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, 2004.
[ ] 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 ]
The issuer's revenues for the fiscal year ended June 30, 2004 were $20,587,273.
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the issuer was approximately $12.0 million as of September 21,
2004, based on the average bid and asked price on that date.
As of September 21, 2004, there were 8,958,938 shares of the issuer's common
stock outstanding.
Documents Incorporated by Reference
The issuer hereby incorporates information required by Part III (Items 9, 10, 11
and 14) of this report by reference to the issuer's definitive proxy statement
to be filed pursuant to Regulation14A and provided to shareholders subsequent to
the filing of this report.
Transitional Small Business Disclosure Format (Check one): Yes No X
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TABLE OF CONTENTS
PART I
Item 1. Description of Business..............................................1
Item 2. Description of Property..............................................8
Item 3. Legal Proceedings....................................................8
Item 4. Submission of Matters to a Vote of Security Holders..................8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............8
Item 6. Management's Discussion and Analysis or Plan of Operations...........9
Item 7. Financial Statements...............................................F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................18
Item 8A. Controls and Procedures.............................................18
PART III
Item 9. Directors and Executive Officers; Compliance with Section 16(a)
of the Exchange Act.................................................18
Item 10. Executive Compensation..............................................18
Item 11. Security Ownership of Certain Beneficial Owners and Management......18
Item 12. Certain Relationships and Related Transactions......................18
Item 13. Exhibits and Reports on Form 8-K....................................18
Item 14. Principal Accountants Fees and Services.............................19
Signatures ................................................................20
Certifications ..............................................................21
Unless the context otherwise requires, all references in this report to "we,"
"us," "our," "Dynatronics" or the "Company" include Dynatronics Corporation, a
Utah corporation.
ii
PART I
Item 1. Description of the Business
Dynatronics was organized as a Utah corporation on April 29, 1983. The
principal business of the Company is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products.
Dynatronics currently sells approximately 2,000 physical medicine and
aesthetic products. We manufacture approximately 20% of the physical medicine
products and 16% of the aesthetic products in our product line. The remainder of
the products are manufactured by third parties for whom Dynatronics acts as a
distributor.
Sales of manufactured physical medicine products in fiscal years 2004
and 2003 represented approximately 75% and 66%, respectively 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 2004
and 2003 represented approximately 97% and 92%, respectively of the Company's
aesthetic product sales with the balance each year sold by the Company as a
distributor.
We primarily distribute our products in three ways: 1) through a
network of independent dealers nationwide and internationally, 2) through direct
relationships with certain national accounts, and 3) through a full-line
catalog. Some of our aesthetic products are also sold through manufacturer
representatives or direct to the practitioner by company representatives.
On May 1, 1996, the Company acquired the assets of Superior
Orthopaedics Supplies, Inc. ("Superior"), a manufacturer and distributor of
medical soft goods, supplies, wood therapy tables and rehabilitation products
for the physical medicine market. The Company retained the former location of
Superior in Ooltewah, a suburb of Chattanooga, Tennessee. The addition of
Superior's products to our existing line of capital equipment significantly
broadened our product offerings and strengthened channels of distribution,
allowing for greater market penetration both domestically and internationally.
In July 1998, the Company expanded into the aesthetic products market
with the introduction of the Synergie(TM) AMS device. This product incorporates
therapeutic massage technology to achieve, among other things, a temporary
reduction in the appearance of cellulite - a claim cleared by the U.S. Food and
Drug Administration ("FDA") during fiscal year 1999. This claim is supported by
a Company-sponsored research study in which 91% of participants reported
favorable reductions in the appearance of cellulite. In addition, this product
is indicated for the temporary reduction in circumferential body measurements of
treated areas. This benefit was also validated in the research study as
participants reported cumulative reductions of six inches in treated areas.
In February 2000, the Company expanded its offering of aesthetic
products with the introduction of the Synergie Peel(TM) microdermabrasion
device. The Synergie Peel device reduces fine lines, wrinkles, and other
superficial skin damage by gently peeling away the top layers of skin, exposing
smoother, softer skin. In conjunction with the Synergie Peel device, during
fiscal year 2000 Dynatronics introduced Calisse(TM) - a unique line of skin care
products designed to enhance the effects of the Synergie Peel treatments.
In August 2000, Dynatronics signed an agreement with Alan Neuromedical
Technologies (ANT) naming Dynatronics the exclusive licensee of ANT's patented
technology for treating chronic pain. Developed by doctors in Texas, this unique
technology has been incorporated into three unique electrotherapy devices - the
Dynatron STS (Sympathetic TherapyTM System), a dual patient device designed for
clinical use, the Dynatron STSi introduced in November 2002 for clinical use
offering standard interferential therapy on one channel and STS therapy on the
other channel, and the Dynatron STS Rx, a single channel prescription unit for
home use. According to the American Pain Society, over 70 million Americans
suffer from moderate to severe chronic pain. While effective in reducing or even
eliminating forms of chronic and sub-acute pain, the success of this modality
has been hampered by the lack of available insurance reimbursement.
In September 2003, the Company introduced the Dynatron Solaris(TM)
Series, a line of combination therapy devices. The Solaris product line consists
of five combination devices, four of which were part of the initial release with
the fifth device introduced in June 2004. The devices offer varying combinations
of electrotherapy modalities and ultrasound with the option of adding
Dynatronics new 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
1
been used in tissue regeneration applications and in accelerating healing of
chronic wounds. During fiscal 2004, the Company received marketing clearance
from FDA for its new low-power laser probe. This new laser probe was introduced
to the market in August 2004 and provides 625mW of output at a wavelength of 875
nanometers ("nm"). The probe is 600 times more powerful than our first laser
probes introduced in the 1980's. The increased power allows treatments times to
be dramatically reduced. The new Solaris Series devices are engineered to
accommodate future Dynatronics' laser or light therapy probes.
Description of Products Manufactured and/or Distributed by Dynatronics
Dynatronics manufactures and distributes a broad line of medical
equipment including therapy devices, medical supplies and soft goods, treatment
tables and rehabilitation equipment. In addition, we manufacture and distribute
a line of aesthetic equipment including aesthetic massage and microdermabrasion
devices as well as skin care products. Our products are used primarily by
physical therapists, chiropractors, sports medicine practitioners, podiatrists,
plastic surgeons, dermatologists, estheticians and other aesthetic services
providers.
Physical Medicine Products
--------------------------
Electrotherapy - The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over four decades. There
has been an evolution through the years to use the most effective and painless
waveforms and frequencies for patient comfort and for success in the treatment
of pain and related physical ailments. Medium frequency alternating currents,
which are used primarily in the Company's electrotherapy devices, are believed
to be the most effective and comfortable for patients. Electrotherapy is
effective in treating chronic intractable pain and/or acute post-traumatic pain,
increasing local blood circulation, relaxation of muscle spasms, prevention or
retardation of disuse atrophy, and muscle re-education.
Therapeutic Ultrasound - Ultrasound therapy is a process of providing
therapeutic deep heat to soft tissues through the introduction of sound waves
into the body. It is one of the most common modalities used in physical therapy
today for treating pain, muscle spasms and joint contractures.
Dynatronics markets twelve devices that include electrotherapy,
ultrasound or a combination of both modalities in a single device. The Dynatron
125 ultrasound device and the Dynatron 525 electrotherapy device target the
low-priced segment of the market. The "50 Series Plus" products offer
combinations of electrotherapy and ultrasound modalities at a reasonable cost to
the practitioner. The new Solaris products provide our most advanced technology
in combination therapy devices by adding 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.
Light Therapy - The Company's five new Dynatron Solaris units feature
light therapy technology. These units are capable of powering a cluster probe
containing 32 infrared superluminous diodes ("SLD") at 880 nm wavelength along
with four red spectrum SLD's in the 640 to 660 nm wavelength range. A new laser
probe was introduced in August 2004. It contains a laser diode generating 625mW
of output at 875nm wavelength. Additional light probes of various wavelengths
and sizes are being developed by the Company. These probes are engineered to
work with current Solaris devices and are scheduled to be introduced in fiscal
2005 and 2006. The benefits of light therapy have been documented by hundreds of
research studies published over the past two decades..
STS Therapy - STS Therapy is a patented method of administering
therapeutic electrical current via peripheral nerves that are accessed through
the lower legs and feet as well as the arms and hands creating a unique form of
stimulation of the autonomic or sympathetic nervous system. It is an effective,
non-invasive and non-addictive treatment for many chronic pain conditions.
