UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended MARCH 31, 1995.
or
[ ] Transition Report Pursuant to 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
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(Exact name of registrant 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) (ZIP Code)
(801) 568-7000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is:
Class Outstanding at March 31, 1995
- - -------------------------- -----------------------------
Common Stock, No Par Value 7,943,897 shares
DYNATRONICS CORPORATION
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
March 31, 1995, and June 30, 1994........................ 1
Condensed Statements of Income
Three and Nine Months Ended March 31, 1995,
and March 31, 1994..................................... 2
Condensed Statement of Stockholders' Equity
Nine Months Ended March 31, 1995....................... 3
Condensed Statements of Cash Flows
Nine Months Ended March 31, 1995,
and March 31, 1994..................................... 4
Notes to Condensed Financial Statements................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......... 8
Part II. OTHER INFORMATION.............................. 12
DYNATRONICS CORPORATION
Condensed Balance Sheets
(Unaudited)
March 31 June 30
ASSETS 1995 1994
---------- ----------
Current assets:
Cash and cash equivalents $ 315,914 871,008
Trade accounts receivable, less allowance for doubtful
accounts of $53,965 in March and $45,844 in June 1,261,468 758,799
Income tax refund receivable 123,851 134,102
Other receivables 218,914 27,505
Inventories (note 3) 1,827,374 1,795,359
Prepaid expenses 45,896 32,926
Deferred tax asset-current 55,545 55,044
---------- ----------
Total current assets 3,848,962 3,674,743
Net property and equipment (note 4) 2,705,088 2,799,439
Excess of cost over book value of minority interest
acquired, net of accumulated amortization of
$103,153 in March and $96,569 in June 160,209 166,793
Deferred tax asset-noncurrent 185,919 260,378
Other assets 333,556 275,288
---------- ----------
$7,233,734 7,176,641
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 99,481 94,093
Current installments of capital lease obligations 47,170 61,348
Accounts payable 219,081 231,409
Accrued expenses 246,945 388,697
---------- ----------
Total current liabilities 612,677 775,547
Long-term debt, excluding current installments 2,112,485 2,187,783
Capital lease obligations, excluding current installments 32,246 49,363
Deferred credits and other liabilities 271,947 217,002
---------- ----------
Total long-term liabilities, excluding current installments 2,416,678 2,454,148
---------- ----------
Total liabilities 3,029,355 3,229,695
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 7,943,897 shares in
March and 7,916,957 in June 1,653,818 1,554,141
Retained earnings 2,550,561 2,392,805
---------- ----------
Total stockholders' equity 4,204,379 3,946,946
---------- ----------
$7,233,734 7,176,641
========== ==========
See accompanying notes to condensed financial statements.
1
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
1995 1994 1995 1994
---------- --------- --------- ---------
Net sales $1,402,662 1,306,684 4,651,592 3,693,349
Cost of sales 811,154 718,281 2,649,847 2,043,300
---------- --------- --------- ---------
Gross profit 591,508 588,403 2,001,745 1,650,049
Selling, general, and administrative expenses 404,21 394,683 1,309,957 1,484,177
Research and development expenses 123,920 160,143 432,919 503,009
---------- --------- --------- ---------
Operating income (loss) 63,378 33,577 258,869 (337,137)
Other income (expense):
Interest income 3,644 4,900 10,793 11,455
Interest expense (40,695) (42,694) (124,574) (62,546)
Gain on sale of unconsolidated
subsidiary stock - - - 403,743
Other income, net 36,364 16,070 138,232 57,983
---------- --------- --------- ---------
Total other income (expense) (687) (21,724) 24,451 410,635
Income before income taxes 62,691 11,853 283,320 73,498
Income tax expense (benefit) 42,399 (23,526) 125,564 (4,010)
---------- --------- --------- ---------
Income before cumulative
effect of accounting change 20,292 35,379 157,756 77,508
Cumulative effect at July 1, 1993 of change
in accounting for income taxes (note 5) - - - 301,602
---------- --------- --------- ---------
Net income $ 20,292 35,379 157,756 379,110
========== ========= ========= =========
Net income per common share and common
share equivalents (note 2):
Before cumulative effect of change
in accounting for income taxes $ - - 0.02 0.01
Cumulative effect of accounting change - - - 0.04
---------- --------- --------- ---------
Total net income per share $ - - 0.02 0.05
========== ========= ========= =========
Weighted average number of common shares
and common share equivalents outstanding 7,934,008 8,342,100 7,923,810 8,142,316
See accompanying notes to condensed financial statements.
