UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
---- ------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
(Address of principal executive offices)
(801) 568-7000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the issuer's common stock, no par value, as
of November 11, 2002 is 8,869,335.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
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DYNATRONICS CORPORATION
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Unaudited Condensed Balance Sheets
September 30, 2002 and June 30, 2002......................................1
Unaudited Condensed Statements of Income
Three Months Ended September 30, 2002 and 2001............................2
Unaudited Condensed Statements of Cash Flows
Three Months Ended September 30, 2002 and 2001............................3
Notes to Unaudited Condensed Financial Statements.........................4
Item 2. Management's Discussion and Analysis or Plan of Operation.........9
Item 3. Controls and Procedures..........................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.................................18
DYNATRONICS CORPORATION
Balance Sheets
(Unaudited)
September 30, June 30,
Assets 2002 2002
-------------------- ---------------------
Current assets:
Cash $ 326,481 396,803
Trade accounts receivable, less allowance for doubtful accounts
of $183,763 September 30, 2002 and $165,763 at June 30, 2002 3,453,739 3,156,436
Other receivables 64,956 58,202
Inventories 3,916,006 3,836,751
Prepaid expenses 389,427 359,000
Deferred tax asset-current 276,905 276,905
-------------------- ---------------------
Total current assets 8,427,514 8,084,097
Property and equipment, net 3,321,998 3,345,059
Goodwill, net of accumulated amortization of $649,792 at
September 30, 2002 and at June 30, 2002 789,422 789,422
Other assets 293,244 289,624
-------------------- ---------------------
$ 12,832,178 12,508,202
==================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 225,604 225,604
Line of credit 1,369,262 1,435,689
Accounts payable 550,523 318,905
Accrued expenses 372,734 380,424
Accrued payroll and benefit expenses 247,252 208,504
Income tax payable 98,580 30,804
-------------------- ---------------------
Total current liabilities 2,863,955 2,599,930
Long-term debt, excluding current installments 1,896,137 1,950,309
Deferred compensation 288,085 282,229
Deferred tax liability - noncurrent 99,160 99,160
-------------------- ---------------------
Total liabilities 5,147,337 4,931,628
-------------------- ---------------------
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued 8,869,335 shares at September 30, 2002 and
8,928,774 shares at June 30, 2002 2,478,981 2,638,677
Treasury stock, zero common shares at cost at
September 30, 2002 and 59,439 at June 30, 2002 - (159,696)
Retained earnings 5,205,860 5,097,593
-------------------- ---------------------
Total stockholders' equity 7,684,841 7,576,574
-------------------- ---------------------
$ 12,832,178 12,508,202
==================== =====================
See accompanying notes to financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended
September 30
2002 2001
--------------- ---------------
Net sales $ 4,115,770 4,167,287
Cost of sales 2,450,169 2,435,348
--------------- ---------------
Gross profit 1,665,601 1,731,939
Selling, general, and administrative expenses 1,234,416 1,333,469
Research and development expenses 212,060 161,436
--------------- ---------------
Operating income 219,125 237,034
--------------- ---------------
Other income (expense):
Interest income 10 2,023
Interest expense (45,876) (81,113)
Other income, net 2,783 2,337
--------------- ---------------
Total other income (expense)
(43,083) (76,753)
--------------- ---------------
Income before income taxes 176,042 160,281
Income tax expense 67,776 63,438
--------------- ---------------
Net income $ 108,266 96,843
=============== ===============
Basic and diluted net income per common share $ 0.01 0.01
--------------- ---------------
Weighted average basic and diluted common shares outstanding (note 2)
Basic 8,869,335 8,831,216
Diluted 8,869,335 8,978,429
See accompanying notes to condensed financial statements.
