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, 1996.
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act for
the transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
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(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
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(Address of principal executive offices)
(801) 568-7000
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(Issuer's telephone number)
Check whether the issuer (1) has 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.
X Yes No
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The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date is:
Class Outstanding at November 1, 1996
- -------------------------- -------------------------------
Common Stock, No Par Value 8,424,747 shares
Transitional Small Business Disclosure Format.
Yes X No
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DYNATRONICS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
Condensed Balance Sheet
September 30, 1996 1
Condensed Statements of Income
Three Months Ended September 30, 1996,
and September 30, 1995 2
Condensed Statements of Cash Flows
Three Months Ended September 30, 1996,
and September 30, 1995 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
Part II. OTHER INFORMATION 9
DYNATRONICS CORPORATION
Condensed Balance Sheet
(Unaudited)
September 30,
ASSETS 1996
--------------
Current assets:
Cash and cash equivalents $ 31,777
Trade accounts receivable, less allowance for doubtful
accounts of $74,141 1,771,192
Income tax refund receivable 198,849
Related party and other receivables 114,674
Inventories 1,690,209
Prepaid expenses 53,257
Deferred tax asset-current 71,974
---------------
Total current assets 3,931,932
Net property and equipment 2,650,431
Excess of cost over book value, net of accumulated amortization
of $148,861 1,285,913
Deferred tax asset-noncurrent 234,836
Other assets 450,485
--------------
Total Assets $ 8,553,597
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 145,363
Current installments of capital lease obligations 10,467
Line of credit 166,339
Accounts payable 426,349
Accrued expenses 491,371
--------------
Total current liabilities 1,239,889
Long-term debt, excluding current installments 2,451,021
Capital lease obligations, excluding current installments 3,143
Deferred compensation 386,892
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Total long-term liabilities, excluding current installments 2,841,056
--------------
Total liabilities 4,080,945
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 8,424,747 shares 1,981,204
Retained earnings 2,491,448
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Total stockholders' equity 4,472,652
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$ 8,553,597
==============
See accompanying notes to condensed financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended
September 30
1996 1995
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Net sales $ 2,382,671 1,329,939
Cost of sales 1,365,449 716,008
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Gross profit 1,017,222 613,931
Selling, general, and administrative expenses 737,500 465,304
Research and development expenses 138,227 156,812
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Operating income (loss) 141,495 (8,185)
Other income (expense):
Interest income 2,986 9,318
Interest expense (50,610) (39,674)
Other income, net 29,045 42,752
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Total other income (expense) (18,579) 12,396
Income before income taxes 122,916 4,211
Income tax expense (benefit) 47,464 1,314
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Net income $ 75,452 2,897
============== =============
Net income per common share and common
share equivalents $ 0.01 0.00
=============== =============
Weighted average number of common shares
and common share equivalents outstanding (note 6) 8,424,747 7,945,011
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30
1996 1995
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Cash flows from operating activities:
Net income $ 75,452 2,897
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of property and equipment 44,730 42,445
Other amortization 21,718 2,195
Provision for doubtful accounts 3,000 3,000
Provision for inventory obsolescence 24,000 24,000
Provision for warranty reserve 26,950 24,790
Decrease (increase) in operating assets:
Receivables (392,052) (135,088)
Inventories (96,374) (113,578)
Prepaid expenses and other assets (22,868) (26,839)
Deferred tax assets 14,447 (3,545)
Increase (decrease) in operating liabilities:
Trade accounts payable and accrued expenses 88,049 (34,772)
Deferred compensation 20,046 19,146
Income taxes payable 32,674 4,858
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Net cash provided by (used in) operating activities (160,228) (190,491)
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Cash flows from investing activities:
Capital expenditures (59,340) (13,726)
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Net cash provided by (used in) investing activities (59,340) (13,726)
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Cash flows from financing activities:
Principal payments under capital lease obligations (9,061) (12,226)
Principal payments on long-term debt (36,876) (24,635)
Net change in line of credit (119,572) -
Proceeds from sale of common stock - 17,938
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Net cash provided by (used in) financing activities (165,509) (18,923)
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Net increase (decrease) in cash and cash equivalents (385,077) (223,140)
Cash and cash equivalents at beginning of period 416,854 779,054
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Cash and cash equivalents at end of period $ 31,777 555,914
========== ==========
Supplemental cash flow information
Cash paid for interest (net of amounts capitalized) 50,610 39,674
Cash paid for income taxes - -
Supplemental disclosure of non-cash investing and
financing activities
Long-term debt incurred for fixed assets - -
Capital lease obligations incurred for property and equipment - -
See accompanying notes to condensed financial statements.
3
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of September 30, 1996 and for the three months
then ended were prepared by the Company without audit pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all necessary adjustments to
the financial statements have been made to present fairly the financial
position and results of operations and cash flows. All adjustments were
of a normal recurring nature. 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 Annual Reports on Form 10-K under the name of Dynatronics
Corporation and/or Dynatronics Laser Corporation which included audited
financial statements for the three years ending June 30, 1996, 1995, and
1994. 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-K filing.