2
DYNATRONICS CORPORATION
Condensed Statement of Stockholders' Equity
Nine Months ended March 31, 1995
(Unaudited)
Total
Common Retained stockholders'
stock earnings equity
------------ ------------ ----------------
Balances at June 30, 1994 $ 1,554,141 2,392,805 3,946,946
Issuance of 26,940 shares of common stock
upon exercise of employee stock options 23,572 - 23,572
Benefit from nonqualified sales and non-
employee exercise of stock options 76,105 - 76,105
Net income - 157,756 157,756
------------ ------------ ----------------
Balances at March 31, 1995 $ 1,653,818 2,550,561 4,204,379
============ ============ ================
See accompanying notes to condensed financial statements.
3
DYNATRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31
1995 1994
--------- ---------
Cash flows from operating activities:
Net income $ 157,756 379,110
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change - (301,602)
Depreciation and amortization of property and equipment 141,991 110,921
Gain on sale of unconsolidated subsidiary stock - (403,743)
Other amortization 6,584 6,584
Provision for doubtful accounts 9,000 -
Provision for inventory obsolescence 72,000 45,512
Provision for warranty reserve 110,932 76,757
Decrease (increase) in deferred tax assets 73,958 (12,720)
Decrease (increase) in operating assets:
Receivables (703,078) 71,914
Inventories (104,015) (439,936)
Prepaid expenses and other assets (71,238) (24,339)
Increase (decrease) in operating liabilities:
Trade accounts payable and accrued expenses (265,012) (173,027)
Deferred compensation 54,945 52,641
Income taxes payable 86,356 (66,652)
--------- ---------
Net cash provided by (used in) operating activities (429,821) (678,580)
--------- ---------
Cash flows from investing activities:
Capital (expenditures) source (27,650) 149,720
Proceeds from sale of unconsolidated subsidiary stock - 403,743
--------- ---------
Net cash provided by (used in) investing activities (27,650) 553,463
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations (51,285) (50,854)
Principal payments on long-term debt (69,910) (129,523)
Proceeds from sale of common stock 23,572 89,420
--------- ---------
Net cash provided by (used in) financing activities (97,623) (90,957)
--------- ---------
Net increase (decrease) in cash and cash equivalents (555,094) (216,074)
Cash and cash equivalents at beginning of period 871,008 701,128
--------- ---------
Cash and cash equivalents at end of period $ 315,914 485,054
========= =========
Supplemental cash flow information
Cash paid for interest (net of amounts capitalized) 124,574 62,546
Cash paid for income taxes 250 103,164
Supplemental disclosure of non-cash investing and financing activities
Long-term debt incurred for fixed assets - 1,179,132
Capital lease obligations incurred for property and equipment 19,990 88,912
See accompanying notes to condensed financial statements.
