UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- -----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
(Address of principal executive offices)
(801) 568-7000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's common stock, no par value, as
of February 12, 2002 is 8,869,335.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
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DYNATRONICS CORPORATION
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Unaudited Condensed Balance Sheets
December 31, 2002 and June 30, 2002...........................................1
Unaudited Condensed Statements of Income
Three and Six Months Ended December 31, 2002 and 2001.........................2
Unaudited Condensed Statements of Cash Flows
Six Months Ended December 31, 2002 and 2001...................................3
Notes to Unaudited Condensed Financial Statements.............................4
Item 2. Management's Discussion and Analysis or Plan of Operation............10
Item 3. Controls and Procedures..............................................19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................19
Item 5. Other Information...................................................20
Item 6. Exhibits and Report on Form 8-K.....................................20
DYNATRONICS CORPORATION
Condensed Balance Sheets
(Unaudited)
December 31, June 30,
Assets 2002 2002
-------------------- ------------------
Current assets:
Cash $ 213,054 396,803
Trade accounts receivable, less allowance for doubtful accounts
of $191,557 December 31, 2002 and $165,763 at June 30, 2002 3,209,786 3,156,436
Other receivables 21,574 58,202
Inventories 4,085,652 3,836,751
Prepaid expenses 466,627 359,000
Deferred tax asset-current 276,905 276,905
-------------------- ------------------
Total current assets 8,273,598 8,084,097
Property and equipment, net 3,318,656 3,345,059
Goodwill, net of accumulated amortization of $649,752 at
December 31, 2002 and at June 30, 2002 789,422 789,422
Other assets 296,864 289,624
-------------------- ------------------
$ 12,678,540 12,508,202
==================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 206,136 225,604
Line of credit 1,003,389 1,435,689
Accounts payable 773,082 318,905
Accrued expenses 486,708 380,424
Accrued payroll and benefit expenses 197,324 208,504
Income tax payable 25,005 30,804
-------------------- ------------------
Total current liabilities 2,691,644 2,599,930
Long-term debt, excluding current installments 1,859,449 1,950,309
Deferred compensation 293,941 282,229
Deferred tax liability - noncurrent 99,160 99,160
-------------------- ------------------
Total liabilities 4,944,194 4,931,628
-------------------- ------------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 8,869,335 shares at December 31, 2002 and
8,928,774 shares at June 30, 2002 2,478,981 2,638,677
Treasury stock, zero common shares at cost at
December 31, 2002 and 59,439 at June 30, 2002 - (159,696)
Retained earnings 5,255,365 5,097,593
-------------------- ------------------
Total stockholders' equity 7,734,346 7,576,574
-------------------- ------------------
-------------------- ------------------
$ 12,678,540 12,508,202
==================== ==================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net sales $ 4,125,089 3,956,430 8,240,858 8,123,717
Cost of sales 2,534,141 2,360,452 4,984,309 4,795,800
--------------- --------------- --------------- ---------------
Gross profit 1,590,948 1,595,978 3,256,549 3,327,917
Selling, general, and administrative expenses 1,227,316 1,285,179 2,461,732 2,618,648
Research and development expenses 242,023 164,654 454,083 326,090
--------------- --------------- --------------- ---------------
Operating income 121,609 146,145 340,734 383,179
--------------- --------------- --------------- ---------------
Other income (expense):
Interest income 856 873 866 2,896
Interest expense (43,794) (74,145) (89,670) (155,258)
Other income, net 1,827 2,159 4,610 4,497
--------------- --------------- --------------- ---------------
Total other income (expense) (41,111) (71,113) (84,194) (147,865)
--------------- --------------- --------------- ---------------
Income before income taxes 80,498 75,032 256,540 235,314
Income tax expense 30,992 28,512 98,768 91,950
--------------- --------------- --------------- ---------------
Net income $ 49,506 46,520 157,772 143,364
=============== =============== =============== ===============
Basic and diluted net income
per common share $ 0.01 0.01 0.02 0.02
--------------- --------------- --------------- ---------------
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,869,335 8,854,335 8,869,335 8,842,776
Diluted 8,869,335 8,883,477 8,869,335 8,918,139
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31
2002 2001
---------------- --------------
Cash flows from operating activities:
Net income $ 157,772 143,364
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 167,023 158,805
Other amortization 3,662 43,607
Provision for doubtful accounts 36,000 24,000
Provision for inventory obsolescence 120,000 102,000
Provision for warranty reserve 105,664 113,828
Provision for deferred compensation 11,712 10,818
Change in operating assets and liabilities:
Receivables (52,722) (263,581)
Inventories (368,901) 99,118
Prepaid expenses and other assets (118,529) (165,532)
Accounts payable and accrued expenses 443,617 (974)
Income taxes payable (5,799) 9,450
---------------- --------------
Net cash provided by operating activities 499,499 274,903
---------------- --------------
Cash flows from investing activities:
Capital expenditures (140,620) (80,001)
---------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt (110,328) (104,526)
Net change in line of credit (432,300) 30,858
Proceeds from sale of common stock - 14,065
---------------- --------------
Net cash used in financing activities (542,628) (59,603)
---------------- --------------
Net increase (decrease) in cash (183,749) 135,299
Cash at beginning of period 396,803 258,884
---------------- --------------
Cash at end of period $ 213,054 394,183
================ ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 94,091 148,130
Cash paid for income taxes 104,500 82,500
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in exchange for cashless exercise of options
using mature stock $ - 39,600
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 2002 and June 30, 2002 and for the
six months ended December 31, 2002 and 2001 were prepared by the Company without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all necessary adjustments, which consist only of normal recurring adjustments,
to the financial statements have been made to present fairly the financial
position and results of operations and cash flows. The results of operations for
the respective periods presented are not necessarily indicative of the results
for the respective complete years. The Company has previously filed with the SEC
an annual report on Form 10-KSB which included audited financial statements for
the two years ended June 30, 2002. It is suggested that the financial statements
contained in this filing be read in conjunction with the statements and notes
thereto contained in the Company's 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three and six months
ended December 31, 2002 and 2001 is summarized as follows:
4
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Basic weighted average number of common
shares outstanding during the period 8,869,335 8,854,335 8,869,335 8,842,776
Weighted average number of dilutive common
stock options outstanding during the period - 29,142 - 75,363
--------------- --------------- -------------- ---------------
Diluted weighted average number of common
and common equivalent shares outstanding
during the period 8,869,335 8,883,477 8,869,335 8,918,139
=============== =============== ============== ===============
Outstanding options not included in the computation of diluted net income per
share for the three and six month periods ended December 31, 2002 and 2001 total
978,005 and 211,471 respectively, because to do so would have been
anti-dilutive.
NOTE 3. COMPREHENSIVE INCOME
For the periods ended December 31, 2002 and 2001, comprehensive income was equal
to the net income as presented in the accompanying condensed statements of
income.
NOTE 4. INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2002 2002
--------------- -------------
Raw Material $ 2,752,307 2,555,535
Finished Goods 1,719,037 1,546,908
Inventory Reserve (385,692) (265,692)
--------------- -------------
$ 4,085,652 3,836,751
=============== =============
5
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31, June 30,
2002 2002
--------------- -------------
Land $ 354,743 354,743
Buildings 2,896,928 2,871,286
Machinery and equipment 1,647,631 1,603,963
Office equipment 413,435 352,502
Vehicles 72,148 61,771
--------------- -------------
5,384,885 5,244,265
Less accumulated depreciation
and amortization 2,066,229 1,899,206
--------------- -------------
$ 3,318,656 3,345,059
=============== =============
NOTE 6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB), issued Statement
of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of
the pooling-of-interest method of accounting and requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and is applicable to all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies that intangible
assets acquired in a purchase method business combination must meet certain
criteria to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite lives no longer be amortized effective July 1, 2002; rather, these
assets must be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite 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 the Impairment or Disposal of
Long-Lived Assets.
Beginning July 1, 2002, the Company adopted the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation, the
Company performed an assessment of whether there is an indication that goodwill
is impaired as of the date of adoption. The Company has determined that it has
one reporting unit. The Company determined its fair value using an independent
appraisal firm and compared it to its book value. 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. However, the publicly traded value, one of
the indicators of the fair value of the Company, has decreased since July 1,
2002. If the publicly traded value of the Company does not increase prior to the
Company's annual assessment date in the fourth quarter, impairment may be
6
indicated. If upon the Company's annual assessment of the fair value of goodwill
an impairment is indicated, the Company will be required to perform the second
step of the impairment test. In the second step, the Company must compare the
implied fair value of goodwill with the carrying amount of the Company's
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the Company to all of the assets (recognized and unrecognized) and
liabilities of the Company in a manner similar to a purchase price allocation in
accordance with SFAS No. 141. The residual fair value after this allocation is
the implied fair value of the goodwill.