DYNATRONICS CORPORATION
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
2002 2001
---------------- --------------
Cash flows from operating activities:
Net income $ 108,266 96,843
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 74,084 78,471
Other amortization 1,831 21,803
Provision for doubtful accounts 18,000 12,000
Provision for inventory obsolescence 60,000 51,000
Provision for warranty reserve 53,411 53,205
Provision for deferred compensation 5,856 5,409
Change in operating assets and liabilities:
Receivables (322,057) (571,883)
Inventories (139,255) (63,125)
Prepaid expenses and other assets (35,878) (229,650)
Accounts payable and accrued expenses 209,266 550,776
Income taxes payable 67,776 63,438
---------------- --------------
Net cash provided by operating activities 101,300 68,287
---------------- --------------
Cash flows from investing activities:
Capital expenditures (51,023) (16,841)
---------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt (54,172) (69,026)
Net change in line of credit (66,427) 68,369
Proceeds from sale of common stock - 14,065
---------------- --------------
Net cash provided by (used in) financing activities (120,599) 13,408
---------------- --------------
Net increase in cash and cash equivalents (70,322) 64,854
Cash at beginning of year 396,803 258,884
---------------- --------------
Cash at end of year $ 326,481 323,738
================ ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 49,179 86,774
Cash paid for income taxes 49,000 -
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in exchange for cashless exercise of options
using mature stock $ - 39,600
See accompanying notes to financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of September 30, 2002 and June 30, 2002 and for the
three months ended September 30, 2002 and 2001 were prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all necessary adjustments, which consist only of normal recurring
adjustments, to the financial statements have been made to present fairly the
financial position and results of operations and cash flows. The results of
operations for the respective periods presented are not necessarily indicative
of the results for the respective complete years. The Company has previously
filed with the SEC an annual report on Form 10-KSB which included audited
financial statements for the two years ended June 30, 2002. It is suggested that
the financial statements contained in this filing be read in conjunction with
the statements and notes thereto contained in the Company's 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted-average number of
common shares and, as appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period.
Diluted net income per common share is the amount of net income for the period
available to each share of common stock outstanding during the reporting period
and to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period.
In calculating net income per common share, the net income was the same for both
the basic and diluted calculation. A reconciliation between the basic and
diluted weighted-average number of common shares for the three months ended
September 30, 2002 and 2001 is summarized as follows:
4
(Unaudited)
Three Months Ended
September 30,
2002 2001
---- ----
Basic weighted average number
of common shares outstanding
during the period 8,869,335 8,831,216
Weighted average number of dilutive
common stock options outstanding
during the period -0- 147,213
--------------------------------
Diluted weighted average number
of common and common equivalent
shares outstanding during the period 8,869,335 8,978,429
================================
Outstanding options not included in the computation of diluted net income per
share for the three month periods ended September 30, 2002 and 2001 total
971,403 and 202,297 respectively, because to do so would have been
anti-dilutive.
NOTE 3. COMPREHENSIVE INCOME
For the periods ended September 30, 2002 and 2001, comprehensive income was
equal to the net income as presented in the accompanying condensed statements of
income.
NOTE 4. INVENTORIES
Inventories consisted of the following:
September 30 June 30
2002 2002
--------------- --------------
Raw Material $ 2,419,340 2,555,535
Finished Goods 1,822,358 1,546,908
Inventory Reserve (325,692) (265,692)
--------------- --------------
$ 3,916,006 3,836,751
=============== ==============
5
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30 June 30
2002 2002
-------------- --------------
Land $ 354,743 354,743
Buildings 2,877,980 2,871,286
Machinery and equipment 1,612,450 1,603,963
Office equipment 377,967 352,502
Vehicles 72,148 61,771
-------------- --------------
5,295,288 5,244,265
Less accumulated depreciation
and amortization 1,973,290 1,899,206
-------------- --------------
$ 3,321,998 3,345,059
============== ==============
NOTE 6. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB), issued Statement
of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of
the pooling-of-interest method of accounting and requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and is applicable to all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies that intangible
assets acquired in a purchase method business combination must meet certain
criteria to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite lives no longer be amortized effective July 1, 2002; rather, these
assets must be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Beginning July 1, 2002, the Company adopted the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation, the
Company will perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. The Company has determined that
it has one reporting unit. The Company will have six months from the date of
adoption to determine the fair value of the Company and compare it to the
carrying amount of the Company. Should the carrying amount of the Company exceed
the fair value of the Company, an indication exists that the Company's goodwill
may be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
6
value of goodwill with the carrying amount of the Company's goodwill, both of
which would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the Company to all of the
assets (recognized and unrecognized) and liabilities of the Company in a manner
similar to a purchase price allocation in accordance with SFAS No. 141. The
residual fair value after this allocation is the implied fair value of the
goodwill. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in the Company's statement of income.
