therapy unit capable of operating two Xp infrared light pads,
or one infrared light therapy probe and one Xp light pad simultaneously.
In September 2006, the Company introduced the DX2 combination traction
and light therapy device. 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, makes 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, in December 2006.
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
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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 can be
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 15 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, as
well as the new Dynatron 702 and Dynatron X3 devices, feature infrared light
therapy technology. These units are capable of powering various cluster probes
at different wavelengths for treating a variety of medical conditions including
pain and stiffness associated with arthritis, as well as muscle and joint pain.
The benefits of light therapy have been documented by thousands of research
studies published over the past four decades. In fiscal year 2006, the Company
introduced the Dynatron Xp light pad for treating larger areas of the body via
unattended infrared light therapy.
Iontophoresis - Iontophoresis uses electrical current to transdermally
deliver drugs such as lidocaine for localized treatment of inflammation without
the use of needles. In fiscal year 2006, the Company developed its own
proprietary iontophoresis device - the Dynatron iBox - which is capable of
delivering two treatments simultaneously. In addition, the Company began
distribution in September 2006 of a line of proprietary iontophoresis electrodes
with the brand name of Dynatron Ion electrodes. These electrodes replace the
line of electrodes the Company previously distributed for Life-Tech and Naimco.
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
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 Electrotherapy for Chronic Pain
Dynatron(R) STS Rx Electrotherapy for Chronic Pain
Dynatron(R) STSi Multi-modality Electrotherapy for
Chronic Pain
Dynatron Solaris(TM) 701 Ultrasound with Infrared Light
Therapy
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Dynatron 702 Infrared Light Therapy
Dynatron Solaris(TM) 705 Electrotherapy with Infrared Light
Therapy
Dynatron Solaris(TM) 706 Electrotherapy with Infrared Light
Therapy
Dynatron Solaris(TM) 708 Combination Electrotherapy/Ultrasound
with Infrared Light Therapy
Dynatron Solaris(TM) 709 Combination Electrotherapy/
Ultrasound with Infrared Light
Therapy
Dynatron Solaris(TM) 880 Accessory Infrared Light Probe
Dynatron Solaris(TM) 890 Accessory Infrared Laser Light Probe
Dynatron X3 Infrared Light Therapy
DX2 Combination Traction with Infrared
Light Therapy
Dynatron iBox Iontophoresis
Dynatron TX900 Traction Therapy
_____________________
Dynatron(R) is a registered trademark (#1280629) owned by Dynatronics
** "50 Series Plus" Product Line
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. We continually seek to update our line of
manufactured and distributed medical supplies and soft goods.
Treatment Tables and Rehabilitation Equipment - Dynatronics
manufactures and distributes motorized and manually operated physical therapy
treatment tables, rehabilitation parallel bars, and other specialty
rehabilitation products.
Aesthetic Products
In July 1998, Dynatronics began shipping its 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 reducing 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
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 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 2006 and 2005.
3
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. Two additional patent applications pertaining to the Company's
infrared light therapy technology and combination traction/light therapy
technology have been filed with the U.S. Patent and Trademark Office and are
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, Utah and Chattanooga,
Tennessee 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 2006 and
2005.
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.
Customers and Markets
Dynatronics' products are sold to a network of over 450 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 a few
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 2006 or 2005.
Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) totaled $1,040,930 in
fiscal year 2006 compared to $1,035,686 in fiscal year 2005. The Company is
working to establish 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 infrared
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.
4
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, Erchonia, Anodyne and Medex, among others.
These competitors offer units that are not as powerful as our units. We are
aware of only one other competitor, Encore Medical, that 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, Sammons Preston (a
division of Patterson Dental), and Meyer Distributing.
Iontophoresis. Competition in the iontophoresis market includes Iomed,
Inc., Encore Medical (EMPI division), Birch Point Medical, Vyteris and Naimco.
Iomed and Encore Medical enjoy the largest market share. 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 our new Dynatron iBox iontophoresis device will help us 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, Sammons Preston (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. Other
competitors include Cynosure, Inc., Diamond Systems, Palomar Medical and
Durmafirm. 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' aesthetic
massage equipment is priced lower than competitor's units, providing a
significant advantage in the marketplace. 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. Powered by the Synergie AMS device,
the Synergie Peel is one of the most powerful units on the market.
Competitors in the light therapy segment of the aesthetic market
include Revitalite, Silhouette Tone, Photo Actif, and DermaPulse. We believe the
Synergie LT device is the most powerful of all the units on the market. It
features a computerized dosage calculation system and is competitively priced.