Doctors theorize that STS Therapy has a modulating effect on the autonomic
nervous system, thus resulting in symptomatic relief of chronic intractable
pain.
Iontophoresis - Since 1997, we have distributed Life-Tech's line of
iontophoresis products which are used in physical medicine applications
primarily for treating inflammation. In September 2004, we were named a master
distributor by Naimco Corp. for their new line of "IontoPlus" iontophoresis
electrodes. Iontophoresis uses electrical current to deliver drugs such as
lidocaine transdermally for localized treatment of inflammation without the use
of needles. The Company is currently developing its own proprietary
iontophoresis device which is scheduled for introduction in fiscal year 2005.
2
The following chart lists the therapy device products manufactured
and/or distributed by the Company.
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
Product Name Description
------------ -----------
Dynatron(R) 125 Ultrasound
Dynatron(R) 525 Electrotherapy
Iontophor II(R) & Microphor(R) + Iontophoresis
Dynatron(R) 150 Plus** Ultrasound
Dynatron(R) 550 Plus** Multi-modality Electrotherapy
Dynatron(R) 650 Plus** Multi-modality Electrotherapy
Dynatron(R) 850 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) 950 Plus** Combination Electrotherapy/Ultrasound
Dynatron(R) STS STS Chronic Pain Therapy
Dynatron(R) STS Rx STS Chronic Pain Therapy
Dynatron(R) STSi Combination Electrotherapy/STS Chronic
Pain Therapy
Dynatron Solaris(TM) 701 Ultrasound with Light Therapy
Dynatron Solaris(TM) 705 Electrotherapy with Light Therapy
Dynatron Solaris(TM) 706 Electrotherapy with Light Therapy
Dynatron Solaris(TM) 708 Combination Electrotherapy/Ultrasound with
Light Therapy
Dynatron Solaris(TM) 709 Combination Electrotherapy/Ultrasound with
Light Therapy
Dynatron Solaris(TM) 880 Accessory Infrared Light Probe
Dynatron Solaris(TM) 890 Accessory Infrared Laser Light Probe
---------------------
Dynatron(R) is a registered trademark (#1280629) owned by Dynatronics
Iontophor II(R) and Microphor(R) are registered trademarks owned by Life-Tech,
Inc.
** "50 Series Plus" Product Line
+ Both manufactured by Life-Tech
Medical Supplies and Soft Goods - We currently manufacture the
following medical supplies and soft goods: hot packs, cold packs, therapy wraps,
wrist splints, ankle weights, lumbar supports, cervical collars, slings,
cervical pillows, back cushions, weight racks, and parallel bars. We also
distribute products such as: hot and cold therapy products, exercise balls,
lotions and gels, paper products, athletic tape, canes and crutches, reflex
hammers, stethoscopes, splints, elastic wraps, exercise weights, Thera-Band(R)
(a registered mark of Hygenic Corp.) tubing, walkers, treadmills, stair
climbers, heating units for hot packs, whirlpools, gloves, electrodes, TENS
devices, and traction equipment.
Dynatronics markets its products through independent dealers and
through a product catalog. In April 2004, we introduced our new product catalog
featuring approximately 2,000 products. We continually seek to update our line
of manufactured and distributed medical supplies and soft goods.
Treatment Tables and Rehabilitation Equipment - In January 1997,
Dynatronics acquired a metal treatment table manufacturing operation in
Columbia, South Carolina. In July 1999, we consolidated this operation into our
Chattanooga facilities to improve efficiencies. We now manufacture and
distribute motorized and manually operated physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products.
With the acquisition of Superior and the treatment table manufacturing
operation, Dynatronics became a broad-line supplier to the physical medicine
market which includes physical therapy, chiropractic, podiatry, sports medicine,
industrial and occupational medicine, family practice, long-term care
facilities, and the sub-groups of each of these specialties.
3
Aesthetic Products
------------------
In July 1998, Dynatronics began shipments of our Synergie Aesthetic
Massage System (AMS). The Synergie AMS device applies therapeutic vacuum massage
to skin and subcutaneous tissues to achieve a temporary reduction in the
appearance of cellulite as well as the circumferential body measurements of the
treated areas.
In December 1999, we released the results of a Company-sponsored study
reporting that 91% of participants experienced a reduction in the appearance of
cellulite. In addition, participants on average reported a cumulative reduction
of six-inches in girth around the hips, thighs, and waist.
In February 2000, we introduced the Synergie Peel microdermabrasion
device as a companion to the Synergie AMS device. The Synergie Peel device
gently exfoliates the upper layers of skin, exposing softer, smoother skin.
In January 2004, we introduced the Synergie LT device which provides
light therapy for aesthetic applications. Light therapy is becoming popular in
spas and health clubs for improving skin tone and appearance. Combining elements
of the AMS vacuum massage techniques with microdermabrasion and Synergie LT for
light therapy has provided estheticians 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 year 2004. Sales of the Company's Dynatron 950Plus device accounted for
10.2% of total revenues for the fiscal year ended June 30, 2003.
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. We also hold two design patents on the
microdermabrasion device that will remain in effect until November 2015.
Additional patent applications pertaining to the Company's Solaris technology
and STS 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 an 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," and "Sympathetic
Therapy," and trademark registration has been obtained or is now pending for
various other product trademarks. Company materials are also protected under
copyright laws, both in the United States and internationally.
Warranty Service
The Company warrants all products it manufactures for time periods
ranging in length from 90 days to five years from the date of sale. Warranty
service is provided from the Company's Salt Lake City and Chattanooga facilities
according to the service required. These warranty policies are comparable to
warranties generally available in the industry. Warranty claims as a percentage
of gross sales were not material in fiscal years 2004 and 2003.
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 300 independent
dealers throughout the United States and internationally. These dealers are the
Company's primary customers. The dealers purchase and take title to the
products, which they then sell to licensed practitioners such as physical
therapists, physiatrists, podiatrists, sports medicine specialists, medical
doctors, chiropractors, hospitals, plastic surgeons, dermatologists and
estheticians.
4
The Company has entered into direct sales relationships with national
and regional chains of physical therapy clinics and hospitals. Under these
arrangements, we sell our products directly to the clinics and hospitals with
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 2004 or 2003.
Dynatronics exports products to approximately 30 different countries.
International sales (i.e., sales outside North America) increased 48% to
approximately $633,800 in fiscal year 2004 compared to approximately $427,000 in
fiscal year 2003. 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 made Dynatronics a leader in technologically
advanced therapy devices. Dynatronics was the first company to integrate light
therapy as part of a combination therapy device. The Company has applied for a
patent on its new light therapy technology. In addition, by manufacturing many
of the medical supplies, soft goods and tables it sells, the Company can focus
on quality manufacturing at competitive prices. We believe these factors give
Dynatronics an edge over many competitors who are solely distributors of such
products.
Electrotherapy/Ultrasound Competition. The competition in the clinical
market for electrotherapy and ultrasound devices comes from both domestic and
foreign companies. No fewer than a dozen companies produce devices similar to
those offered by Dynatronics. 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, 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: Microlight Corp., Erchonia, Rich-Mar and Medex, among others.
These competitors offer units that are priced significantly higher than our unit
or are not as powerful. Management is not aware of any competitor that currently
offers a combination light therapy device that includes electrotherapy and
ultrasound capabilities.
STS Therapy. The STS technology for treating chronic pain is protected
by a U.S. patent. 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 Chattanooga Group (a division of Encore Medical), and
Fabrication Enterprises, most competitors are primarily distributors such as
EMPI, North Coast Medical, Ability-One (a division of Patterson Dental), and
Meyer Distributing.
Iontophoresis. Competition in the iontophoresis market includes Iomed,
Inc., EMPI, Birch Point Medical and Naimco. Iomed and EMPI enjoy the largest
market share. While Naimco has named Dynatronics a master distributor they also
distribute directly to the iontophoresis market and are a competitor in some
situations. We have distributed the Life-Tech products since 1996, but are not
an exclusive distributor of those products. We believe that our strong
distribution network is important to our continued ability to compete in this
increasingly competitive market. In addition, our products target a lower
selling price than the products of Iomed, EMPI and Birch Point. We anticipate
that the introduction of a new, proprietary iontophoresis device in fiscal year
2005 will allow us to gain market share, while, at the same time, increasing
profit margins on these products.