Goodwill. The cost of acquired companies in excess of the fair value of the net
assets and purchased intangible assets at acquisition date is recorded as
goodwill. As of June 30, 2002, the Company had goodwill, net, of $789,422 from
the acquisition of Superior Orthopaedic Supplies, Inc on May 1, 1996 and the
exchange of Dynatronics Laser Corporation common stock for a minority interest
in Dynatronics Marketing Corporation on June 30, 1983. Through June 30, 2002,
goodwill was amortized over a period of 15 and 30 years, respectively, on a
straight-line basis. The following table sets forth reported net income and
basic and diluted net income per share, as adjusted, to exclude amortization of
goodwill which would not have been recorded under SFAS No. 142:
Three months ended
September 30, 2001
--------------------
Net income, as reported $ 96,843
Amortization expense of goodwill, net of tax 13,409
--------------------
Net income, as adjusted $ 110,252
Basic net income per share, as reported $ 0.01
Diluted net income per share, as reported 0.01
Amortization expense of goodwill basic and
diluted share -
Basic net income per share, as adjusted 0.01
Diluted net income per share, as adjusted 0.01
7
Year ended June 30,
2002 2001
---------------- ----------------
Net income, as reported $ 316,101 334,179
Amortization expense of goodwill, net of tax 57,018 57,018
--------------- ----------------
Net income, as adjusted $ 373,119 391,197
Basic net income per share, as reported $ 0.04 0.04
Diluted net income per share, as reported 0.04 0.04
Amortization expense of goodwill per basic
and diluted share 0.01 0.01
Basic net income per share, as adjusted 0.04 0.04
Diluted net income per share, as adjusted 0.04 0.04
License Agreement. Identifiable intangible assets consist of a license agreement
entered into on August 16, 2000 for a certain concept and process relating to a
patent. The license agreement is being amortized over ten years on a
straight-line basis. The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the license agreement:
As of As of
September 30, 2002 June 30, 2002
------------------ --------------
Gross carrying amount $ 73,240 73,240
Accumulated amortization 15,258 13,427
------------------ --------------
Net carrying amount $ 57,982 59,813
Amortization expense associated with the license agreement was $1,831 for both
the three months ended September 30, 2002 and 2001. Estimated amortization
expense for the existing license agreement is expected to be $7,324 for each of
the fiscal years ending June 30, 2003 through June 30, 2010.
NOTE 7. COMMON STOCK.
During the three months ended September 30, 2002 the Company canceled 59,439
shares of treasury stock.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Condensed Financial Statements
(unaudited) and Notes thereto appearing elsewhere in this Form 10-QSB.
Results of Operations
Sales for the quarter ended September 30, 2002 were $4,115,770, compared to
$4,167,287 during the same period last year. Net income for the quarter ended
September 30, 2002 increased 12% to $108,266 compared to $96,843 in the prior
year period. The profits for the first fiscal quarter reflect the continuing
success of our `Back to Basics' program. This program, initiated at the first of
the calendar year, undertakes a thorough evaluation of corporate overhead
expenses and refocuses corporate resources to achieve both long-term and
short-term strategic objectives. The results have generated improvements in
operating efficiencies, reduced overhead expenses and accelerated new product
development. In addition, amortization of intangibles decreased from $23,635 to
$1,831 for the quarter ended September 30, 2002 as compared to the same quarter
in 2001. The decrease is the result of our adoption as of July 1, 2002, of the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets that eliminated the amortization of
goodwill. During the quarter ended September 30, 2001, Dynatronics recorded
amortization expense of $21,804 that would not have been recorded under SFAS No.
142.