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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
qualified to market these products throughout the European Union and in other
countries where CE Mark Certification and ISO 13485 certification are
recognized.
Research and Development
In fiscal years 2006 and 2005, Dynatronics focused its resources on an
aggressive R&D campaign to develop several new products. Total R&D expenditures
for 2006 were a record $1,756,281, compared to $1,302,722 in 2005. R&D expenses
represented approximately 9.0% and 6.4% of the revenues of the Company in 2006
and 2005, respectively. Substantially all of the research and development
expenditures during both years 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 U.S. Food and Drug Administration ("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
6
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 2006 was
$3,066. The fee per submission for new products in fiscal year 2007 will be
approximately $3,326.
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.
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, 2006, we had a total of 141 full-time employees and 10
part-time employees, compared to 132 full-time and six part-time employees at
June 30, 2005.
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
$16,042. The mortgages mature in 2008 and 2013. The Company also owns a 53,200
sq. ft. manufacturing facility in Ooltewah, Tennessee, and accompanying
undeveloped acreage for future expansion subject to a mortgage requiring monthly
payments of $13,278 and maturing in 2021. During fiscal year 2006, the Company
built a 10,000 sq. ft. addition to its Tennessee facility to expand its
manufacturing and warehouse 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.
7
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 2006.
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 Capital 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,
2006 2005
---- ----
High Low High Low
---- --- ---- ---
1st Quarter (July-September) $2.02 $1.55 $2.42 $1.30
2nd Quarter (October-December) $1.70 $1.32 $2.15 $1.40
3rd Quarter (January-March) $1.76 $1.36 $2.82 $1.59
4th Quarter (April-June) $1.75 $1.12 $2.24 $1.53
Holders. As of September 18, 2006, the approximate number of common
stock shareholders of record was 440. 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 2006, 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 236,374 shares
with an average exercise price of $1.49 per share. In fiscal year 2005,
Dynatronics granted 564,924 stock options for shares of common stock at an
average exercise price of $1.70 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. No shares were
repurchased during fiscal year 2005. During fiscal year 2006, the Company
purchased 46,393 shares for $59,449, leaving over $350,000 of original
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.
8
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. We manufacture
approximately 20% of the physical medicine products and 15% 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
2006 and 2005 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 2006 and 2005
represented approximately 96% of the Company's aesthetic product sales each year
with the balance sold by the Company as a distributor. The majority of the
Company's revenues are generated from the sale of its manufactured products
because demand for these products is much greater and because the average
selling price of our manufactured products is significantly higher than
distributed products.
Sales of all physical medicine products represented 87% of total
revenues in 2006 compared to 85% in 2005, while sales of aesthetic products
accounted for 7% of total revenues in 2006 and 9% of total revenues in 2005.
Chargeable repairs, billable freight revenue and other miscellaneous revenue
accounted for 6% of total revenues in both 2006 and 2005.
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are regulated by both 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, 2006 and 2005 are
included with this report.
Selected Financial Data
Fiscal Year Ended June 30
2006 2005 2004 2003 2002 2001
Net Sales $ 19,513,136 $ 20,404,368 $ 20,587,273 $ 16,896,992 $ 17,133,953 $ 17,460,789
Net Income $ 194,031 $ 728,816 $ 883,300 $ 24,799 $ 316,101 $ 334,179
Net Income
per share (diluted) $ .02 $ .08 $ .10 $ .00 $ .04 $ .04
Working Capital $ 7,390,147 $ 7,043,854 $ 6,300,582 $ 5,516,720 $ 5,484,167 $ 4,971,946
Total Assets $ 14,523,655 $ 13,459,723 $ 14,272,579 $ 12,713,029 $ 12,508,202 $ 13,560,347
Long-term Obligations $ 2,637,263 $ 1,914,490 $ 2,034,854 $ 2,203,779 $ 2,331,698 $ 2,174,348
Fiscal Year 2006 Compared to Fiscal Year 2005
---------------------------------------------
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
Total net sales for the year ended June 30, 2006 were $19,513,136,
compared to $20,404,368 during fiscal year 2005. The majority of the reduction
in sales in fiscal year 2006 was due to approximately $629,600 of lower sales of
the Company's Synergie aesthetic products. Reduced sales of aesthetic equipment
are primarily attributable to certain dealers deciding to drop high dollar
9
capital equipment from their product offerings. Strategies are being implemented
with the intention of restoring these lost sales, although there can be no
assurance that the strategies will be successful. In addition, we had
approximately $458,600 in lower sales of older "50 Series" products.