NOTE 2. EARNINGS PER SHARE
Earnings per common share and common share equivalents are computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period. Common
stock equivalents include shares issuable upon exercise of the Company's
stock options.
NOTE 3. INVENTORIES
Inventories consisted of the following:
September 30
1996
------------
Raw Materials $ 999,318
Finished Goods 760,602
Inventory Reserve (69,711)
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$1,690,209
==========
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
September 30
1996
------------
Land $ 589,920
Building 1,935,297
Machinery and equipment, and
equipment under capital lease 911,931
----------
3,437,148
Less Accumulated depreciation
and amortization 786,717
----------
$2,650,431
==========
NOTE 5. STOCK OPTIONS GRANTED
During the reporting quarter, the Company cancelled 145,026 options
granted to employees and officers during the quarter ended March 31, 1996
with an exercise price of $1.08. Also during the reporting quarter, the
Company issued 137,754 options at an exercise price of $.70 to employees
and officers of the Company.
NOTE 6. OTHER RECEIVABLES
Included in other receivables is a promissory note for $100,000 due to the
Company from ITEC. This note represents a "D.I.P." (Debtor in Possession)
Loan which is a super priority loan positioned before all other ITEC
liabilities including the first mortgage on the ITEC building.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales for the quarter ended September 30, 1996 increased 79 percent to
$2,382,671 as compared to $1,329,939 in the same quarter last year.
Net income for the reporting quarter increased to $75,452 as compared
to $2,897 in the prior year period. The strong increases in both sales
and profits are attributable to three key components: 1) The introduction
of the new "DynaMite Series" products - the Dynatron 125 Ultrasound
Therapy device and the Dynatron 525 Electrotherapy device - which target
the low-priced segment of the market; 2) Increased medical soft goods and
supply sales from the Company's acquisition of Superior Orthopaedic
Supplies in May, 1996; and 3) Sales of iontophoresis products through the
Company's exclusive distribution agreement with Life-Tech, Inc.
The DynaMite product line has led Dynatronics into a segment of the market
in which the Company has not historically competed. This new line is
expected to open increased sales opportunities for the Company both
domestically and internationally. By incorporating state-of-the-art
technology which reduces costs of manufacturing, profit margins for these
products are among the highest of any devices manufactured by the Company.
The development of business obtained through the acquisition of Superior
Orthopaedics continues to be a focal point of the Company's overall
strategy. Combining the Superior product line with Dynatronics
distribution network has resulted in sales of soft goods increasing at a
rate of approximately 50%. This increase in sales is expected to continue
over the course of this fiscal year as more distributors incorporate these
items into their product lines. Dynatronics first full-line catalogue
will be published in December which is expected to further boost sales of
these products.
The results of this quarter reflect only one full month of the agreement
with Life-Tech which appointed Dynatronics as the exclusive distributor of
Life-Tech iontophoresis products to the physical medicine market. The
full impact of this agreement will become more evident in future quarters
as the program matures.
Gross Margins for the reporting quarter increased 65 percent to
$1,017,222 as compared to $613,931 in the prior year period due to the
increase in sales volume as mentioned above and the higher margins
associated with the new DynaMite products. In spite of higher margins
on the new DynaMite products, Gross Margins as a percentage of sales
declined to 42.7 percent during the reporting quarter as compared to
46.2 percent in the prior year period due entirely to the addition of
medical supplies and soft goods which carry lower margins than the
Company's medical devices.
Selling, General and Administrative (SG&A) expenses for the reporting
period increased to $737,500 as compared to $465,304 in the same
quarter last year. This increase is primarily related to additional
SG&A expenses associated with the new operations in Tennessee resulting
from the May 1996 acquisition of Superior Orthopaedic Supplies. Labor
expense also increased due to staffing needs created by higher sales
volume (and in anticipation of and in preparation for further increases
in the future).
Research and development expenses in the reporting quarter decreased to
$138,227 as compared to $156,812 in the prior year period. During the
comparative quarter last year, the Company was completing the
introduction of its Dynatron 650 and 950 devices. The reduced cost for
introducing the new DynaMite line of products during the current
reporting quarter accounts for the lower R&D expenditures.
Operating income increased to $141,495 in the reporting quarter
compared to a loss of $8,185 in the prior year period while income
before tax increased to $122,916 as compared to $4,211 during the
similar quarter of the prior year. Net income for the reporting
quarter increased to $75,452 as compared to $2,897 for the same quarter
in the prior year. These increases are attributable to the 79 percent
increase in sales together with the higher margins associated with the
"DynaMite Series" products.
Liquidity and Capital Resources
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The Company expects that revenues from operations, together with
available sources of borrowing, will be adequate to meet its working
capital needs related to its business and its planned capital
expenditures for the upcoming operating period.