Total gross profit during the quarter ended September 30, 2002 was $1,665,601 or
40.5% of sales compared to $1,731,939 or 41.6% of sales in the quarter ended
September 30, 2001. While gross margin dropped slightly as a percentage of
sales, such fluctuations from quarter to quarter can be expected depending on
the mix of products sold during the period. Going forward, we believe gross
profit as a percentage of sales will improve as a result of our strategic
initiatives to lower manufacturing costs through the automation of certain
manufacturing processes and overseas sourcing of high-volume products. In
addition, we plan to introduce several new, higher-margin products during this
fiscal year, which are expected to increase overall margins.
Selling, general and administrative (SG&A) expenses for the three-month period
ended September 30, 2002, decreased to $1,234,416 or 30.0% of sales compared to
$1,333,469 or 32.0% of sales in the same period of the prior year. The $99,053
decrease in SG&A expenses reflects our efforts to reduce operating expenses
through the Back to Basics program that targeted a $500,000 annual reduction in
expenses beginning January 2002. We reduced certain selling expenses in the
quarter ended September 30, 2002 to be more consistent with strategic focus on
core products. We also realized savings in labor expense related to personnel
reductions. Interest expense also decreased markedly due to reduced rates and
more importantly to a much lower outstanding balance on our line of credit
resulting from a $1,400,000 reduction in inventory and accounts receivable since
September 30, 2001. In addition, we were able to eliminate $21,804 of goodwill
expense in the quarter ended September 30, 2002 as a result of the adoption of
new accounting pronouncements affecting goodwill.
Research and development (R&D) expenses during the three-month period ended
September 30, 2002 totaled $212,060 compared to $161,436 for the same period in
2001. This $50,000 increase in R&D expenses is part of a major R&D campaign to
9
develop several new products including a low-power laser device, a combination
STS/Interferential device, and a redesign of our primary line of therapy
devices. In addition, we will undertake important clinical research studies
related to the STS and laser technologies. As a result, R&D expenses in fiscal
year 2003 are budgeted to be significantly higher than prior years due to these
extensive development plans.
Pre-tax profit for the quarter ended September 30, 2002 was $176,042 compared to
$160,281 during the same period of the prior year. Reduced expenses achieved
through the Back to Basics program along with the elimination of goodwill
expense and lower interest expense account for this increase.
Income tax expense for the three months ended September 30, 2002 was $67,776
compared to $63,438 in the three months ended September 30, 2001. The effective
tax rate for the quarter ended September 30, 2002 was 38.5% compared to 39.6% in
the prior year period.
Net income for the quarter ended September 30, 2002 increased 12% to $108,266
(approximately $.01 per share), compared to $96,843 (approximately $.01 per
share) in the same quarter in 2001. We have improved profitability due to the
stability in demand for our core products, the implementation of strategic
initiatives to improve operating efficiencies and reduce overhead expenses, the
elimination of goodwill amortization and the reduction of interest expense.
Liquidity and Capital Resources
We expect that revenues from operations, together with amounts available under
an existing bank line of credit will be adequate to meet working capital needs
related to our business and planned capital expenditures for the next 12 months.
The current ratio at September 30, 2002 was 2.9 to 1 compared to 3.1 to 1 at
June 30, 2002. Current assets represent 66% of total assets at September 30,
2002.
Net accounts receivable at September 30, 2002 were $3,453,739 compared to
$3,156,436 at June 30, 2002. The days of sales outstanding in accounts
receivable increased to 77 days at September 30, 2002 from 71 days at June 30,
2002. Accounts receivable are from the dealer network and are generally
considered to be within term.
All accounts payable are within term. We continue to take advantage of available
payment discounts when possible.
We have a revolving line of credit facility with a commercial bank in the amount
of $4,500,000. Borrowing limitations are based on 30% of eligible inventory and
up to 80% of eligible accounts receivable. The outstanding balance on the line
of credit at September 30, 2002 was $1,369,262 compared to $1,435,689 at June
30, 2002. The line of credit is secured by inventory and accounts receivable and
bears interest at the bank's "Prime Rate," which was 4.75% per annum at
September 30, 2002. This line is subject to annual renewal and matures on
December 1, 2002. Accrued interest is payable monthly. Renewal of the line with
our existing commercial bank is fully expected.