Goodwill. The cost of acquired companies in excess of the fair value of the net
assets and purchased intangible assets at acquisition date is recorded as
goodwill. As of June 30, 2002, the Company had goodwill, net, of $789,422 from
the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and the
exchange of Dynatronics Laser Corporation common stock for a minority interest
in Dynatronics Marketing Corporation on June 30, 1983. Through June 30, 2002,
goodwill was amortized over a period of 15 and 30 years, respectively, on a
straight-line basis. The following table sets forth reported net income and
basic and diluted net income per share, as adjusted, to exclude amortization of
goodwill which would not have been recorded under SFAS No. 142:
Three months ended Six months ended
December 31, 2001 December 31, 2001
-------------------------- --------------------------
Net income, as reported $ 46,520 143,364
Amortization expense of goodwill, net of tax 13,518 27,036
-------------------------- --------------------------
Net income, as adjusted $ 60,038 170,400
Basic net income per share, as reported $ 0.01 0.02
Diluted net income per share, as reported 0.01 0.02
Amortization expense of goodwill basic and diluted
shares - -
Basic net income per share, as adjusted 0.01 0.02
Diluted net income per share, as adjusted 0.01 0.02
7
Year ended June 30,
2002 2001
--------------------------- ---------------------------
Net income, as reported $ 316,101 334,179
Amortization expense of goodwill, net of tax 57,018 57,018
--------------------------- ---------------------------
Net income, as adjusted $ 373,119 391,197
Basic net income per share, as reported $ 0.04 0.04
Diluted net income per share, as reported 0.04 0.04
Amortization expense of goodwill per basic
and diluted share 0.01 0.01
Basic net income per share, as adjusted 0.04 0.04
Diluted net income per share, as adjusted 0.04 0.04
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
December 31, 2002 June 30, 2002
--------------------------- ---------------------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 17,090 13,427
--------------------------- ---------------------------
Net carrying amount $ 56,150 59,813
Amortization expense associated with the license agreement was $1,831 and
$3,662, respectively, for the three and six months ended for both December 31,
2002 and 2001. Estimated amortization expense for the existing license agreement
is expected to be $7,324 for each of the fiscal years ending June 30, 2003
through June 30, 2010.
NOTE 7. PRODUCT WARRANTY RESERVE
The Company adopted the provisions of FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, for the quarter ended December 31, 2002.
The Company accrues the estimated costs to be incurred in connection with the
Company's product warranty programs as products are sold based on historical
warranty rates. A reconciliation of the changes in the warranty liability is as
follows:
8
Three months ended Three months ended
December 31, 2002 December 31, 2001
---------------------------- --------------------------
Beginning product warranty reserve balance $ 142,000 118,000
Warranty repairs (46,254) (54,624)
Warranties issued 59,401 54,401
Changes in estimated warranty costs (7,147) 6,223
---------------------------- --------------------------
Ending product warranty liability balance $ 148,000 124,000
============================ ==========================
Six months ended Six months ended
December 31, 2002 December 31, 2001
---------------------------- -------------------------
Beginning product warranty reserve balance $ 136,000 112,000
Warranty repairs (93,664) (101,828)
Warranties issued 118,668 111,701
Changes in estimated warranty costs (13,004) 2,127
---------------------------- -------------------------
Ending product warranty liability balance $ 148,000 124,000
============================ =========================
NOTE 8. COMMON STOCK.
During the six months ended December 31, 2002 the Company canceled 59,439 shares
of treasury stock.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Condensed Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this report on Form 10-QSB.
Results of Operations
During the second fiscal quarter ended December 31, 2002, sales increased 4% to
$4,125,089, compared to $3,956,430 during the same quarter of the previous year.