Approximately $469,000 in higher sales of traction equipment and metal treatment
tables during 2006 partially offset the decrease in overall sales. The increase
in sales of traction equipment and metal treatment tables was due to the new DX9
traction and light therapy package which was introduced during fiscal year 2006.
This package combines the Company's TX900 traction unit with the new Dynatron
702 Infrared Light Therapy device and the new DT4X motorized traction therapy
table.
Gross Profit
During fiscal year 2006, gross profit was $7,291,761 or 37.4% of net
sales compared to $8,299,289 or 40.7% of net sales in 2005. The decrease in
gross margin in 2006 reflects lower sales of high-margin Synergie devices and
legacy "50 Series" products, which carry average gross margins in excess of 50%.
In addition, a shift in product mix toward sales of lower margin medical supply
products, traction equipment and treatment tables contributed to the decrease in
gross margin as a percent of sales.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the year ended
June 30, 2006 were $5,239,462 or 26.9% of net sales compared to $5,748,529 or
28.2% of net sales in 2005. Total SG&A expenses in 2006 decreased by $509,067 or
8.9% compared to 2005. The primary components affecting SG&A expenses in fiscal
year 2006 compared to 2005 were:
o Approximately $161,000 in lower labor costs.
o Approximately $187,600 in lower selling expenses.
o Approximately $247,500 in lower incentive compensation expenses.
o Partially offsetting the reduction in SG&A expenses were $42,000
in higher health insurance premiums.
Research and Development
In fiscal year 2006, we invested heavily in R&D in order to develop our
next-generation products. We spent a company record $1,756,281 developing new,
state-of-the-art equipment during the year. This compares to $1,302,722 spent in
fiscal year 2005. During fiscal year 2006, we increased the size of our
engineering department in order to develop several new products. Among the new
products developed during the year were the Dynatron Xp light pad, the Dynatron
702 light therapy device, the Dynatron iBox iontophoresis device, as well as two
light probes. We also spent time developing the Dynatron X3 and DX2 units, which
were introduced in the first quarter of fiscal 2007 and the T4 and T3 motorized
therapy tables scheduled for introduction in the second quarter of fiscal 2007.
Dynatronics intends to continue to develop several new products in fiscal year
2007 and beyond in order to position the Company for growth. R&D expenses
represented approximately 9.0% and 6.4% of the net sales of the Company in the
2006 and 2005, respectively. R&D costs are expensed as incurred.
Pre-tax profit
Pre-tax profit for the year ended June 30, 2006 was $209,221 compared
to $1,150,856 in 2005. Lower sales and gross profit generated during fiscal year
2006, together with higher R&D costs decreased overall profits during the year.
These factors were partially offset by lower SG&A expenses.
Income Tax
Income tax expense for the year ended June 30, 2006 was $15,190
compared to $422,040 in 2005. The effective tax rate for 2006 was 7.3% compared
to an effective tax rate for 2005 of 36.7%. The income tax accrual rate in
fiscal year 2006 was different than the prior year due to a change in the
valuation allowance for research and development credits and certain other
items.
Net Income
Net income for the year ended June 30, 2006 was $194,031 ($.02 per
share), compared to $728,816 ($.08 per share) in fiscal 2005. The addition of
new R&D personnel and the ramp up in new product development have all added cost
to the past year, but we believe they have also provided a launching pad for
future growth in sales and profits.
10
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 $7,390,147 at June 30, 2006,
inclusive of the current portion of long-term obligations and credit facilities,
as compared to working capital of $7,043,854 at June 30, 2005.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts,
remained constant at $3,022,991 at June 30, 2006 compared to $3,006,315 at June
30, 2005. Management anticipates accounts receivable could increase in future
periods due to the planned introduction of new products in fiscal year 2007
which is 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, 2006 increased $270,467 to
$4,982,990 compared to $4,712,523 at June 30, 2005. Management expects that
inventories will likely be maintained at current levels over the course of the
next fiscal year.
Goodwill
Goodwill at June 30, 2006 and June 30, 2005 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, 2006,
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, 2006. 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 remained relatively constant at $593,016 at June 30,
2006 compared to $605,788 at June 30, 2005. All accounts payable are within
term. We continue to take advantage of available early payment discounts when
offered.
Accrued Expenses
Accrued expenses decreased by $35,809 to $536,131 at June 30, 2006
compared to $571,940 at June 30, 2005. The decrease in accrued expenses is
related primarily to the timing of our June 2005 national dealer meeting and
accrued expenses for sales incentive programs. In 2006, the sales incentive
programs were completed earlier in the year. Our sales incentives are primarily
comprised of special pricing and/or discounts, which are recognized as a
reduction of revenue in the year incurred.