10
Inventory levels, net of reserves, totaled $3,916,006 at September 30, 2002,
compared to $3,836,751 at June 30, 2002. While inventory levels have been
significantly reduced from the same period a year ago, we expect inventory
levels during the latter part of fiscal year 2003 to increase concurrently with
the introduction of several new products currently being developed, including a
low-power laser device.
Long-term debt excluding current installments totaled $1,896,137 at September
30, 2002, compared to $1,950,309 at June 30, 2002. Long-term debt is comprised
primarily of the mortgage loans on our office and manufacturing facilities in
Utah and Tennessee. The principal balance on the mortgage loans is approximately
$1.9 million with monthly principal and interest payments of $21,409.
Critical Accounting Policies
In Note 1 to the consolidated financial statements attached to our Annual Report
on Form 10-KSB for the year ended June 30 2002, we discuss those accounting
policies that are considered to be significant in determining our results of
operations and financial position. In all material respects, the accounting
principles that are utilized conform with generally accepted accounting
principles in the United States of America.
The preparation of consolidated financial statements requires management to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. By their nature, these judgments are subject
to an inherent degree of uncertainty. On an on-going basis, we evaluate these
estimates, including those related to bad debts, inventories, intangible assets,
warranty obligations, product liability, revenue, and income taxes. We base our
estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments
about the carrying value of assets and liabilities. The actual results may
differ from these estimates under different assumptions or conditions.
With respect to inventory reserves, revenue recognition and allowance for
doubtful accounts, we apply the following critical accounting policies in the
preparation of the financial statements:
Inventory Reserves
The nature of our business requires that we maintain sufficient inventory on
hand at all times to meet the requirements of our customers. We record finished
goods inventory at the lower of standard cost, which approximates actual costs
(first-in, first-out) or market. Raw materials are stated at the lower of cost
(first-in, first-out), or market. Inventory reserves are maintained for the
estimated impairment of the inventory. Impairment may be a result of slow moving
or excess inventory, product obsolescence or changes in the valuation of the
inventory. In determining the adequacy of reserves, we analyze the following,
among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
11
o Forecast sales;
o Product obsolescence; and o Technological innovations.
Any modifications to estimates of its reserves are reflected in the cost of
goods sold within the statement of operations during the period in which such
modifications are determined necessary by management. At September 30, 2002 and
June 30, 2002, our inventory reserve balance was $325,692 and $265,692,
respectively and our inventory balance was $3,916,006 and $3,836,751 net of
reserves, respectively.
Revenue Recognition
Our products are sold primarily through a network of independent distributors.
Sales revenues are generally recorded when products are shipped under an
agreement with a distributor or customer, risk of loss and title have passed and
collection of any resulting receivable is reasonably assured. The distributors,
who sell the products to other customers, take title to the products, have no
special rights of return, and assume the risk for credit and obsolescence.
Allowance for Doubtful Accounts
We must make estimates of the collectibility of accounts receivables. In doing
so, we analyze accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends and changes in customer payment
patterns when evaluating the adequacy of the allowance for doubtful accounts.
Our accounts receivable balance was $3,453,739 and $3,156,436, net of allowance
for doubtful accounts of $183,763 and $165,763, at September 30, 2002 and June
30, 2002, respectively.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or normal use of the asset.
We adopted the provisions of SFAS No. 143 during the quarter ended September 30,
2002 and determined there was no liability for asset retirement obligations.
Thus, the adoption of SFAS No. 143 did not impact our operating results or
financial condition.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144 retains
the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
12
associated with SFAS No. 121. SFAS No. 144 retains the basic provisions of APB
Opinion 30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity rather than a
segment of a business.
We adopted the provisions of SFAS No. 144 during the quarter ended September 30,
2002. The adoption of SFAS No. 144 for long-lived assets held for use did not
have a material impact on our financial statements because the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The
provisions of the statement for assets held for sale or other disposal generally
are required to be applied prospectively to newly initiated disposal activities.