During the six months ended December 31, 2002, sales rose to $8,240,858, 1%
higher than the $8,123,717 in sales during the six months ended December 31,
2001. Net income increased 6% during the quarter ended December 31, 2002, to
$49,506, compared to $46,520 in the same quarter in 2001. Net income increased
10% during the six months ended December 31, 2002, to $157,772, up from $143,364
in the prior year period.
The improved results of operations during the three and six months ended
December 31, 2002 reflect the efforts of our Back to Basics initiatives. For the
past year, management has been evaluating and refining the company's
manufacturing processes in order to reduce costs and permit more competitive
pricing on certain products. As a result, manufacturing efficiencies are
improving for several product lines due to better material and component
sourcing, in-house manufacturing of certain high-volume products and automation
of key manufacturing processes. The focus of these manufacturing improvements
has been primarily on medical supply products and treatment tables, which carry
lower margins than our therapy devices and aesthetic products. Increased sales
objectives are starting to be realized and manufacturing efficiencies are still
improving. To the extent sales of these lower margin products increases more
rapidly than higher margin products, there is a corresponding effect of
decreasing gross margins as occurred in the current reporting period. Management
expects margins to show improvement as new higher margin products are introduced
over the coming quarters and ongoing improvements in operating efficiencies are
realized further improving margins.
During the quarter ended December 31, 2002, we completed development of and
introduced the Dynatron STSi device. This device combines the company's new STS
chronic pain technology with its well-established interferential acute pain
modality in order to target a much broader segment of the pain market. Because
it carries a lower selling price than previous STS technology devices, the STSi
will allow the introduction of the STS technology to a broader segment of the
physical medicine market. Shipments of the new device began the end of November,
2002 with approximately 70 units sold in the first five weeks.
Another focus of management over the past year has been the reduction of
inventory and accounts receivable, which have a combined decrease of
approximately $900,000 from December 31, 2001 to December 31, 2002. These
improvements, together with other cash flows generated from operations, helped
reduce the outstanding balance on our line of credit facility from $2.9 million
to $1 million during the past year. As a result, interest expense was reduced by
approximately $30,000 during the quarter ended December 31, 2002. Also, the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," which was required as of July 1, 2002,
reduced the expense associated with the amortization of goodwill and intangible
assets for the three and six-months ended December 31, 2002, to $1,831 and
10
$3,662 respectively compared to $23,635 and $47,270, for the same periods in
2001. This resulted in savings of $21,804 and $43,608 for the current reporting
periods in 2002. For a more complete discussion of the effects of Standard No.
142, including the potential future impact of goodwill impairment assessments,
please refer to Note 6 in the accompanying financial statements.
During the quarter ended December 31, 2002 total gross profit was $1,590,948 or
38.6% of sales compared to $1,595,978 or 40.3% of sales in the quarter ended
December 31, 2001. Gross profit for the six months ended December 31, 2002 was
$3,256,549 or 39.5% of sales compared to $3,327,917 or 41.0% of sales in the
quarter ended December 31, 2001. The decrease in gross margin as a percent of
sales in the quarter and six month periods reflects a shift in product mix due
to increased sales of treatment tables and supplies which carry lower margins
compared to therapy and aesthetic devices. Going forward, we believe gross
profit as a percentage of sales will improve as a result of our strategic
initiatives to lower manufacturing costs through the automation of certain
manufacturing processes and overseas sourcing of higher-volume products. In
addition, we plan to introduce several new, high-margin products during this
calendar year, which are expected to increase overall margins.
Selling, general and administrative (SG&A) expenses for the quarter ended
December 31, 2002, decreased to $1,227,316 or 29.8% of sales compared to
$1,285,179 or 32.5% of sales in the quarter ended December 31, 2001. SG&A
expenses for the six-months ended December 31, 2002 were $2,461,732 or 29.9% of
sales compared to $2,618,648 or 32.2% of sales for the six months ended December
31, 2001. The decrease in SG&A expenses reflects our efforts during the year to
reduce operating expenses through the Back to Basics program. Through this
program, we have realized reductions in overhead expenses as well as certain
selling expenses. We also realized savings in labor expense related to personnel
reductions. In addition, as a result of the adoption of new accounting
pronouncements affecting the amortization of goodwill, $21,804 and $43,608,
respectively of goodwill expense was eliminated in the three and six months
ended December 31, 2002.