5
Treatment Tables. The primary competition in the treatment table market
is from domestic manufacturers including Hill Laboratories Company, Hausmann
Industries, Ability-One (a division of Patterson Dental), Bailey Manufacturing,
Tri-W-G, Chattanooga Group (a division of Encore Medical), and Clinton
Industries. We believe we compete based on our industry experience and product
quality. In addition, certain components of the treatment tables are
manufactured overseas which allows for pricing advantages over competitors.
Aesthetic Products. The Company's two primary competitors in the
therapeutic massage industry are LPG Systems, and Silhouette Tone. The Synergie
AMS device utilizes proprietary technology that has been proven effective in a
research study. In addition, we provide a comprehensive training and
certification program for estheticians. Dynatronics is developing a network of
domestic and international distributors and national accounts, which is expected
to provide another competitive advantage in the marketplace for these products.
There are a number of competitors in the microdermabrasion market
including: Mega Peel, Diamond Peel, DermaGenesis, DermaMed, E-Med, Integremed,
Medical Alliance, Palomar, Slimtone USA and Soundskin Corp. The Synergie Peel
device incorporates a patented anti-clogging design for the crystals, which sets
it apart from competitors' units. In addition, the system has an innovative
disposable system for the abrasive material, which prevents unwanted contact
with the spent crystals following treatment.
Many of the competitors in the light therapy segment of the aesthetic
market are relatively new to this segment of the industry and smaller in size
than Dynatronics. Competitors include Revitalite, Silhouette Tone, Photo Actif,
and DermaPulse. The Synergie LT device is the most powerful of all the units on
the market and features a computerized dosage calculation system. The Synergie
LT is also the least expensive of the table model units on the market.
Information necessary to determine or reasonably estimate the market
share of Dynatronics or any competitor in any of these markets is not readily
available.
Manufacturing and Quality Assurance
Dynatronics manufactures therapy devices, soft goods and other medical
products at its facilities in Salt Lake City, Utah and Chattanooga, Tennessee.
The Company purchases some components for our manufactured products from
third-party suppliers. All parts and components purchased from these suppliers
meet specifications set by Dynatronics. Trained staff performs 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. 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
and Synergie products. CE Mark Certification for the new Solaris Series is in
process. With the CE Mark Certification, we are able to market these products
throughout the European Union and in other countries where CE Mark Certification
and ISO 13485 certification are recognized.
6
Research and Development
In fiscal years 2003 and 2004, Dynatronics focused its resources on an
aggressive R&D campaign to develop several new products, including the Solaris
Series line of light therapy products. Total R&D expenditures for 2004 were
$1,146,715, compared to $1,038,753 in 2003. R&D expenses represented
approximately 5.6% and 6.1% of the revenues of the Company in 2004 and 2003,
respectively. As a result of our R&D focus, we were able to introduce five
Solaris devices in 2004, along with the infrared light therapy probe.
Substantially all of the research and development expenditures during 2003 and
2004 were for the development of new products, or the upgrading of existing
products.
Regulatory Matters
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are subject to regulation by numerous
national and local governmental agencies in the United States and other
countries. In the United States, the FDA regulates our products pursuant to the
Medical Device Amendment of the Food, Drug, and Cosmetic Act ("FDC Act") and
regulations promulgated thereunder. Advertising and other forms of promotion and
methods of marketing of the products are subject to regulation by the Federal
Trade Commission ("FTC") under the Federal Trade Commission Act ("FTC Act").
All of our therapeutic and aesthetic treatment devices as currently
designed are cleared for marketing under section 510(k) of the Medical Device
Amendment to the FDC Act or are considered 510(k) exempt. If a device is subject
to section 510(k), the FDA must receive premarket notification from the
manufacturer of its intent to market the device. The FDA must find that the
device is substantially equivalent to a legally marketed predicate device before
the agency will clear the new device for marketing. In addition, certain
modifications to the Company's marketed devices may require a premarket
notification and clearance under section 510(k) before the changed device may be
marketed, if the change or modification could significantly affect safety or
effectiveness. All of the Company's devices, unless specifically exempted by
regulation, are subject to the FDC Act's general controls, which include, among
other things, registration and listing, adherence to the Quality System
Regulation requirements for manufacturing, Medical Device Reporting and the
potential for voluntary and mandatory recalls.
During fiscal year 2003, Congress enacted the Medical Device User Fee
and Modernization Act (MDUFMA). Among other things, this act imposes for the
first time a user fee on medical device manufacturers. Under the provisions of
MDUFMA, manufacturers seeking clearance to market a new device must pay a fee to
the FDA in order to have their applications reviewed. Dynatronics primarily
submits new products for clearance under section 510(k) of the Medical Device
Amendment of the FDC Act. The fee per 510(k) submission in fiscal year 2004 was
$2,784. The fee for new products in fiscal year 2005 will be approximately
$2,841.
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,
7
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, 2004, we had a total of 136 full-time employees and 11
part-time employees, compared to 122 full-time and 11 part-time employees at
June 30, 2003.
Item 2. Description of Property
-----------------------
The Company's headquarters and principal place of business are located
at 7030 Park Centre Drive, Salt Lake City, Utah, 84121. The headquarters consist
of a single facility housing administrative offices and manufacturing space
totaling approximately 36,000 square feet. The Company owns the land and
building, subject to mortgages requiring a monthly payment of approximately
$15,729. The mortgages mature in 2008 and 2013. The Company also owns a 43,200
sq. ft. manufacturing facility in Ooltewah, Tennessee, and accompanying
undeveloped acreage for future expansion subject to a mortgage requiring monthly
payments of $5,641 and maturing in 2017.
We believe the facilities described above are adequate to accommodate
presently expected growth and needs of the Company for its operations. As
Dynatronics continues to grow, additional facilities or the expansion of
existing facilities will likely be required.
The Company owns equipment used in the manufacture and assembly of its
products. The nature of this equipment is not specialized and replacements may
be readily obtained from any of a number of suppliers. The Company also owns
computer equipment and engineering and design equipment used in its research and
development programs.
Item 3. Legal Proceedings.
-----------------
There are no pending legal proceedings of a material nature to which
Dynatronics is a party or of which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report. The Company's annual meeting of shareholders will
be held in November 2004.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
---------------------------------------------------------
Market Information. The common stock of the Company is listed on the
Nasdaq SmallCap Market (symbol: DYNT). The following table shows the range of
high and low sale prices for the common stock as quoted on the Nasdaq system for
the quarterly periods indicated.
8
Year Ended June 30,
2004 2003
---- ----
High Low High Low
--------------------------------------
1st Quarter (July-September) $1.59 $ .73 $.96 $.59
2nd Quarter (October-December) $2.41 $1.25 $.93 $.53
3rd Quarter (January-March) $4.08 $1.55 $.96 $.53
4th Quarter (April-June) $3.35 $1.90 $1.20 $.61
Holders. As of September 21, 2004, the approximate number of common
stock shareholders of record was 457. 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 a private or public offer and sale.
Stock Options. In fiscal year 2004, 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 118,712 shares
with an average exercise price of $1.81 per share. In fiscal year 2003,
Dynatronics granted options to employees and directors pursuant to stock option
plans. The total number of shares of common stock issuable under such options is
324,651 shares with an average exercise price of $.77 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. The decision to initiate the
program was based on management's confidence in the Company's future growth - a
confidence bolstered in part by the introduction of the Solaris line - combined
with a languishing stock price deemed to be undervalued. During fiscal year
2004, the Company purchased 77,400 shares for approximately $89,000, leaving
over $400,000 of authorized funds for future stock repurchases. The stock
repurchase program is conducted pursuant to safe harbor regulations under Rule
10b-18 of the Exchange Act for the repurchase by an issuer of its own shares.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Overview
--------
Our principal business is the design, manufacture, marketing and
distribution of physical medicine products and aesthetic products. We currently
sell approximately 2,000 physical medicine and aesthetic products through a
network of national and international independent dealers, direct relationships
with certain national accounts, and a full-line catalog.
Sales of all physical medicine products represented 87% of total
revenues in 2004 compared to 86% in 2003, while sales of aesthetic products
accounted for 7% of total revenues in both 2004 and 2003. Chargeable repairs,
billable freight revenue and other miscellaneous revenue accounted for 6% of
total revenues in 2004 and 7% in 2003.
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of our products are regulated by numerous national and
local governmental agencies in the United States and other countries, including
the FDA. In addition, the FTC regulates our advertising and other forms of
product promotion and marketing. Failure to comply with applicable FDA, FTC or
other regulatory requirements may result in, among other things, injunctions,
product withdrawals, recalls, product seizures, fines, criminal prosecutions,
limits on advertising, consumer redress, divestiture of assets, and rescission
of contracts.