Business Plan
Over the past five years, annual net sales have grown 60 percent from $10.2
million in fiscal year 1997 to $16.3 million in fiscal year 2002. During fiscal
year 2003, we will continue to implement a strategy of expanding product lines,
strengthening channels of distribution, and developing new products for the
rehabilitation and aesthetic markets.
To further strengthen our position in the core physical medicine market, we plan
to introduce several new products in the current fiscal year, including a
low-power laser device. In the early 1980's we attempted to gain FDA approval
for a low-power laser device, but were unsuccessful. At that time the laser
device was the only product we offered - a fact reflected in the original name
of the company, Dynatronics Laser Corporation. When we were unable to obtain
approval for the low power laser device, we began pursuing the development of
other physical medicine modalities and subsequently changed our name to
Dynatronics Corporation. A recent change in the regulatory landscape now allows
the introduction of low-power laser devices for the treatment of pain. We
believe the company enjoys a residual reputation as a pioneer in this field and
we intend to capitalize on that by introducing a technologically advanced, yet
affordable, low-power laser product in late fiscal year 2003.
In addition to the low-power laser device, over the course of the fiscal year we
will introduce a new line of electrotherapy and ultrasound products
incorporating advanced technology features and design. This new line of products
is expected to further enhance our share of the electrotherapy and ultrasound
market.
Over the past year, we enhanced our manufacturing capabilities with the goal of
improving margins and competitive pricing capability. To that end, some products
previously contracted to other manufacturers are being converted to in-house
manufacturing. Other products are being contracted for overseas manufacturing.
During fiscal year 2003, we will continue to emphasize our "Back to Basics"
plan. Resources are being allocated to strengthen our core market emphasis and
products. We will incur more research and development expense in 2003 than at
any time since the early days of seeking FDA approval for our first low-power
laser product. All of these efforts are designed to increase market share and
improve profitability in the coming years.
13
In August 2000, we acquired an exclusive license for the patented STS technology
for treating chronic pain. Two devices incorporating the new technology - the
Dynatron STS clinical unit and the Dynatron STS Rx prescription unit for home
use - were introduced in fiscal year 2001. The treatment delivered by these
devices is referred to as Sympathetic Therapy or STS Therapy. Medical
professionals have used this therapy to treat chronic pain associated with a
variety of conditions in patients who had previously experienced only marginal
results with traditional therapy regimens. According to the American Pain
Foundation, millions of people around the world suffer from chronic pain. The
associated costs in the United States alone are estimated to exceed $100 billion
annually. There is great demand for an effective treatment in the battle against
chronic pain.
In a research study published in the January, 2002 edition of the American
Journal of Pain Management, test results showed 85% of STS-treated patients
suffering pain associated with peripheral neuropathies realized some reduction
of pain, with 50% of the patients becoming totally pain-free. We believe that
the fact these results were achieved with patients who had suffered on average
for eight years with their chronic pain condition further attests to the
effectiveness of this therapy. Additional research studies are underway to
further validate the efficacy of this innovative technology.
As with many new medical therapies or technologies, insurance reimbursement may
influence the rate of growth of the STS technology. Presently, limited
reimbursement is available for STS treatments or home units. Most are reviewed
on a case-by-case basis. However, as medical practitioners experience positive
outcomes and further research supports the efficacy of this therapy, it is
anticipated that reimbursements will be more broadly established. It will take
time, perhaps years, to obtain broad acceptance and reimbursement for this new
therapy. Notably, this technology potentially holds the key to not only
relieving suffering for many chronic pain patients, but significantly reducing
the long-term costs of supporting chronic pain patients through reducing intake
of expensive narcotic medications or avoiding costly invasive procedures. We
believe that as these potential cost savings are realized, insurance companies
should begin to view STS treatments as an economical alternative to the
traditional treatments for chronic pain sufferers. STS treatments are not a
panacea and do not help every chronic pain sufferer. However, they seem to be
particularly effective with pain conditions that present with a sympathetic
bias.