Since June 30, 2002, Dynatronics has launched a concentrated research and
development (R&D) campaign to develop several new products including a low-power
laser device, the STSi combination STS/Interferential device, and a redesign of
our primary line of therapy devices. In addition, we have undertaken important
clinical research studies related to the STS and laser technologies. R&D
expenses during the quarter ended December 31, 2002 totaled $242,023, compared
to $164,654 in the quarter ended December 31, 2001, an increase of $77,369 or
47%. R&D expenses during the six-months ended December 31, 2002 increased
$127,993 to $454,083 compared to $326,090 for the same period in 2001. R&D
expenses for the balance of the fiscal year are expected to continue to show
increases over prior periods in accordance with our strategic plans for
introducing new products.
Pre-tax profit for the quarter ended December 31, 2002 was $80,498 compared to
$75,032 during the same period of the prior year. Pre-tax profit for the six
months ended December 31, 2002 was $256,540 compared to $235,314 in 2001. These
increases are a result of reduced expenses achieved through the Back to Basics
program together with lower interest expense and the elimination of goodwill
expense during the current fiscal year periods.
11
Income tax expense for the three months ended December 31, 2002 was $30,992
compared to $28,512 in the three months ended December 31, 2001. The effective
tax rate for the quarter ended December 31, 2002 was 38.5% compared to 38.0% in
the quarter ended December 31, 2001. Income tax expense for the six months ended
December 31, 2002 was $98,768 compared to $91,950 in the six months ended
December 31, 2001. The effective tax rate for the six months ended December 31,
2002 was 38.5% compared to 39.1% in the same period in 2001.
Net income increased 6% for the quarter ended December 31, 2002, to $49,506
(approximately $.01 per share), compared to $46,520 (approximately $.01 per
share) in the same quarter in 2001. Net income increased 10% for the six months
ended December 31, 2002, to $157,772 (approximately $.02 per share), compared to
$143,364 (approximately $.02 per share) during the six months ended December 31,
2001. The improvement in profitability is due primarily to reduced overhead
expenses, the elimination of goodwill amortization due to changes in accounting
rules and the reduction of interest expense. Additionally, management expects
that efforts now underway to develop new products and improve operating
efficiencies will further contribute to overall performance in the coming
quarters.
Liquidity and Capital Resources
The company has financed its operations through available borrowings under its
credit line facility and from cash provided by operations. The company had
working capital of $5,581,954 at December 31, 2002, inclusive of the current
portion of long-term obligations and credit facilities, as compared to working
capital of $5,484,167 at June 30, 2002. The increase in working capital is
primarily attributable to the increased turns on inventories and the continued
payments on current obligations outstanding.
We expect that cash flows from operations, together with amounts available under
an existing bank line of credit will be adequate to meet working capital needs
related to our business and planned capital expenditures for the next 12 months.
The current ratio at December 31, 2002 and June 30, 2002 was 3.1 to 1. Current
assets represent 65% of total assets at December 31, 2002.
Net accounts receivable at December 31, 2002 were $3,209,786 compared to
$3,156,436 at June 30, 2002. The days of sales outstanding in accounts
receivable increased to 72 days at December 31, 2002 compared to 71 days at June
30, 2002. Accounts receivable are from the dealer network and are generally
considered to be within term.
All accounts payable are within term. We continue to take advantage of available
payment discounts when possible.
During the quarter, we renewed a revolving line of credit facility with a
commercial bank in the amount of $4,500,000. Borrowing limitations are based on
30% of eligible inventory and up to 80% of eligible accounts receivable. The
outstanding balance on the line of credit at December 31, 2002 was $1,003,389
compared to $1,435,689 at June 30, 2002. The line of credit is secured by
inventory and accounts receivable and bears interest at the bank's prime rate,
12
which was 4.25% per annum at December 31, 2002. This line is subject to annual
renewal and matures on December 1, 2003. Accrued interest is payable monthly.
Inventory levels, net of reserves, totaled $4,085,652 at December 31, 2002,
compared to $3,836,751 at June 30, 2002. We expect inventory levels during the
latter part of fiscal year 2003 to increase concurrently with the introduction
of several new products currently being developed, including a low-power laser
device.