9
Selected Financial Data
-----------------------
The table below summarizes selected financial data contained in the
Company's audited financial statements for the past five fiscal years. The
financial statements for the fiscal years ended June 30, 2004 and 2003 are
included with this report.
Selected Financial Data
Fiscal Year Ended June 30
2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------
Net Sales $ 20,587,273 $ 16,896,992 $ 17,133,953 $ 17,460,789 $ 15,779,748
Net Income $ 883,300 $ 24,799 $ 316,101 $ 334,179 $ 35,910
Net Income
per share (diluted) $ .10 $ .00 $ .04 $ .04 $ .00
Working Capital $ 6,300,582 $ 5,516,720 $ 5,484,167 $ 4,971,946 $ 4,550,747
Total Assets $ 14,272,579 $ 12,713,029 $ 12,508,202 $ 13,560,347 $ 12,595,581
Long-term Obligations $ 2,034,854 $ 2,203,779 $ 2,331,698 $ 2,174,348 $ 2,330,501
Fiscal Year 2004 Compared to Fiscal Year 2003
---------------------------------------------
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
During the year ended June 30, 2004, net sales increased 22% to a
record $20,587,273, compared to $16,896,992 during fiscal year 2003. Strong
demand for the Company's new Solaris product line gave a boost to sales and
profits for the year ended June 30, 2004. The Dynatron Solaris Series is a
family of advanced technology combination therapy devices incorporating seven
electrotherapy waveforms and/or ultrasound therapy in combination with optional
infrared light therapy probe. Infrared light therapy is commonly used for
treating muscle and joint pain as well as arthritis pain and stiffness. Hundreds
of independent research studies have proven the efficacy of light therapy in
clinics around the world. As the only product line of combination therapy
devices on the market to include infrared light therapy, our Solaris Series
products are rapidly gaining acceptance and popularity in the physical medicine
market. During 2004, Solaris received coverage on television newscasts and in
printed trade journals around the country. This positive national exposure
helped to introduce large numbers of people to the benefits of this technology.
Light therapy is enjoying strong interest not only in the rehabilitation
market, but also in the aesthetic market. In January 2004, the Company
introduced the Synergie LT, a light therapy device for the spa and beauty
market. The Company plans to develop and introduce additional light therapy
probes this summer for both the aesthetic as well as the medical rehabilitation
market. In addition, we are exploring new applications for light therapy beyond
our current markets. For example, excellent results are being reported using
light therapy for relief of dental pain and in accelerating wound healing. This
type of success provides an opportunity to develop light therapy products
specifically for new markets.
Overall sales increased 22% over last year. While the introduction of the
Solaris product line was the main contributor to the increase, sales of the
Company's line of general medical supply products also remained strong during
2004. In addition, sales of aesthetic products kept pace with the general trend
and increased 22% over last year.
Gross Profit
During fiscal year 2004, gross profit was $8,200,295 or 39.8% of net
sales compared to $6,187,156 or 36.6% of net sales in 2003. The increase in
gross margin in 2004 reflects added sales of high-margin Solaris devices, which
carry an average gross margin in excess of 50%, which is more favorable to the
Company. Due to these higher margins, gross margins as a percentage of net sales
in 2004 increased over three percentage points compared to the prior year
period.
10
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expenses for the year ended
June 30, 2004, were $5,528,835 or 26.9% of net sales compared to $4,948,385 or
29.3% of net sales in 2003. As a percentage of total net sales, SG&A expense
decreased 2.4 percentage points in 2004 compared to 2003. Total SG&A expenses in
2004 increased by $580,450 or 11.7% compared to 2003. There were four material
components affecting SG&A expenses in fiscal year 2004 compared to 2003:
o Approximately $191,000 in increased selling expenses primarily
related to dealer incentive programs
o Approximately $117,000 in increased health insurance and worker's
compensation insurance premiums; the costs of health and dental
insurance continue to be one of the fastest growing costs for the
Company
o Incentive compensation was $283,000 higher in 2004 than in 2003
due to the large increase in Company profits
o Partially offsetting the increased SG&A expenses were lower audit
and legal fees. General expenses decreased by approximately
$55,600 in 2004 compared to 2003.
Research and Development
Maintaining our leadership role in the physical medicine market requires
the Company's continued commitment to developing cutting-edge products such as
the new Solaris Series line of therapy devices. Although there can be no
assurance that our research and development efforts will result in new,
cutting-edge devices in fiscal 2005, our research and development efforts are
expected to continue at approximately their current cash level in 2005 as we
continue to develop new products for the future. Research and development
expenses increased to $1,146,715 during fiscal 2004 compared to $1,038,753 in
fiscal 2003. R&D expenses represented approximately 5.6% and 6.1% of the net
sales of the Company in the 2004 and 2003 periods, respectively. The majority of
the increase represents additional staffing in the R&D department calculated to
address an increasing workload associated with planned new products. R&D costs
are expensed as incurred.
Pre-tax profit
Pre-tax profit for the year ended June 30, 2004 increased to $1,377,444
compared to $41,507 in 2003. Increased sales and gross margins attributable to
the new Solaris Series line, combined with SG&A and R&D costs increasing only
marginally were the primary reasons for increased profits before tax for the
year ended June 30, 2004.
Income Tax
Income tax expense for the year ended June 30, 2004 was $494,144 compared
to $16,708 in 2003. The effective tax rate for the year ended June 30, 2004 was
35.9% compared to 40.3% in 2003.
Net Income
Net income for the year ended June 30, 2004 was $883,300 (approximately
$.10 per share), compared to $24,799 (approximately $.00 per share) in 2003.
Improved sales and margin associated with the new Solaris Series line were the
primary contributors to the increased profitability. Additionally, the
containment in growth of SG&A and R&D expenses contributed to the increases in
net income for fiscal 2004 over 2003.
Liquidity and Capital Resources
-------------------------------
The Company has financed its operations through cash reserves,
available borrowings under its line of credit, and from cash provided by
operations. The Company had working capital of $6,300,582 at June 30, 2004,
inclusive of the current portion of long-term obligations and credit facilities,
as compared to working capital of $5,516,720 at June 30, 2003.
Accounts Receivable
With the introduction of the Solaris Series product line and the
associated increase in sales of these products, trade accounts receivable, net
of allowance for doubtful accounts, increased $1,454,349 to $3,737,420 at June
30, 2004 compared to $2,283,071 at June 30, 2003. Management anticipates
accounts receivable will likely remain at current levels in future periods due
to continuing demand for the Company's new Solaris Series products and other new
products anticipated for future release which are expected to contribute to
sustaining sales at current levels and above.
11
Trade accounts receivable represent amounts due from the Company's dealer
network and from medical practitioners and clinics. We estimate that the
allowance for doubtful accounts is adequate based on our historical knowledge
and relationship with these customers. Accounts receivable are generally
collected within 30 days of the terms extended.
Inventories
Inventories, net of reserves, at June 30, 2004 remained relatively
constant at $4,687,797 compared to $4,644,489 at June 30, 2003. Management
expects that inventories will fluctuate somewhat over the course of the next
fiscal year, as optimum inventory levels are determined based on ongoing sales
demand for the Solaris Series and other new products.
Prepaid Expenses
Prepaid expenses decreased modestly to $452,754 at June 30, 2004
compared to $480,697 at June 30, 2003 due to a reduction in packaging and
freight prepayments.
Goodwill
Goodwill at June 30, 2004 and June 30, 2003 totaled $789,422. Beginning
July 1, 2002, the Company adopted the provisions of SFAS No. 142 Goodwill and
other Intangible Assets. In compliance with SFAS 142, management utilized
standard principles of financial analysis and valuation including: transaction
value, market value and income value methods to arrive at a reasonable estimate
of the fair value of the Company in comparison to its book value. The Company
has determined it has one reporting unit. As of July 1, 2002 and June 30, 2004,
the fair value of the Company exceeded the book value of the Company. Therefore,
there was no indication of impairment upon adoption of SFAS No. 142 or at June
30, 2004. Management is primarily responsible for the FAS 142 valuation
determination and performed the annual impairment assessment during the
Company's fourth quarter.
Accounts Payable
Accounts payable increased by $84,224 to $681,335 at June 30, 2004
compared to $597,111 at June 30, 2003. The increase in accounts payable is a
result of the timing of our weekly payments to suppliers and the timing of
purchases of product components. All accounts payable are within term. We
continue to take advantage of available early payment discounts when offered.