Accrued Payroll & Benefit Expenses
Accrued payroll & benefit expenses decreased by $113,714 to $254,453 at
June 30, 2006 compared to $368,167 at June 30, 2005. The decrease in accrued
payroll & benefit expenses is related to lower accrued bonuses for employees and
officers, and amounts accrued for directors for their services for fiscal year
2006 compared to 2005.
Cash
The Company's cash position was $423,184 at June 30, 2006 compared to
$472,899 at June 30, 2005. 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.
11
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
$577,232 at June 30, 2006 compared to $264,761 at June 30, 2005. Interest on the
line of credit is based on the bank's prime rate, which at June 30, 2006,
equaled 8.25%. 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, 2006, the maximum borrowing
base was calculated to be approximately $3.8 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, 2006, the Company was in
compliance with all loan covenants.
The current ratio was 4.3 to 1 at June 30, 2006 compared to 4.5 to 1 at
June 30, 2005. Current assets represent 66% of total assets at June 30, 2006.
Debt
Long-term debt excluding current installments totaled $2,023,410 at
June 30, 2006 compared to $1,330,325 at June 30, 2005. The Company expanded its
Tennessee facility and refinanced the property during fiscal year 2006.
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 $2.2 million with monthly principal and interest
payments of $29,006.
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.
12
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, 2006 and 2005, our inventory valuation reserve balance, which
established a new cost basis, was $383,492 and $368,167, respectively, and our
inventory balance was $4,982,990 and $4,712,523 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.
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 $3,022,991 and $3,006,315, net of allowance for doubtful accounts of
$244,238 and $252,509, at June 30, 2006 and June 30, 2005, respectively.
Business Plan and Outlook
-------------------------
During fiscal year 2006, we continued to focus our efforts on 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.
During the year, we introduced several new products including the
Dynatron Xp Infrared Light Pad which allows unattended therapy of large segments
of the body such as the back, thigh or shoulder. We also began shipping the
Dynatron iBox, a new transdermal drug delivery device for iontophoresis that we
believe is the most technologically advanced product of its kind on the market.
In addition, we began shipping the Dynatron 702, a stand-alone light therapy
device that simplifies infrared light therapy treatments. We also began offering
a unique package of Dynatron modalities referred to as the DX9 package. This
package includes a Dynatron TX900 traction device, related traction accessories,
a Dynatron 702 Infrared Light Therapy device and the DT4X motorized traction
therapy table. 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, has made our DX9 traction system one
of the most unique products of its kind on the market. It is designed to provide
practitioners a more effective way to relieve pain using combination therapy.
We also introduced two new light probes to the market during fiscal
year 2006 - the Dynatron 880Plus light therapy probe which generates twice the
power output of its predecessor model and the Dynatron 405 combination blue/IR
light probe.
In July 2006, we introduced the Dynatron X3, a unit that offers
multiple light therapy applications due to its ability to operate two Xp
Infrared Light Pads or a light therapy probe with a light pad simultaneously.
This device incorporates touch screen technology for easy interface with the
practitioner.
In September 2006, we introduced the DX2 combination traction and light
therapy device. It is Dynatronics' first proprietary traction device and
incorporates not only touch screen technology, but other unique and proprietary
technology that will facilitate traction and decompression therapy. We believe
it is the only unit on the market that offers traction and infrared light
therapy from the same device. To support this product, we plan to introduce a
new traction therapy table, the Dynatron T4, which we expect will 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. We also plan to introduce
a new 3-section treatment table called the T3 in the quarter ending December 31,
2006.
13
In fiscal year 2006, the Company developed its own proprietary
iontophoresis device - the Dynatron iBox - which is capable of delivering two
treatments simultaneously. In addition, the Company began distribution in
September 2006 of a line of proprietary iontophoresis electrodes with the brand
name of Dynatron Ion electrodes.
Another important part of our strategic plan is the further expansion
of worldwide marketing efforts. Over the past two years, international sales
have been maintained above the $1 million level or approximately 5% of net sales
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 equipment which
includes the Synergie AMS device for dermal massage, the Synergie MDA device for
microdermabrasion, and the Synergie LT device, an infrared light therapy unit
designed specifically for aesthetic applications. In September 2006, we hired a
new, experienced sales manager for the aesthetic department. During fiscal year
2007, we plan to redesign our Synergie product line and make it more attractive
to the international market. We also plan to develop and introduce additional
products for the aesthetic market. 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. We are also considering new methods of distribution
to boost sales that have lagged due to reduced dealer interest in capital
equipment.