Long-term debt excluding current installments totaled $1,859,449 at December 31,
2002, compared to $1,950,309 at June 30, 2002. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.9 million with monthly principal and interest payments of $21,409.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any risks related
to these policies on our business operations are discussed in Management's
Discussion and Analysis or Plan of Operations where such policies affect our
reported and expected financial results. For a detailed discussion of the
application of these and other accounting policies, see Notes to the Financial
Statements (Note 1) included in our Annual Report on Form 10-KSB for the year
ended June 30, 2002. In all material respects, the accounting principles that
are utilized conform with generally accepted accounting principles in the United
States of America.
The preparation of this quarterly report on Form 10-QSB requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are stated at the lower of cost
(first-in, first-out), or market. Inventory valuation reserves are maintained
for the estimated impairment of the inventory. Impairment may be a result of
slow moving or excess inventory, product obsolescence or changes in the
valuation of the inventory. In determining the adequacy of reserves, we analyze
the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
13
o Customer demand;
o Historical sales;
o Forecast sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to estimates of inventory valuation reserves are reflected in
the cost of goods sold within the statements of income during the period in
which such modifications are determined necessary by management. At December 31,
2002 and June 30, 2002, our inventory valuation reserve balance was $385,692 and
$265,692, respectively and our inventory balance was $4,085,652 and $3,836,751
net of reserves, respectively.
Revenue Recognition
Our products are sold primarily through a network of independent distributors.
Sales revenues are generally recorded when products are shipped under an
agreement with a distributor or customer, risk of loss and title have passed and
collection of any resulting receivable is reasonably assured. The distributors,
who sell the products to other customers, take title to the products, have no
special rights of return, and assume the risk for credit and obsolescence.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivable. In doing
so, we analyze accounts receivable and historical bad debts, 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 $3,209,786 and $3,156,436, net of allowance
for doubtful accounts of $191,557 and $165,763, at December 31, 2002 and June
30, 2002, respectively.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure an
amendment of FASB Statement No. 123. This Statement amends FASB statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company plans 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. The Company is required and plans to adopt the
disclosure provisions of SFAS No. 148 for the quarter ending March 31, 2003.
14
Business Plan
Over the past five years, annual net sales have grown 60 percent from $10.2
million in fiscal year 1997 to $16.3 million in fiscal year 2002. During fiscal
year 2003, we will continue to implement a strategy of expanding product lines,
strengthening channels of distribution, and developing new products for the
rehabilitation and aesthetic markets.
To further strengthen our position in the core physical medicine market, we plan
to introduce several new products in the current fiscal year, including a
low-power laser device. In the early 1980's we attempted to gain FDA approval
for a low-power laser device, but were unsuccessful. At that time the laser
device was the only product we offered - a fact reflected in the original name
of the company, Dynatronics Laser Corporation. When we were unable to obtain
approval for the low power laser device, we began pursuing the development of
other physical medicine modalities and subsequently changed our name to
Dynatronics Corporation.
A recent change in the regulatory landscape now allows the introduction of
low-power laser devices for the treatment of pain. In support of a planned
submission to the Food and Drug Administration to obtain clearance to market the
new laser, the company is currently funding a clinical study at multiple
research sites including universities and clinics. The study will evaluate the
efficacy of the laser in treating wrist pain such as Carpal Tunnel Syndrome, a
claim that FDA has recently allowed for low-power lasers. We believe our device
will not only be more affordable, but also technically superior to anything
currently sold in the domestic market.
In addition to the low-power laser device, over the next six months we expect to
introduce a new line of electrotherapy and ultrasound products incorporating
advanced technology features and design. This new line of products is expected
to further enhance our share of the electrotherapy and ultrasound market.
Over the past year, we strengthened our manufacturing capabilities with the goal
of improving margins and competitive pricing capability. To that end, some
products previously contracted to other manufacturers are being converted to
in-house manufacturing. Other products are being contracted for overseas
manufacturing.
During the remainder of fiscal year 2003, we will continue to emphasize our Back
to Basics plan. Resources are being allocated to strengthen our core market
emphasis and products. We will incur more research and development expense in
2003 than at any time since the early days of seeking FDA approval for our first
low-power laser product. All of these efforts are designed to increase market
share and improve profitability in the coming years.