Accrued Payroll & Benefit Expenses
Accrued Payroll & Benefit Expenses increased by $234,165 to $423,972 at
June 30, 2004 compared to $189,807 at June 30, 2003. The increase in accrued
expenses is related to accrued bonuses for employees, officers, and directors
resulting from the Company's record profits generated in fiscal year 2004.
Income Taxes Payable
Income Taxes Payable was $200,294 at June 30, 2004. The Company received
a refund for fiscal year 2003. Profits in 2004 increased to $883,300 compared to
$24,799 in 2003. The increased profits generated during 2004 compared to 2003
resulted in the increase in income taxes payable.
Cash
The Company's cash position at June 30, 2004 was $573,027 compared to
$404,276 at June 30, 2003. The Company believes that its current cash balances,
amounts available under its line of credit and cash provided by operations will
be sufficient to cover its operating needs in the ordinary course of business
for the next twelve months. If we experience an adverse operating environment or
unusual capital expenditure requirements, additional financing may be required.
However, no assurance can be given that additional financing, if required, would
be available on favorable terms.
Line of Credit
The Company maintains a revolving line of credit with a commercial bank
in the amount of $4,500,000. The outstanding balance on our line of credit was
approximately $1.6 million at June 30, 2004 compared to $1.38 million at June
30, 2003. Interest on the line of credit is based on the bank's prime rate,
12
which at June 30, 2004, equaled 4.25%. 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,
2004, the maximum borrowing base was calculated to be $3.9 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, 2004, the
Company was in compliance with all loan covenants.
The current ratio at June 30, 2004 was 2.8 to 1 compared to 2.9 to 1 at
June 30, 2003. Current assets represent 69% of total assets at June 30, 2004.
Debt
Long-term debt excluding current installments totaled $1,553,832 at June
30, 2004 compared to $1,754,066 at June 30, 2003. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.6 million with monthly principal and interest payments of $21,370.
Stock Repurchase Program
On September 3, 2003, the Company announced a stock repurchase program.
The Board of Directors authorized the expenditure of up to $500,000 to purchase
the Company's common stock on the open market pursuant to regulatory
restrictions governing such repurchases. During fiscal 2004, the Company
purchased $89,000 of stock leaving over $400,000 of authorized funds for future
stock repurchases. The stock repurchase program is conducted pursuant to safe
harbor regulations under Rule 10b-18 of the Exchange Act for the repurchase by
an issuer of its own shares.
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 of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. For a detailed discussion of the application of these and other
accounting policies, see Notes to the Audited Financial Statements contained in
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:
13
o Current inventory quantities on hand.
o Product acceptance in the marketplace.
o Customer demand.
o Historical sales.
o Forecast sales.
o Product obsolescence.
o Technological innovations.
Any modifications to estimates of inventory valuation reserves are
reflected in the cost of goods sold within the statements of income during the
period in which such modifications are determined necessary by management. At
June 30, 2004 and 2003, our inventory valuation reserve balance, which
established a new cost basis, was $334,393 and $289,936, respectively and our
inventory balance was $4,687,797 and $4,644,489 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 $3,737,420 and $2,283,071, net of allowance for doubtful accounts of
$182,941 and $145,130, at June 30, 2004 and June 30, 2003, respectively.
Business Plan and Outlook
-------------------------
Over the past six years, annual net sales have grown from $12.6 million
in fiscal year 1998 to a $20.6 million in 2004. During fiscal year 2004, we
continued to focus our efforts on fueling and sustaining future growth through
the development of new products for the rehabilitation and aesthetics markets
while, at the same time, strengthening our channels of distribution and
improving operating efficiencies.
The fruits of our focused R&D campaign begun in 2002 were manifest in
September 2003 when we introduced the Solaris Series, a new product line of
advanced technology electrotherapy/ultrasound products featuring an infrared
light therapy probe. This new family of products has quickly become our top
selling line, due largely to the popularity of light therapy. Light therapy is
becoming widely recognized for its successful treatment of painful conditions.
The Solaris product line is designed to accommodate additional light therapy
probes that will be introduced in the future. This design insures that
practitioners can, over time, economically accumulate multiple light therapy
probes for various therapeutic purposes - all powered by the same Solaris
device.
Consistent with that design, in June 2004 the Company received FDA
marketing clearance for the Dynatron 890, a low-power laser accessory probe for
the Solaris Series products. Laser technology takes the Company back to its
origin 25 years ago when the Company first attempted to gain FDA approval for a
laser therapy device. However, the Dynatron 890 is 500 times more powerful than
the original devices 25 years ago which enhances efficacy and significantly
reduces treatment times for patients.
R&D efforts over the past several years have not been limited to high
tech products. During fiscal year 2003, Dynatronics introduced a new, more
price-competitive, powered treatment table. Demand for this table has remained
high since its introduction. Additional powered treatment table models are
currently under development and targeted for introduction in the next 12-18
months.
14
In April 2004, we introduced our new product catalog featuring over 2,000
products. Over the years, our product catalog has been an important sales tool
for our nationwide network of dealers. It provides important information about
the new Solaris product line as well as many other products that we manufacture
and/or distribute.
Going forward, we intend to continue to strengthen our manufacturing
capabilities with the goal of improving margins and gaining greater pricing
advantages over competitors. To that end, some products previously purchased
from other manufacturers are being converted to in-house manufacturing. Other
products are being sourced from overseas manufacturers or moved to more
competitive domestic manufacturers.
Another important part of our strategic plan is the expansion of
worldwide marketing efforts. Similar efforts over the past few years have had
limited success. Despite this experience, we continue to press forward seeking
opportunities for international expansion. The Company's Salt Lake City
operation, where all electrotherapy, ultrasound, STS devices, light therapy and
Synergie products are manufactured, is certified to ISO 13485, an
internationally recognized standard of excellence in medical device
manufacturing. This designation is an important requirement in obtaining the CE
Mark certification, which allows us to market our products in the European
Union. It is expected that the attractive features of the Solaris Series will
make foreign distribution channels more accessible. Interest in Synergie
products is presently leading the way for international expansion with the
recent establishment of new distributors in Japan, South Africa, Europe and
Southeast Asia.
We continue efforts to promote our line of aesthetic products. In January
2004, we introduced the Synergie LT device, an infrared light therapy unit
designed specifically for aesthetic applications. Interest in light therapy
applications is growing in the aesthetics market. The introduction of the
Synergie LT device is positioning Dynatronics to compete more fully in the spa
and beauty market. We plan to develop and introduce additional light therapy
probes for the aesthetic market using different wavelengths of light. Recent
interest by medical spas in the use of other physical therapy modalities such as
electrotherapy, ultrasound and light therapy in aesthetic applications has
opened new potential for crossover of physical medicine modalities into the
aesthetics market. This presents a unique opportunity for us to grow sales of
new aesthetic products with little additional R&D effort since the products have
already been developed for the physical medicine markets.
Based on our defined strategic initiatives, we are focusing our resources
in the following areas:
o Increasing sales of Solaris devices through introduction of new
light therapy accessories and by developing new markets for light
therapy applications. .
o Reinforcing our position in the physical medicine market through
an aggressive research and development campaign that will result
in the introduction of more new products, both high tech and
commodity, over the coming two years.
o Improving sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Improving distribution of aesthetic products domestically and
exploring the opportunities to introduce more light therapy
devices and versions of our physical therapy modalities into the
aesthetics market.
o Expanding distribution of both rehabilitation and aesthetic
products internationally.
o Seeking strategic partnerships to further expand our presence in
and market share of the physical rehabilitation and the aesthetics
markets.
Forward-Looking Statements
--------------------------
When used in this report, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements within the safe harbor provisions of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. Risks and circumstances that may cause actual results to
vary from the Company's expectations include, among others, the following:
15
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 five
patents issued and two patents pending relating to its products. In addition, we
have obtained by license the worldwide rights to the STS patent. The Company's
trademarks have also been registered in the United States and in other
countries. There can be no assurance that patents owned by or licensed to us
will not be challenged or circumvented or will provide us with any competitive
advantages or that a patent will issue from any pending patent application. We
16
also rely upon copyright protection for our proprietary software and other
property. There can be no assurance that any copyright obtained will not be
circumvented or challenged. In addition, we rely on trade secrets that we seek
to protect, in part, through confidentiality agreements with employees and other
parties. There can be no assurance that these agreements will not be breached,
that the Company would have adequate remedies for any breach or that the our
trade secrets will not otherwise become known to or independently developed by
competitors. The Company may become involved from time to time in litigation to
determine the enforceability, scope and validity of proprietary rights. Any such
litigation could result in substantial cost to the Company and divert the
efforts of its management and technical personnel.