We have perceived increasing interest in STS technology in the workers
compensation market. Workers' compensation carriers in several states have
adopted or are considering offering an STS trial program to their clients. We
believe the development of the workers compensation market represents an
important step in expanding STS treatment programs because a significant number
of chronic pain patients are covered under workers' compensation plans.
The development of the STS technology as an effective weapon in the treatment of
chronic pain remains one of our strategic objectives. We continue to receive
reports of chronic pain sufferers who have attained significant, if not total,
relief from their pain even after years of suffering. While the potential for a
non-invasive, non-addictive, safe alternative for the treatment of chronic pain
would seem to be vast, the realities of accessing that market will demand
vigilance over the coming years to fully exploit that potential.
14
Another important part of our strategic plan is the expansion of worldwide
marketing efforts, particularly into the European Community. In March 2001, our
Salt Lake operation, where all electrotherapy, ultrasound, STS devices and
Synergie products are manufactured, was designated an ISO 9001 certified
facility. With this designation, we can market products manufactured in this
facility in any country that recognizes the CE Mark. We are now working to
establish effective distribution of these products in the European Community.
To take full advantage of the opportunities of the aesthetics market, we will
continue to refine our efforts to establish effective distribution for our line
of aesthetic products. Our Chairman, Kelvyn H. Cullimore, is personally managing
the effort to establish this distribution. We recently shifted our distribution
strategy to establishing dealers who are uniquely focused on the aesthetics
market and also to cultivating national accounts and direct sales. Previously,
we had attempted to establish a direct sales force for Synergie products. We
changed our strategy because we believe that the dealer strategy requires less
overhead expense, is more easily managed and will result in better local control
of sales. Controlling and expanding the channels of distribution for these
products is expected to ultimately increase sales and allow us to more fully
access the potential of the aesthetics products market. We perceive this market
to be both lucrative and expanding, particularly as aging baby boomers continue
to look for ways to retain a youthful appearance.
Over the past two years, we have allocated resources to enhance our presence in
the e-business arena. We have undertaken to improve the appearance and
application of our corporate website and we are researching ways to apply
electronic media and Internet solutions to better serve customer needs, access
new business opportunities, reduce cost of operations, and stay technologically
current in the way business is conducted. We believe the allocation of resources
to developing e-business capabilities is critical to improving future
performance and have made the establishment of these capabilities a focal
strategy for this fiscal year. Our website may be viewed at www.dynatronics.com.
This reference to our website is not intended to incorporate the contents of the
website into or as a part of this report.
Based on these strategic initiatives, we are focusing our resources in the
following areas:
o Reinforce our position in the physical medicine market through an
aggressive research and development campaign that will result in
the introduction of several new products.
o Continue implementation of our "Back to Basics" program which
evaluates ways to improve margins and competitive pricing through
strategic manufacturing processes and alliances as well as
controlling expenses.
o Maximize sales of the Dynatron STS technology in the face of
limited reimbursement by focusing on specific target markets that
will embrace STS treatments such as workers compensation programs
and thus better educate the medical and insurance communities on
the efficacy of STS treatments. This includes conducting
additional research and other related activities to obtain broader
support from the medical and insurance communities.
15
o Improve sales and distribution of rehabilitation products
domestically through strengthened relationships with dealers,
particularly the high-volume specialty dealers.
o Expand distribution of both rehabilitation and aesthetic products
internationally.
o Apply e-commerce solutions to improving overall performance.
Cautionary Statement Concerning Forward-Looking Statements
The statements contained in this Report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act. These statements refer to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the
future. They may be identified by the use of the words or phrases "believes,"
"expects," "anticipates," "should," "plans," "estimates," "intends," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis or Plan
of Operation regarding product development, clinical results, market acceptance,
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements for
the reasons detailed in our Annual Report on Form 10-KSB under the headings
"Description of Business" and "Risk Factors." The fact that some of the risk
factors may be the same or similar to past reports filed with the Securities and
Exchange Commission means only that the risks are present in multiple periods.