In August 2000, we acquired an exclusive license for the patented STS technology
for treating chronic pain. Two devices incorporating the new technology - the
Dynatron STS clinical unit and the Dynatron STS Rx prescription unit for home
use - were introduced in fiscal year 2001. The treatment delivered by these
devices is referred to as Sympathetic Therapy or STS Therapy. In November 2002,
we introduced the Dynatron STSi combination therapy device. This device provides
both the STS chronic pain treatment technology together with interferential
therapy for treating patients with acute pain.
15
In a research study published in the January, 2002 edition of the American
Journal of Pain Management, test results showed 85% of STS-treated patients
suffering pain associated with peripheral neuropathies realized some reduction
of pain, with 50% of the patients becoming totally pain-free. We believe that
the fact these results were achieved with patients who had suffered on average
for eight years with their chronic pain condition further attests to the
effectiveness of this therapy. Additional research studies are underway to
further validate the efficacy of this innovative technology.
As with many new medical therapies or technologies, insurance reimbursement may
influence the rate of growth of the STS technology. Presently, limited
reimbursement is available for STS treatments or home units. Most are reviewed
on a case-by-case basis. However, as medical practitioners experience positive
outcomes and further research supports the efficacy of this therapy, it is
anticipated that reimbursements will be more broadly established. It will take
time, perhaps years, to obtain broad acceptance and reimbursement for this new
therapy. Notably, this technology potentially holds the key to not only
relieving suffering for many chronic pain patients, but significantly reducing
the long-term costs of supporting chronic pain patients through reducing intake
of expensive narcotic medications or avoiding costly invasive procedures. We
believe that as these potential cost savings are realized, insurance companies
should begin to view STS treatments as an economical alternative to the
traditional treatments for chronic pain sufferers. STS treatments are not a
panacea and do not help every chronic pain sufferer. However, they seem to be
particularly effective with pain conditions that present with a sympathetic
bias.
The development of the STS technology as an effective weapon in the treatment of
chronic pain remains one of our strategic objectives. We continue to receive
reports of chronic pain sufferers who have attained significant, if not total,
relief from their pain even after years of suffering. While the potential for a
non-invasive, non-addictive, safe alternative for the treatment of chronic pain
would seem to be vast, the realities of accessing that market will demand
vigilance over the coming years to fully exploit that potential.
Another important part of our strategic plan is the expansion of worldwide
marketing efforts. In March 2001, our Salt Lake operation, where all
electrotherapy, ultrasound, STS devices and Synergie products are manufactured,
was designated an ISO 9001 certified facility. That certification was renewed in
July, 2002. With this designation, we can market products manufactured in this
facility in any country that recognizes the CE Mark. We are now working to
establish effective distribution of these products in the European Community.
To take full advantage of the opportunities of the aesthetics market, we will
continue to refine our efforts to establish effective distribution for our line
of aesthetic products. Our Chairman, Kelvyn H. Cullimore, continues to
personally manage the effort to establish this distribution. Controlling and
expanding the channels of distribution for these products is expected to
ultimately increase sales and allow us to more fully access the potential of the
aesthetics products market. We perceive this market to be both lucrative and
expanding, particularly as aging baby boomers continue to look for ways to
retain a youthful appearance.
16
Over the past two years, we have allocated resources to enhance our presence in
the e-business arena. We have undertaken to improve the appearance and
application of our corporate website and we are researching ways to apply
electronic media and Internet solutions to better serve customer needs, access
new business opportunities, reduce cost of operations, and stay technologically
current in the way business is conducted. Our website may be viewed at
www.dynatronics.com. This reference to our website is not intended to
incorporate the contents of the website into or as a part of this report.
Based on these strategic initiatives, we are focusing our resources in the
following areas:
o Reinforce our position in the physical medicine market through an
aggressive research and development campaign that will result in
the introduction of several new products over the coming 12
months.
o Continue implementation of our Back to Basics program which
evaluates ways to improve margins and competitive pricing through
strategic manufacturing processes and alliances as well as
controlling expenses.
o Maximize sales of the Dynatron STS technology in the face of
limited reimbursement and better educate the medical and insurance
communities on the efficacy of STS treatments. This includes
conducting additional research and other related activities to
obtain broader support from the medical and insurance communities.
o Improve sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Expand distribution of both rehabilitation and aesthetic products
internationally.
o Apply e-commerce solutions to improving overall performance.