Dynatronics continues to look for strategic business opportunities that
would enhance shareholder value. Such opportunities could take the form of
acquisitions, exclusive marketing agreements, mergers or asset acquisitions.
Such opportunities are unique and often difficult to structure. Nevertheless,
Dynatronics considers this an important potential avenue for growth.
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 important new products, both high tech and
commodity, in fiscal year 2007. However, it is expected that the
intensity of R&D investment will diminish somewhat in 2007
compared to 2006.
o Increasing sales of Solaris devices through the 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 products 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:
14
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.
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. In
addition, each patent owned by the Company expires after approximately 17 years
from its date of issuance. 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
15
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that 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.
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.
16
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, 2006
and 2005, 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. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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, 2006 and 2005, 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
September 27, 2006
F-1
DYNATRONICS CORPORATION
Balance Sheets
June 30, 2006 and 2005
Assets 2006 2005
------------- ------------
Current assets:
Cash $ 423,184 472,899
Trade accounts receivable, less allowance
for doubtful accounts of $244,238 at
June 30, 2006 and $252,509 at June 30,
2005 3,022,991 3,006,315
Other receivables 216,847 91,129
Inventories, net 4,982,990 4,712,523
Prepaid expenses 505,786 386,935
Prepaid income taxes 65,869 21,701
Deferred tax asset - current 387,830 384,077
------------- -----------
Total current assets 9,605,497 9,075,579
Property and equipment, net 3,671,216 3,221,944
Goodwill, net of accumulated amortization of
$649,792 at June 30, 2006 and at June 30, 2005 789,422 789,422
Other assets 457,520 372,778
------------- -----------
$ 14,523,655 13,459,723
============= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 254,518 221,069
Line of credit 577,232 264,761
Accounts payable 593,016 605,788
Accrued expenses 536,131 571,940
Accrued payroll and benefit expenses 254,453 368,167
------------- ------------
Total current liabilities 2,215,350 2,031,725
Long-term debt, excluding current installments 2,023,410 1,330,325
Deferred compensation 388,250 360,518
Deferred tax liability - noncurrent 225,603 223,647
------------- ------------
Total liabilities 4,852,613 3,946,215
------------- ------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued 9,034,566 shares
at June 30, 2006 and 9,015,128 shares at
June 30, 2005 2,746,503 2,779,000
Deferred stock compensation (4,000) -
Retained earnings 6,928,539 6,734,508
------------- -----------
Commitments
Total stockholders' equity 9,671,042 9,513,508
------------- -----------
$ 14,523,655 13,459,723
============= ===========
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Statements of Income
Years Ended June 30, 2006 and 2005
2006 2005
------------- ------------
Net sales $ 19,513,136 20,404,368
Cost of sales 12,221,375 12,105,079
------------- ------------
Gross profit 7,291,761 8,299,289
Selling, general, and administrative expenses 5,239,462 5,748,529
Research and development expenses 1,756,281 1,302,722
------------- ------------
Operating income 296,018 1,248,038
------------- ------------
Other income (expense):
Interest income 10,714 9,377
Interest expense (163,287) (139,482)
Other income, net 65,776 32,923
------------- ------------
Total other income (expense) (86,797) (97,182)
------------- ------------
Income before income taxes 209,221 1,150,856
Income tax expense 15,190 422,040
------------- ------------
Net income $ 194,031 728,816
============= ============
Basic net income per common share $ 0.02 0.08
Diluted net income per common share $ 0.02 0.08
Weighted average basic and diluted common
shares outstanding
Basic 9,019,416 8,973,911
Diluted 9,170,270 9,213,808
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Statements of Cash Flows
Years Ended June 30, 2006 and 2005
2006 2005
------------- ------------
Cash flows from operating activities:
Net income $ 194,031 728,816
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization of property
and equipment 354,220 372,332
Other amortization 7,324 7,324
Provision for doubtful accounts 48,000 96,000
Provision for inventory obsolescence 252,000 276,000
Provision for warranty reserve 280,085 169,321
Provision for deferred compensation 27,732 29,496
Compensation expense on stock and options 4,000 29,700
Change in operating assets and liabilities:
Receivables (190,394) 620,189
Inventories (522,467) (300,726)
Prepaid expenses and other assets (210,916) (3,420)
Deferred tax asset, net (1,797) 24,570
Accounts payable and accrued expenses (442,381) (173,207)
Prepaid income taxes (41,013) 21,701
Income tax payable - (218,601)
------------- ------------
Net cash provided by (used in)
operating activities (241,576) 1,679,495
------------- ------------
Cash flows from investing activities:
Capital expenditures (804,992) (284,162)
Proceeds from sale of assets 1,500 (31)
------------- ------------
Net cash used in investing