The Company continues to maintain a liquid position. The Company's
current ratio at September 30, 1996 was 3.2 to 1. Current assets
represent 46 percent of total assets.
Trade accounts receivable are from the Company's dealer network and are
generally considered to be within term. All accounts payable are
within term with the Company continuing its policy of taking advantage
of any and all payment discounts available.
The Company maintains a revolving line of credit in the amount of
$1,500,000 with a commercial bank. The outstanding balance on this
line of credit at September 30, 1996 was $166,339.
Inventory levels at September 30, 1996 equaled $1,690,209. Accounts
receivable at September 30, 1996 equaled $1,771,192. Management
anticipates inventory and accounts receivable levels may increase in
future quarters as new products are introduced and sales volumes
improve.
Long-term debt and capital lease obligations excluding current
installments at September 30, 1996 totaled $2,454,164, comprised
primarily of the mortgage loan on the Company's office and
manufacturing facility.
Business Plan
- -------------
The Company plans to introduce the new, improved "50 Series Plus"
product line over the coming months which management anticipates will
further support the Company's dramatic growth trends.
Management expects demand for both the "DynaMite Series" and "50 Series
Plus" product lines will also be strong in the international market
once regulatory approvals are obtained. The Company feels it can
expand its international presence significantly with these two product
lines.
With the acquisition of Superior Orthopaedic Supplies in May, 1996, the
Company has been able to expand distribution of Superior's product line
of soft goods and supply products through Dynatronics' dealer network.
Offering a broad product line is of strategic importance as clinics
continue to consolidate and develop centralized purchasing which favors
single source suppliers for their medical device and supplies needs.
The Company recognizes the need to continually upgrade and re-engineer
existing products as well as introduce new products. The Company's
continuing commitment to Research and Development enables Dynatronics
to be a technological leader in the market. New products and
engineering improvements are constantly being evaluated and developed.
The Company's marketing strategy includes the development of niche
markets, increased emphasis on international sales, lead generation
through direct marketing efforts as well as the introduction of new
products. The emphasis on introducing new products specifically
designed to lower costs of production while providing leading-edge
technology at competitive prices has positioned the Company well for
the future.
Another avenue to increase sales and profits being pursued by
management is that of strategic business alliances, mergers or
acquisitions such as the Superior Orthopaedics acquisition discussed
above and the exclusive distribution agreement signed with Life-Tech,
Inc. in August, 1996. The Company continues to evaluate additional
acquisition opportunities and strategic alliances which could enhance
and broaden the Company's product line.
The Company continues to support research into areas of potential
efficacy of its low-power laser device. Should any such research
provide evidence deemed sufficient for submission to the U.S. Food and
Drug Administration, the Company would give consideration to submitting
a Pre-Market Approval Application for the laser to the FDA.
This quarterly report contains forward-looking statements relating to
anticipated financial performance, product development, and similar
matters. Securities laws provide a safe harbor for such statements.
The Company notes that risks inherent in its business and a variety of
factors could cause or contribute to a difference between actual
results and anticipated results. Those risks include, but are not
limited to, such factors as market acceptance of Company products
(particularly new product lines and re-designed product lines), the
ability to hire and retain the services of trained personnel at cost-
effective labor rates, the absence of new adverse government regulation
of the Company's products, the actions of foreign regulators that may
adversely affect the expansion of the Company's marketing activities in
foreign markets, political or economic changes in the United States and
abroad which may adversely affect the market for physical therapy
devices or soft goods in general or the Company's products in
particular, the Company's ability to keep pace with technological
advances which can occur rapidly, and the Company's ability to finance
such changes. The foregoing and other factors, both within and outside
the Company's control, may cause actual results to differ from those
described in forward-looking statements made in this Report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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There are no material legal proceedings pending to which
the Company or any of its subsidiaries is a party or of
which any of their property is the subject which require
disclosure in this statement.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
In November, 1996, the Company hired Mr. John L. Hales to
be its Chief Financial Officer and Treasurer replacing Mr.
Keith E. Turner who left employment with the Company to
pursue other business interests. Management anticipates
Mr. Hales will be formally elected Chief Financial Officer
at the Company's next Board Meeting. Prior to joining the
Company, Mr. Hales worked as an independent management
consultant from 1994 until 1996. From 1993 to 1994, he
served as Chief Financial Officer of the Covey Leadership
Center. From 1980 to 1992, he was employed by the Hill-Rom
Company, a subsidiary of Hillenbrand Industries, and served
as Vice President of Finance and Administration for nine
years.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A) Not applicable.
B) Not applicable.
SIGNATURES
Pursuant to 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
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Registrant
Date 11/13/96 /s/ Kelvyn H. Cullimore, Jr.
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Kelvyn H. Cullimore, Jr.
President
Chief Executive Officer and
Acting Principal Financial Officer