Cautionary Statement Concerning Forward-Looking Statements
The statements contained in this report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis or Plan
of Operation regarding product development, clinical results, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in our Annual Report on Form 10-KSB under the headings
"Description of Business" and "Risk Factors." The fact that some of the risk
factors may be the same or similar to past reports filed with the Securities and
Exchange Commission means only that the risks are present in multiple periods.
17
We believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this report are made as of the date
of this report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line and Dynatron STS,
STSi and Dynatron STS Rx products;
o Clinical outcomes of research studies regarding STS and the laser.
Also, obtaining insurance company reimbursement for STS treatments
and the home prescription Dynatron STS Rx device;
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense of
expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation; and
o The ability to obtain required financing to meet changes or other
risks described above.
18
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Based upon their review, the
company's principal executive officer and principal financial officer have
concluded that the current disclosure controls and procedures (as defined in
Exchange Act Rules 240.13a-14(c) and 15d-14(c) are effective in providing the
material information required to be disclosed in the reports we file or submit
under the Exchange Act. Their review was completed as of a date within 90 days
before the filing date of this quarterly report Changes in Internal Controls.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the company's Annual Meeting of Shareholders held on November 19, 2002, the
shareholders of the company voted on the following proposals:
Proposal 1 - To elect seven directors, each to serve until the next
annual meeting of shareholders and until his successor is elected and shall have
qualified. Those nominated were all currently serving as directors of the
company, i.e., Kelvyn H. Cullimore, Kelvyn H. Cullimore, Jr., Larry K. Beardall,
E. Keith Hansen MD, Joseph H. Barton, Howard L. Edwards and Val J. Christensen.
Proposal 2 - To approve the Audit Committee's selection of KPMG LLP as
the company's independent auditors for the year ending June 30, 2003.
Each of the proposals was approved by the requisite majority of the
shares cast at the annual meeting. The following table summarizes the voting
results:
For Against Abstain
Proposal 1:
Mr. Cullimore 7,614,919 14,400 60,713
Mr. Cullimore, Jr. 7,626,619 2,700 60,713
Mr. Beardall 7,627,119 2,200 60,713
Dr. Hansen 7,628,119 1,200 60,713
Mr. Christensen 7,626,019 3,300 60,713
Mr. Barton 7,624,619 4,700 60,713
Mr. Edwards 7,624,603 4,716 60,713
For Against Abstain
Proposal 2:
7,674,916 11,516 9,600
19
Item 5. Other Information.
Nasdaq Listing Maintenance Requirements. On July 29, 2002, we received notice
from The Nasdaq Stock Market that for 30 trading days the price of our common
stock had closed below the minimum $1.00 per share bid price required for
continued listing on the Nasdaq SmallCap Market by Marketplace Rule 4450(a)(5).
Under Marketplace Rule 4450(c)(2), we will be provided approximately one year,
or until July 27, 2003, to regain compliance with the $1.00 minimum bid price
requirement. We can regain compliance with the minimum bid price requirement if,
at any time before July 27, 2003, the bid price of our common stock closes at
$1.00 per share or more for a minimum of 10 consecutive trading days. Should we
fail to regain compliance, Nasdaq stated that it would provide us with written
notification that our common stock will be delisted from the Nasdaq SmallCap
Stock Market. Removal of our common stock from listing on the Nasdaq Stock
Market would likely have an adverse impact on the trading price and liquidity of
our common stock.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
--------
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K. None.
-------------------
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 2/14/03 /s/ Kelvyn H. Cullimore, Jr.
---------------------- ------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
(duly authorized officer)
Date 2/14/03 /s/ Terry M. Atkinson
---------------------- ------------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
21
CERTIFICATIONS
I, Kelvyn H. Cullimore, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Dynatronics Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
inancial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
22
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Kelvyn H. Cullimore, Jr.
--------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
I, Terry M. Atkinson certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Dynatronics Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
23
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Terry M. Atkinson
-------------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
24
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Dynatronics Corporation on
Form 10-QSB for the period ending December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Kelvyn H.
Cullimore, Jr., Chief Executive Officer and Terry M. Atkinson, Chief Accounting
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Kelvyn H. Cullimore, Jr.
----------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
Dynatronics Corporation
/s/ Terry M. Atkinson
----------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
25