activities (803,492) (284,193)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,530,000 -
Principal payments on long-term debt (803,466) (209,457)
Net change in line of credit 312,471 (1,339,774)
Proceeds from issuance of common stock 15,797 53,801
Redemption of common stock (59,449) -
------------- ------------
Net cash provided by (used in)
financing activities 995,353 (1,495,430)
------------- ------------
Net change in cash (49,715) (100,128)
Cash at beginning of period 472,899 573,027
------------- ------------
Cash at end of period $ 423,184 472,899
============= ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 156,723 138,304
Cash paid for income taxes 58,000 594,370
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for directors fees 8,000 -
Income tax benefit from non-employee exercise
of stock options 3,155 25,095
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Statements of Stockholders' Equity
Years Ended June 30, 2006 and 2005
Deferred Total
Common stock Retained stockholders'
stock compensation earnings equity
------------- ------------ ------------ ---------------
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
Issuance of 14,238 shares of common stock
upon exercise of employee stock options 15,797 - - 15,797
Redeemed 46,393 shares of common stock (59,449) - - (59,449)
Income tax benefit disqualifying disposition
of employee stock options 3,155 - - 3,155
Issuance of 5,200 shares of restricted stock
to outside directors 8,000 - - 8,000
Deferred restricted stock compensation - (4,000) - (4,000)
Net income - - 194,031 194,031
------------- ------------ ------------ ---------------
Balances at June 30, 2006 $ 2,746,503 (4,000) 6,928,539 9,671,042
============= ============ ============ ===============
See accompanying notes to financial statements.
F-5
DYNATRONICS CORPORATION
Notes to Financial Statements
June 30, 2006 and 2005
(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 additional
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, 2006 and 2005.
(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
F-6
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 2006
and 2005 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
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.
F-7
A reconciliation between the basic and diluted weighted average
number of common shares for 2006 and 2005 is summarized as
follows:
2006 2005
------------- -----------
Basic weighted average number of
common shares outstanding during
the year 9,019,416 8,973,911
Weighted average number of
dilutive common stock options
outstanding during the year 150,854 239,897
------------- -----------
Diluted weighted average number
of common and common equivalent
shares outstanding during the year 9,170,270 9,213,808
============= ===========
Outstanding options not included in the computation of diluted net
income per share based on the treasury stock method total 675,638
and 188,092 as of June 30, 2006 and 2005, 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.
(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:
F-8
Year ended Year ended
June 30, June 30,
2006 2005
-------------- ------------
Net income as reported $ 194,031 728,816
Less: pro forma adjustment for
stock based compensation, net
of income tax (563,489) (44,042)
-------------- ------------
Pro forma net
income (loss) $ (369,458) 684,774
============== ============
Basic net income (loss) per
share:
As reported $ 0.02 0.08
Effect of pro forma
adjustment (0.06) -
------------- ------------
Pro forma (0.04) 0.08
Diluted net income (loss)
per share:
As reported 0.02 0.08
Effect of pro forma
adjustment (0.06) (0.01)
------------- ------------
Pro forma $ (0.04) 0.07
============= ============
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
------------------------------
2006 2005
--------------- -------------
Expected dividend yield 0% 0%
Expected stock price volatility 70-88% 86-89%
Risk-free interest rate 4.14 - 4.98% 3.68 - 4.45%
Expected life of options 5 - 10 years 5 - 7 years
The weighted average fair value of options granted during 2006 and
2005 was $1.22 and $1.31, respectively.
On May 19, 2006 the Board of Directors accelerated the vesting of
certain unvested stock options awarded to employees and officers
under the Company's stock option plan. The Company took this
action to avoid an accounting charge (as compensation expense) for
these options starting in the quarter ending September 30, 2006,
as required by FAS 123(R). A portion of the increase in proforma
compensation expense in fiscal 2006, as shown above, is a result
of the vesting acceleration.
(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. The Company maintains its cash in
bank deposit accounts which at times may exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any
significant credit risks on cash or cash equivalents.
F-9
(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 87% of
net sales for the year ended June 30, 2006 and 85% for the year
ended June 30, 2005. Aesthetics products consisted of 7% and 9% of
net sales for years ended June 30, 2006 and 2005, respectively.
Chargeable repairs, billable freight and other miscellaneous
revenue account for the remaining 6% of total revenues in both
years ended June 30, 2006 and 2005, 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, income taxes, 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, 2006 and 2005 was approximately $186,000 and $232,000,
respectively. No prepaid supplies consisted of catalogs as of June
30, 2006 and 2005.