Foreign Duties and Import Restrictions. Some of the Company's products
are exported to the countries in which they ultimately are sold. The countries
in which we sell products may impose various legal restrictions on imports,
impose duties of varying amounts, or enact regulatory requirements, adverse to
the Company's products. There can be no assurance that changes in legal
restrictions, increased duties or taxes, or stricter health and safety
requirements would not have a material adverse effect in the Company's ability
to market its products in a given country.
Effect of Exchange Rate Fluctuations. Exchange rate fluctuations may
have a significant effect on the Company's sales and gross margins in a given
foreign country. If exchange rates fluctuate dramatically, it may become
uneconomical for the Company to establish or continue activities in certain
countries. Differences in the exchange rates may also create a marketing
advantage for foreign competitors, making the purchase price of their products
lower than prices originally denominated in U.S. dollars. As the Company's
business expands outside the United States, an increasing share of its revenues
and expenses will be transacted in currencies other than the U.S. dollar.
Consequently, the reported earnings of the Company in future periods may be
significantly affected by fluctuations in currency exchange rates, with earnings
generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar.
Item 7. Financial Statements
--------------------
The consolidated financial statements and accompanying report of the
Company's auditors follow immediately and form a part of this report.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Dynatronics Corporation:
We have audited the accompanying balance sheet of Dynatronics Corporation as of
June 30, 2003 and the related statements of income, stockholders' equity, and
cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2003 and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in note 1 to the financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles Assets, in 2002.
/s/ KPMG LLP
Salt Lake City, Utah
August 8, 2003
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Dynatronics Corporation
We have audited the balance sheet of Dynatronics Corporation (the Company) as of
June 30, 2004, and the related statements of Income, stockholders' equity, and
cash flows for the year ended June 30, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2004, and the results of its operations and its cash flows for the year
ended June 30, 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/TANNER + CO.
Salt Lake City, Utah
August 16, 2004
F-1
DYNATRONICS CORPORATION
Balance Sheets
June 30, 2004 and 2003
Assets
2004 2003
-------------------- ----------------
Current assets:
Cash $ 573,027 404,276
Trade accounts receivable, less allowance for
doubtful accounts of $182,941 at June 30,
2004 and $145,130 at June 30, 2003 3,737,420 2,283,071
Other receivables 76,213 193,713
Inventories 4,687,797 4,644,489
Prepaid expenses 452,754 480,697
Prepaid income taxes - 105,804
Deferred tax asset-current 335,000 312,547
-------------------- ----------------
Total current assets 9,862,211 8,424,597
Property and equipment, net 3,310,083 3,202,553
Goodwill 789,422 789,422
Other assets 310,863 296,457
-------------------- ----------------
$ 14,272,579 12,713,029
==================== ================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 207,019 198,606
Line of credit 1,604,535 1,382,095
Accounts payable 681,335 597,111
Accrued expenses 444,474 540,258
Accrued payroll and benefit expenses 423,972 189,807
Income tax payable 200,294 -
-------------------- ----------------
Total current liabilities 3,561,629 2,907,877
Long-term debt, excluding current installments 1,553,832 1,754,066
Deferred compensation 331,022 305,654
Deferred tax liability - noncurrent 150,000 144,059
-------------------- ----------------
Total liabilities 5,596,483 5,111,656
-------------------- ----------------
Stockholders' equity:
Common stock, no par value, authorized
50,000,000 shares; issued 8,956,688
shares at June 30, 2004 and
8,869,335 shares at June 30, 2003 2,670,404 2,478,981
Retained earnings 6,005,692 5,122,392
-------------------- ----------------
Total stockholders' equity 8,676,096 7,601,373
-------------------- ----------------
$ 14,272,579 12,713,029
==================== ================
See accompanying notes to financial statements.
F-2
DYNATRONICS CORPORATION
Statements of Income
Years ended June 30, 2004 and 2003
2004 2003
-------------------- ----------------
Net sales $ 20,587,273 16,896,992
Cost of sales 12,386,978 10,709,836
-------------------- ----------------
Gross profit 8,200,295 6,187,156
Selling, general, and administrative expenses 5,528,835 4,948,385
Research and development expense 1,146,715 1,038,753
-------------------- ----------------
Operating income 1,524,745 200,018
-------------------- ----------------
Other income (expense):
Interest income 12,818 6,825
Interest expense (169,433) (176,731)
Other income, net 9,314 11,395
-------------------- ----------------
Total other expense, net (147,301) (158,511)
-------------------- ----------------
Income before income taxes 1,377,444 41,507
Income tax expense 494,144 16,708
-------------------- ----------------
Net income $ 883,300 24,799
==================== ================
Basic net income per share $ 0.10 0.00
Diluted net income per share 0.10 0.00
Weighted average basic and diluted common shares outstanding:
Basic 8,871,214 8,869,335
Diluted 9,213,219 8,869,335
See accompanying notes to financial statements.
F-3
DYNATRONICS CORPORATION
Statements of Cash Flows
Years ended June 30, 2004 and 2003
2004 2003
----------------- --------------
Cash flows from operating activities:
Net income $ 883,300 24,799
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 321,007 374,864
Other amortization 7,324 7,325
Provision for doubtful accounts 96,000 72,000
Provision for inventory obsolescence 276,000 240,000
Provision for warranty reserve 164,574 199,718
Provision for deferred compensation 25,368 23,425
Change in operating assets and liabilities:
Receivables (1,432,848) 665,854
Inventories (319,308) (1,047,738)
Prepaid expenses and other assets 6,213 (135,855)
Deferred tax asset (16,512) 9,257
Income tax receivable 105,804 (105,804)
Accounts payable and accrued expenses 58,031 219,625
Income taxes payable 287,266 (30,804)
----------------- --------------
Net cash provided by operating activities 462,219 516,666
----------------- --------------
Cash flows from investing activities:
Capital expenditures (428,537) (232,358)
----------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 7,375
Principal payments on long-term debt (191,822) (230,616)
Net change in line of credit 222,440 (53,594)
Purchase and retirement of common stock (89,000) -
Proceeds from issuance of common stock 193,451 -
----------------- --------------
Net cash provided by (used in) financing activities 135,069 (276,835)
----------------- --------------
Net increase in cash 168,751 7,473
Cash at beginning of period 404,276 396,803
----------------- --------------
Cash at end of period $ 573,027 404,276
================= ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 169,012 180,217
Cash paid for income taxes 236,800 138,500
Supplemental disclosure of non-cash investing and financing activities:
Income tax benefit from exercise of stock options 86,972 -
See accompanying notes to financial statements.
F-4
DYNATRONICS CORPORATION
Statements of Stockholders' Equity
Years ended June 30, 2004 and 2003
Total
Common Redeemed Retained stockholders'
Balances at June 30, 2002 $ 2,638,677 (159,696) 5,097,593 7,576,574
Retired 23,855 shares of redeemed stock (159,696) 159,696 - -
Net income - - 24,799 24,799
----------------- ------------- ----------------- -----------------
Balances at June 30, 2003 2,478,981 - 5,122,392 7,601,373
Redeemed 77,400 shares of common stock - (89,000) - (89,000)
Retired 77,400 shares of redeemed stock (89,000) 89,000 - -
Issuance of 164,753 shares of common stock
upon exercise of employee stock options 193,451 - - 193,451
Income tax benefit disqualifying disposition
of employee stock options 86,972 - - 86,972
Net income - - 883,300 883,300
----------------- ------------- ----------------- -----------------
Balances at June 30, 2004 $ 2,670,404 - 6,005,692 8,676,096
================= ============= ================= =================
See accompanying notes to financial statements.
F-5
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures, markets, and
distributes a broad line of therapeutic, diagnostic, and
rehabilitation equipment, medical supplies and soft goods,
treatment tables and aesthetic medical devices to an expanding
market of physical therapists, podiatrists, orthopedists,
chiropractors, plastic surgeons, dermatologists, and other medical
professionals. The products are distributed primarily through
dealers in the United States and Canada, with increasing
distribution in foreign countries.
(b) 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.
(c) 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.
(d) 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 2 to 7 years.