We believe that many of the risks detailed here and in our other SEC filings are
part of doing business in the industry in which we operate and compete and will
likely be present in all periods reported. The fact that certain risks are
endemic to the industry does not lessen their significance.
The forward-looking statements contained in this Report are made as of the date
of this Report and we assume no obligation to update them or to update the
reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations include:
o The terrorist attacks in New York and Washington, D.C. on
September 11, 2001, and the subsequent anthrax attacks on the East
Coast of the United States have had an adverse effect on business,
financial and general economic conditions in the United States. At
this time we cannot predict the nature, extent, or duration of
these effects on overall economic conditions generally, or on our
business and operations specifically.
o Market acceptance of our technologies, particularly our core
therapy devices, Synergie AMS/MDA product line and Dynatron STS
and Dynatron STS Rx products;
o Insurance company reimbursement for STS treatments or the home
prescription Dynatron STS Rx device not materializing as
expected;
16
o The ability to hire and retain the services of trained personnel
at cost-effective rates;
o Rigorous government scrutiny or the possibility of additional
government regulation of the industry in which we market our
products;
o Reliance on key management personnel;
o Foreign government regulation of our products and manufacturing
practices that may bar or significantly increase the expense
of expanding to foreign markets;
o Economic and political risks related to expansion into
international markets;
o Failure to sustain or manage growth including the failure to
continue to develop new products or to meet demand for existing
products;
o Reliance on information technology;
o The timing and extent of research and development expenses;
o The ability to keep pace with technological advances, which can
occur rapidly;
o The loss of product market share to competitors;
o Potential adverse effect of taxation;
o The ability to obtain required financing to meet changes or other
risks described above;
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer/Chief Financial Officer and Chief Accounting Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within
90 days before the filing date of this quarterly report. Based on that
evaluation, they have concluded that our current disclosure controls and
procedures are effective in providing the material information required to be
disclosed in the reports we file or submit under the Exchange Act.
Changes in Internal Controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to the date we carried out this evaluation.
PART II. OTHER INFORMATION
Nasdaq Listing Maintenance Requirements. On July 29, 2002, we received notice
from The Nasdaq Stock Market that for 30 trading days the price of our common
stock had closed below the minimum $1.00 per share bid price required for
17
continued listing on the Nasdaq SmallCap Market by Marketplace Rule 4450(a)(5).
Under Marketplace Rule 4450(c)(2), we will be provided approximately one year,
or until July 27, 2003, to regain compliance with the $1.00 minimum bid price
requirement. We can regain compliance with the minimum bid price requirement if,
at any time before July 27, 2003, the bid price of our common stock closes at
$1.00 per share or more for a minimum of 10 consecutive trading days. Should we
fail to regain compliance, Nasdaq stated that it would provide us with written
notification that our common stock will be delisted from the Nasdaq SmallCap
Stock Market. Removal of our common stock from listing on the Nasdaq Stock
Market would likely have an adverse impact on the trading price and liquidity of
our common stock.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
--------
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K. None.
-------------------
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DYNATRONICS CORPORATION
Registrant
Date 11/13/02 s/ Kelvyn H. Cullimore, Jr.
--------------- -------------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
duly authorized officer)
Date 11/13/02 /s/ Terry M. Atkinson
--------------- -------------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
19
CERTIFICATIONS
I, Kelvyn H. Cullimore, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dynatronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
20
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Kelvyn H. Cullimore, Jr.
---------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
I, Terry M. Atkinson certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dynatronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
21
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
`registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Terry M. Atkinson
-------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)
22
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Dynatronics Corporation on
Form 10-QSB for the period ending September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Kelvyn H.
Cullimore, Jr., Chief Executive Officer and Terry M. Atkinson, Chief Accounting
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Kelvyn H. Cullimore, Jr.
----------------------------------------
Kelvyn H. Cullimore, Jr.
President and Chief Executive Officer
Dynatronics Corporation
/s/ Terry M. Atkinson
----------------------------------------
Terry M. Atkinson
Controller
(Chief Accounting Officer)