(2) Inventories
Inventories consist of the following:
2006 2005
-------------- ------------
Raw materials $ 3,034,919 2,671,255
Finished goods 2,331,563 2,409,435
Inventory reserve (383,492) (368,167)
-------------- ------------
4,982,990 4,712,523
============== ============
F-10
(3) Property and Equipment
Property and equipment consist of
the following:
2006 2005
-------------- ------------
Land $ 354,743 354,743
Buildings 3,590,088 2,921,127
Machinery and equipment 1,481,796 1,560,010
Office equipment 1,059,664 1,011,101
Vehicles 94,290 94,290
-------------- ------------
6,580,581 5,941,271
Less accumulated depreciation
and amortization 2,909,365 2,719,327
-------------- ------------
$ 3,671,216 3,221,944
============== ============
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve, which
is include in accrued expenses, consists of the following:
2006 2005
-------------- -------------
Beginning product warranty reserve
balance $ 208,000 184,000
Warranty repairs (280,085) (145,322)
Warranties issued 138,975 139,324
Changes in estimated warranty costs 141,110 29,998
-------------- -------------
Ending product warranty
reserve balance $ 208,000 208,000
============== =============
(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, 2006 and 2005, the outstanding balance was
approximately $577,000 and $265,000, respectively. The line of credit
is collateralized by inventory and accounts receivable and bears
interest at the bank's "prime rate," (8.25% and 6.25% at June 30, 2006
and 2005, respectively). This line is subject to annual renewal and
matures on December 1, 2006. Accrued interest is payable monthly.
(6) Long-Term Debt
Long-term debt consists of the following:
2006 2005
-------------- -------------
6.44% promissory note secured by
trust deed on real property, maturing
January 2021, payable in monthly
installments of $13,278 $ 1,504,394 -
6.21% promissory note secured by a
trust deed on real property, maturing
November 2013, payable in decreasing
installments currently at $7,373 498,159 550,191
5.84% promissory note secured by a
trust deed on real property, payable
in monthly installments of $8,669
through November 2008 233,422 320,791
8.87% promissory note secured by
fixed assets, payable in monthly
installments of $3,901 through May
2007 41,435 83,683
6.75% promissory note secured by
building, maturing May 2017, payable
in monthly installments beginning at
$5,641 - 594,227
Other notes payable 518 2,502
-------------- -------------
Total long-term debt 2,277,928 1,551,394
Less current installments 254,518 221,069
-------------- -------------
Long-term debt, excluding
current installments $ 2,023,410 1,330,325
============== =============
F-11
The aggregate maturities of long-term debt for each of the years
subsequent to 2006 are as follow: 2007, $254,518; 2008, $225,940; 2009,
$177,300; 2010, $144,652; 2011, $154,080 and thereafter $1,321,438.
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Rent expense for the years ended June 30, 2006 and 2005 was
$29,765 and $23,664, respectively. Future minimum rental payments
required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year as of 2006 are as follows:
2007, $28,729; 2008, $20,888 and 2009, $7,702.
(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 net goodwill
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, 2006 June 30, 2005
-------------- -------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 42,724 35,400
-------------- -------------
Net carrying amount $ 30,516 37,840
============== =============
Amortization expense associated with the license agreement was $7,324
for 2006 and 2005. Estimated amortization expense for the existing
license agreement is expected to be $7,324 for each of the fiscal years
ending June 30, 2007 through June 30, 2010.
(9) Income Taxes
Income tax expense (benefit) for the years ended June 30 consists of:
Current Deferred Total
--------------- -------------- ------------
2006:
U.S. federal $ (3,724) (1,556) (5,280)
State and local 20,711 (241) 20,470
--------------- -------------- ------------
$ 16,987 (1,797) 15,190
=============== ============== ============
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
=============== ============== ============
F-12
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:
2006 2005
-------------- -------------
Expected tax expense $ 71,135 391,291
State taxes, net of federal tax benefit 11,206 64,632
Officers' life insurance (3,278) (3,239)
Extraterritorial income exclusion (7,662) (7,480)
Other, net (56,211) (23,164)
-------------- -------------
$ 15,190 422,040
============== =============
Deferred income tax assets and liabilities related to the tax effects
of temporary differences are as follows:
2006 2005
-------------- -------------
Net deferred tax asset - current:
Inventory capitalization for income
tax purposes $ 63,523 64,640
Inventory reserve 143,043 137,326
Warranty reserve 77,584 77,584
Accrued product liability 12,580 10,341
Allowance for doubtful accounts 91,100 94,186
------------- -------------
Total deferred tax
asset - current $ 387,830 384,077
============= =============
Net deferred tax asset (liability) -
non-current:
Deferred compensation $ 144,817 134,473
Property and equipment, principally
due to differences in depreciation (373,052) (361,409)
Non-compete and goodwill 2,632 3,289
------------- -------------
Total deferred tax liability -
non-current $ (225,603) (223,647)
============= =============
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, 2006 and 2005, sales to any
single customer did not exceed 10% of total net sales.