(e) Goodwill and Long-Lived Assets
Goodwill represents the excess of costs over fair value of assets
of businesses acquired. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, as of July 1, 2002. Goodwill
and intangible assets acquired in a purchase business combination
and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. Management is
primarily responsible for the SFAS No. 142 valuation
determination. In compliance with SFAS No. 142, management
utilizes standard principles of financial analysis and valuation
including: transaction value, market value, and income value
methods to arrive at a reasonable estimate of the fair value of
the Company in comparison to its book value. The Company has
determined it has one reporting unit. As of July 1, 2002, the fair
value of the Company exceeded the book value of the Company.
Therefore, there was not an indication of impairment upon adoption
of SFAS No. 142. Management performed its annual impairment
assessment during the Company's fourth quarter of fiscal year 2004
and 2003 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.
F-6
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.
(f) 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.
(g) Research and Development Costs
Research and development costs are expensed as incurred.
(h) 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.
(i) Earnings per Common Share
Basic earnings per common share is the amount of earnings for the
period available to each share of common stock outstanding during
the reporting period. Diluted earnings per common share is the
amount of earnings for the period available to each share of
common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding
during the period.
A reconciliation between the basic and diluted weighted average
number of common shares for 2004 and 2003 is summarized as
follows:
2004 2003
---------------- ----------------
Basic weighted average number of common shares outstanding 8,871,214 8,869,335
during the period
Weighted average number of dilutive common stock options
outstanding during the period 342,005 -
---------------- ----------------
Diluted weighted average number of common and common
equivalent shares outstanding during the period 9,213,219 8,869,335
================ ================
F-7
Outstanding options not included in the computation of diluted net
income per share total 172,332 and 983,645 as of June 30, 2004 and
2003, respectively, because to do so would have been antidilutive.
(j) 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.
(k) Stock-Based Compensation
The Company employs the footnote disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS No. 123 encourages entities to adopt a
fair-value-based method of accounting for stock options or similar
equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25). The Company has elected to apply the
provisions of APB 25 and provide pro forma footnote disclosures
required by SFAS No. 123. Accordingly, no compensation expense has
been recognized for the stock option plan. (See note 11). Had
compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date consistent
with the provisions of SFAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts
indicated below:
Year ended Year ended
June 30, June 30,
2004 2003
----------------- ---------------
Net income as reported $ 883,300 24,799
Less: pro forma adjustment for stock based
compensation, net of income tax (114,656) (36,469)
----------------- ---------------
Pro forma net (loss) income $ 768,644 (11,670)
================= ===============
Basic net (loss) income per share:
As reported 0.10 0.00
Effect of pro forma adjustment (0.01) 0.00
----------------- ---------------
Pro forma 0.09 0.00
Diluted net (loss) income per share:
As reported 0.10 0.00
Effect of pro forma adjustment (0.02) 0.00
----------------- ---------------
Pro forma 0.08 0.00
================= ===============
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.
F-8
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
-----------------------------
2004 2003
-----------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 82-89% 88-91%
Risk-free interest rate 3.31 - 4.34% 2.89 - 4.42%
Expected life of options 5 & 7 years 5 & 7 years
The weighted average fair value of options granted during 2004 and
2003 was $1.40 and $0.60, respectively.
(l) 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.
(m) 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 93% of
net sales for both years ended June 30, 2004 and 2003. Aesthetics
products consisted of 7% of net sales for both years ended June
30, 2004 and 2003.
(n) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues, and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity
with accounting principles generally accepted in the United States
of America. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant, and
equipment; valuation allowances for receivables and inventories;
accrued product warranty reserve; and estimated recoverability of
goodwill. Actual results could differ from those estimates.
F-9
(o) 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.
(p) 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, 2004 and 2003 was approximately $189,000 and $172,000,
respectively. No prepaid supplies consisted of catalogs as of June
30, 2004 and 2003.
(2) Inventories
Inventories consist of the following:
2004 2003
------------------ -----------------
Raw materials $ 2,906,721 2,487,435
Finished goods 2,115,469 2,446,990
Inventory reserve (334,393) (289,936)
------------------ -----------------
$ 4,687,797 4,644,489
================== =================
(3) Property and Equipment
Property and equipment consist of the following:
2004 2003
---------------- ---------------
Land $ 354,743 354,743
Buildings 2,899,729 2,897,447
Machinery and equipment 1,753,220 1,728,106
Office equipment 801,297 415,349
Vehicles 80,680 65,487
---------------- ---------------
5,889,669 5,461,132
Less accumulated depreciation and amortization 2,579,586 2,258,579
---------------- ---------------
$ 3,310,083 3,202,553
================ ===============
(4) Product Warranty Reserve
A reconciliation of the changes in the product warranty reserve, which
is include in accrued expenses, consists of the following:
2004 2003
----------------- -----------------
Beginning product warranty reserve balance $ 160,000 136,000
Warranty repairs (140,573) (175,718)
Warranties issued 296,457 243,317
Changes in estimated warranty costs (131,884) (43,599)
----------------- -----------------
Ending product warranty reserve balance $ 184,000 160,000
================= =================
F-10
(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, 2004 and 2003, the outstanding balance was
$1.60 million and $1.38 million, respectively. The line of credit is
collateralized by inventory and accounts receivable and bears interest
at the bank's "prime rate," (4.25% and 4% at June 30, 2004 and 2003,
respectively). This line is subject to annual renewal and matures on
December 1, 2004. Accrued interest is payable monthly.
(6) Long-Term Debt
Long-term debt consists of the following:
2004 2003
-------------- ---------------
5.25% promissory note secured by building, payable in
monthly installments of $5,641 through May 2017 $ 628,653 $ 663,397
6.21% promissory note secured by a trust deed on real
property, maturing November 2013, payable in decreasing
installments beginning at $7,545 monthly ($7,060 during
2003 and 2002) 599,099 645,072
5.84% promissory note secured by a trust deed on real
property, payable in monthly installments of $8,669
through November 2008 403,150 -
8.87% promissory note secured by fixed assets, payable in
monthly installments of $3,901 through May 2007 123,053 159,741
Other notes payable 6,896 15,819
7.11% promissory note with an interest rate reset in
November 2003 secured by a trust deed on real property,
payable in monthly installments of $8,708 - 468,643
-------------- ---------------
Total long-term debt 1,760,851 1,952,672
Less current installments 207,019 198,606
-------------- ----------------
Long-term debt, excluding current installments $ 1,553,832 $ 1,754,066
============== ================
The aggregate maturities of long-term debt for each of the years
subsequent to 2004 are as follow: 2005, $207,019; 2006, $221,069; 2007,
$229,370; 2008, $198,632; 2009, $147,670; and thereafter $757,091.
(7) Leases
The Company leases vehicles under noncancelable operating lease
agreements. Rent expense for the years ended June 30, 2004 and 2003 was
$24,379 and $29,203, respectively. Future minimum rental payments
required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year as of 2004 are as follows:
2005, $22,497; 2006, $20,440; 2007, $14,269 and 2008, $8,118.
(8) Goodwill and Other Intangible Assets
Goodwill. The cost of acquired companies in excess of the fair value of
the net assets and purchased intangible assets at acquisition date is
recorded as goodwill. As of June 30, 2002, the Company had goodwill,
net of $789,422 arising from the acquisition of Superior Orthopaedic
Supplies, Inc. on May 1, 1996 and the exchange of Dynatronics Laser
Corporation common stock for a minority interest in Dynatronics
Marketing Corporation on June 30, 1983.
F-11
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, 2004 June 30, 2003
------------------- ----------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 28,076 20,752
------------------- ----------------
Net carrying amount $ 45,164 52,488
=================== ================
Amortization expense associated with the license agreement was $7,325
for 2004 and 2003. Estimated amortization expense for the existing
license agreement is expected to be $7,325 for each of the fiscal years
ending June 30, 2005 through June 30, 2010.