F-13
Sales in the United States and other countries were 95 percent and 5
percent for both fiscal years ended June 30, 2006 and 2005,
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, 2006, the Company acquired and retired $59,449 of
common stock. There were no stock repurchases during fiscal year 2005.
The Company granted options to acquire common stock under its 2005
qualified stock option plan for fiscal 2006 and under its 1992
qualified stock option plan for fiscal 2005. 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 ten years from the date
of grant.
A summary of activity follows:
2006 2005
-------------------------------- ---------------------------------
Weighted Weighted
Number average Number average
of shares exercise price of shares exercise price
------------- --------------- -------------- -----------------
Options outstanding at
beginning of year 1,155,839 $ 1.41 723,884 $ 1.15
Options granted 236,374 1.49 564,924 1.70
Options exercised 14,238 1.11 56,880 0.92
Options canceled or expired (248,117) 1.42 (76,089) 1.50
------------- --------------
Options outstanding at end
of year 1,129,858 1.42 1,155,839 1.41
============= ==============
Options exercisable at end
of year 1,129,858 1.42 477,330 0.91
============= ==============
Range of exercise prices at
end of year $ 0.66 - 3.00 $ 0.66 - 3.00
At June 30, 2006, 440,852 shares of common stock were authorized and
reserved for issuance, but were not granted under the terms of the
stock option plan.
At June 30, 2006 and 2005, 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 2006 and 2005, 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 2006 and 2005
were $34,120 and $30,204, respectively. Company matching contributions
for future years are at the discretion of the board of directors.
F-14
(13) Salary Continuation Agreements
As of June 30, 2006 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 2006 and 2005, the Company has
accrued $388,250 and $360,518, respectively, of deferred compensation
under the terms of the agreements.
(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 first quarter of fiscal year 2007. 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.
On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB No. 109, was
issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The provisions of FIN
48 are effective for fiscal years beginning after December 15, 2006.
Accordingly, the Company will implement the revised standard in the
first quarter of fiscal year 2008.
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 2006 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 2006 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 2006
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, 2006, 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 Firm........F-1
17
Balance Sheets at June 30, 2006 and 2005.......................F-2
Statements of Income for years ended
June 30, 2006 and 2005.........................................F-3
Statements of Stockholders'
Equity for years ended June 30, 2006
and 2005.......................................................F-4
Statements of Cash Flows for
years ended June 30, 2006 and 2005 ............................F-5
Notes to Financial Statements..................................F-6
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)
10.7 Dynatronics Corporation 2005 Equity Incentive Award
Plan (previously filed as Annex A to the Company's
Definitive Proxy Statement on Schedule 14A filed on
October 27, 2005)
10.8 Form of Option Agreement for the 2005 Equity
Incentive Award Plan for incentive stock options
(filed herewith)
10.9 Form of Option Agreement for the 2005 Equity
Incentive Award Plan for non-qualified options
(filed herewith)
23.1 Consent of Tanner LC (filed herewith)
31 Certification under Rule 13a-14(a)/15d-14(a) of
principal executive officer and principal financial
officer (filed herewith)
32 Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. SECTION 1350)
(filed herewith)
18
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 2006 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, 2006
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 26, 2006
----------------------------- (Principal Executive
Kelvyn H. Cullimore, Jr. Officer)
/s/ Terry M. Atkinson, CPA Chief Financial Officer September 26, 2006
----------------------------- (Principal Financial Officer
Terry M. Atkinson, CPA and Principal Accounting
Officer)
/s/ Larry K. Beardall Director, Executive September 26, 2006
----------------------------- Vice President
Larry K. Beardall
Director September 26, 2006
-----------------------------
E. Keith Hansen, M.D.
Director September 26, 2006
-----------------------------
Howard L. Edwards
/s/ Val J. Christensen
----------------------------- Director September 26, 2006
Val J. Christensen
/s/ Joseph H. Barton Director September 26, 2006
-----------------------------
Joseph H. Barton
20