(9) Income Taxes
Income tax expense for the years ended June 30 consists of:
Current Deferred Total
--------------- ---------------- --------------
2004:
U.S. federal $ 427,816 (14,298) 413,518
State and local 82,840 (2,214) 80,626
--------------- ---------------- --------------
$ 510,656 (16,512) 494,144
=============== ================ ==============
2003:
U.S. federal $ -- 8,016 8,016
State and local 7,451 1,241 8,692
--------------- ---------------- --------------
$ 7,451 9,257 16,708
=============== ================ ==============
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:
2004 2003
-------------- -------------
Expected tax expense $ 468,000 14,112
State taxes, net of federal tax benefit 53,778 5,737
Meals and entertainment 2,000 1,558
Officers' life insurance (4,716) (3,249)
Extraterritorial income exclusion (5,000) (2,237)
Other, net (19,918) 787
-------------- -------------
$ 494,144 16,708
============== =============
Deferred income tax assets and liabilities related to the tax effects
of temporary differences are as follows:
F-12
2004 2003
----------------- ------------------
Net deferred tax asset - current:
Charitable contribution $ -- 10,614
Inventory capitalization for income tax purposes 58,000 64,385
Inventory reserve 125,000 107,778
Vacation reserve 4,000 3,730
Warranty reserve 69,000 59,680
Accrued product liability 11,000 12,227
Allowance for doubtful accounts 68,000 54,133
----------------- ------------------
Total deferred tax asset - current $ 335,000 312,547
================= ==================
Net deferred tax asset (liability) - noncurrent:
Deferred compensation $ 123,000 114,009
Property and equipment, principally due to differences in
depreciation (277,000) (240,987)
Noncompete and goodwill 4,000 (17,081)
----------------- ------------------
Total deferred tax liability - noncurrent $ (150,000) (144,059)
================= ==================
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, 2004 and 2003, sales to any
single customer did not exceed 10% of total net sales. During the
fiscal year ended June 30, 2004 and 2003, sales in the United States
and other countries were 97 percent and 3 percent, respectively, for
both years.
(11) Common Stock
On July 15, 2003, the Company approved an open-market share repurchase
program for up to $500,000 of the Company's common stock. During the
year ended June 30, 2004, the company acquired and retired $89,000 of
common stock.
The Company granted options to acquire common stock under its 1992
qualified stock option plan. The options are to be granted at not less
than 100% of the market price of the stock at the date of grant. Option
terms are determined by the board of directors, and exercise dates may
range from six months to five years from the date of grant.
F-13
(11) Common Stock - Continued
A summary of activity follows:
2004 2003
------------------------------------ ------------------------------------
Weighted Weighted
Number average Number average
of shares exercise price of shares exercise price
-------------- ----------------- -------------- -----------------
Options outstanding at
beginning of year 903,645 $ 1.09 836,578 $ 1.19
Options granted 118,712 1.81 324,651 0.77
Options exercised 164,753 1.17 -- --
Options canceled or expired (133,720) 1.33 (257,584) 1.00
-------------- --------------
Options outstanding at end
of year 723,884 1.15 903,645 1.09
============== ==============
Options exercisable at end
of year 550,953 1.06 466,506 1.25
============== ==============
Range of exercise prices at
end of year $ 0.66 - 3.00 $ 0.66 - 2.70
At June 30, 2004, 974,824 shares of common stock were authorized and
reserved for issuance, but were not granted under the terms of the
stock option plan.
The Company has 80,000 options outstanding that were not issued under
the Company's stock option plan. The exercise price of the options
ranges from $1.08 to $4.00. The options expire during fiscal 2007
through fiscal 2010.
(12) Employee Benefit Plan
During 1991, the Company established a deferred savings plan which
qualifies under Internal Revenue Code Section 401(k). The plan covers
all employees of the Company who have at least six months of service
and who are age 20 or older. For 2004 and 2003, 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 2004 and 2003
were $26,530 and $19,451, respectively. Company matching contributions
for future years are at the discretion of the board of directors.
(13) Salary Continuation Agreements
As of June 30, 2004 the Company had salary continuation agreements with
two key employees. The agreements provide a preretirement 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 2004 and 2003, the Company has
accrued $331,022 and $305,654, respectively, of deferred compensation
under the terms of the agreements.
F-14
(14) Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This
interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the guarantee. The disclosure requirements are effective
for financial statements of interim or annual periods ending after
December 31, 2002. Because the Company currently is not a guarantor on
any indebtedness, the adoption of FIN 45 did not have any effect on the
Company's financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"),
which addresses how a business enterprise should evaluate whether it
has a controlling interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46 (FIN 46), which was issued in January 2003.
Before concluding that it is appropriate to apply ARB 51 voting
interest consolidation model to an entity, an enterprise must first
determine that the entity is not a variable interest entity ("VIE"). As
of the effective date of FIN 46R, an enterprise must evaluate its
involvement with all entities or legal structures created before
February 1, 2003 to determine whether consolidation requirements of FIN
46R apply to those entities. There is no grandfathering of existing
entities. Public companies must apply either FIN 46 or FIN 46R
immediately to entities created after January 31, 2003 and no later
than the end of the first reporting period that ends after March 15,
2004. The adoption of FIN 46 had no effect on the Company's financial
position, results of operations or cash flows
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The purpose of
SFAS 149 is to amend and clarify financial accounting and reporting for
derivative and hedging activities under SFAS 133. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003 and for
designated hedging relationships after June 30, 2003. Since the Company
does not currently participate in derivative and hedging activities,
the adoption of SFAS 149 did not have any effect on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments With Characteristics of Both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. The statement was effective on July 1, 2003 for financial
instruments entered into or modified after May 31, 2003, and otherwise
effective for existing financial instruments entered into before May
31, 2003. Since the Company does not have any financial instruments
within the scope of this statement, the adoption of SFAS No. 150 did
not have any effect on the Company's financial position or results of
operations.
F-15
Item 8. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 8A. Controls and Procedures
-----------------------
Based on their evaluation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period
covered by this Report, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. There have been no significant changes in internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART III
Item 9. Directors and Executive Officers; 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 2004 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 2004 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.
---------------------------------------------------------------
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 Principle Shareholders" and "Equity Compensation Plan
Information" contained in the Company's definitive proxy statement for its 2004
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, 2004, 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 and Reports on Form 8-K
--------------------------------
(a) Exhibits and documents required by Item 601 of Regulation S-B:
1. Financial Statements (included in Part II, Item 7):
Report of Independent Registered Public Accounting Firms....F-1
Balance Sheets at June 30, 2004 and 2003....................F-2
Statements of Income for years ended
June 30, 2004 and 2003......................................F-3
Statements of Stockholders'
Equity for years ended June 30, 2004
and 2003....................................................F-4
Statements of Cash Flows for
years ended June 30, 2004 and 2003 .........................F-5
Notes to Financial Statements...............................F-6
18
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, as amended by Articles of
Amendment dated November 18, 1993.
3.2 Articles of Amendment dated November 21, 1988
(previously filed).
4.1 Form of certificate representing Dynatronics Laser
Corporation common shares, no par value. Incorporated
by reference to a Registration Statement on Form S-1
(No. 2-85045) filed with the Securities and Exchange
Commission and effective November 2, 1984.
4.2 Amended and Restated 1992 Stock Option Plan, effective
November 28, 1996 (previously filed).
10.2 Employment contract with Kelvyn H. Cullimore, Jr.
(previously filed)
10.2 Employment contract with Larry K. Beardall (previously
filed)
10.3 Loan Agreement with Zion Bank (previously filed)
10.4 Settlement Agreement dated March 29, 2000 with Kelvyn
Cullimore, Sr. (previously filed)
23.1 Consent of Tanner & Co.
23.2 Consent of KPMG LLP
31 Certification under Rule 13a-14(a)/15d-14(a)of
Principal Executive Officer and Principal Financial
Officer
32 Certification under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. SECTION 1350)
(b) Reports on Form 8-K. On June 14, 2004, we filed a Current Report on
Form 8-K to report that we had received FDA marketing clearance for our Solaris
D890 low-power laser probe for the treatment of muscle and joint pain as well as
pain and stiffness associated with arthritis.
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 2004 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 21, 2004
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 Chairman of the Board September 21, 2004
------------------------------
Kelvyn H. Cullimore
/s/ Kelvyn H. Cullimore, Jr. Director, President, CEO September 21, 2004
------------------------------ (Principal Executive &
Kelvyn H. Cullimore, Jr. Financial Officer)
/s/ Terry M. Atkinson, CPA Principal Accounting September 21, 2004
------------------------------ Officer
Terry M. Atkinson, CPA
/s/ Larry K. Beardall Director, Executive September 21, 2004
------------------------------ Vice President
Larry K. Beardall
/s/ E. Keith Hansen, MD Director September 21, 2004
------------------------------
E. Keith Hansen, M.D.
/s/ Howard L. Edwards Director September 21, 2004
------------------------------
Howard L. Edwards
/s/ Val J. Christensen Director September 21, 2004
------------------------------
Val J. Christensen
/s/ Joseph H. Barton Director September 21, 2004
------------------------------
Joseph H. Barton
20