4
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of March 31, 1995 and for the three and nine
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
an Annual Report 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, 1994, 1993, and 1992. 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:
March 31 June 30
1995 1994
---------- ----------
Raw Materials $1,215,590 $1,177,480
Work-in-Process 136,636 200,556
Finished Goods 584,585 460,709
Inventory Reserve (109,437) (43,386)
---------- ----------
$1,827,374 $1,795,359
========== ==========
5
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
March 31 June 30
1995 1994
---------- ----------
Land $ 589,920 589,920
Building 1,935,297 1,935,297
Machinery and equipment, and
equipment under capital lease 711,632 663,992
---------- ----------
3,236,849 3,189,209
Less accumulated depreciation
and amortization 531,761 389,770
---------- ----------
$2,705,088 2,799,439
========== ==========
NOTE 5. CHANGE IN ACCOUNTING PRINCIPLE-ACCOUNTING FOR INCOME TAXES
During the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which is effective for fiscal years beginning after December 15, 1992. The
cumulative effect of this change in accounting for income taxes of $301,602
is determined as of July 1, 1993 and is reported separately in the
statement of income for the quarter ended September 30, 1993. Statement
109 requires the recognition of deferred tax liabilities and assets for the
temporary differences between the financial reporting basis and tax basis
of the Company's assets and liabilities at enacted tax rates expected to be
in effect when such amounts are realized or settled. Prior years'
financial statements have not been restated to apply the provisions of
Statement 109.
NOTE 6. STOCK OPTIONS GRANTED
During 1994, 448,895 options under the 1992 plan were granted to employees,
officers and directors of the Company with an exercise price of $.875 which
are exercisable after August 19, 1994 and expire five years from date of
grant. Under the terms of the plan an additional 51,105 shares of common
stock were authorized and reserved for issuance, but were not granted as of
March 31, 1995. As of March 31, 1995 there were 26,940 options exercised.
Also in 1994, the Board of Directors granted 1,350,075 options to a
nonemployee of which 150,075 granted September 15, 1993 have an exercise
price of $.875 and 1,200,000 granted May 11, 1994 have an exercise price of
$2.00 reflecting the market price at the dates of grant. The options were
exercisable on the date of grant and expire five years and four years,
respectively, from the dates of grant. No options hereunder were exercised
as of March 31, 1995. Subsequent to the reporting quarter, on April 5,
1995 these options were canceled.
6
NOTE 7. GUARANTEE OF PROMISSORY NOTE
During the quarter ended December 31, 1994 the board of directors voted to
approve the guarantee of a $500,000 bank loan to ITEC Attractions, the
Company's 36 percent owned subsidiary. The original loan and guarantee
expired during the quarter ended March 31, 1995 but were replaced with a
new long-term loan and guarantee.
NOTE 8. OTHER RECEIVABLES
Included in the $218,914 of other receivables is $210,065 due from ITEC
Attractions related to unpaid amounts under services agreement, loan
guarantee fee, and other miscellaneous expenses.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
---------------------
For the third consecutive quarter, the Company has shown increased revenue
over comparable periods the year before. This growth in revenue is
attributable to the new "50 Series" product line. The dramatic effect of
the "50 Series" products is best illustrated when comparing gross profit
for the first nine months of fiscal 1995 to fiscal 1994, which reflects an
increase of $351,696. These products include the Dynatron 150 Ultrasound
device, the Dynatron 550 Electrotherapy device and the Dynatron 850
Electrotherapy/Ultrasound Combination Therapy device. These devices
incorporate technology that significantly lowers the cost of manufacturing
and significantly reduces the physical dimensions of the devices.
Sales for the quarter ended March 31, 1995 increased 7.4 percent to
$1,402,662 as compared to $1,306,684 in the same quarter last year. While
the increase in sales is not as dramatic as the two previous quarters, it
should be remembered that it was during this same third quarter of 1994
that the first of the "50 Series", the Dynatron 150 was introduced. Sales
for the nine month period increased 26 percent indicating continued market
acceptance of the new "50 Series" products.
Cost of goods sold as a percentage of sales was 57.8 percent in the
reporting quarter compared to 55 percent in the same period of the previous
year. For the nine month period, Cost of Goods Sold was 57 percent
compared to 55.3 percent for the same period last year. This increase is
directly attributable to the increase in sales of ultrasound products which
carry a higher cost of goods on average as compared to the Company's other
products. Management believes margins will improve as production
refinements of the new "50 Series" ultrasound products are made.
Selling, general and administrative expenses for the reporting quarter were
$9,527 more than the same quarter last year which is less than a 2.5
percent increase. For the nine month period ending March 31, 1995,
selling, general and administrative expenses were down by $174,220. The
primary component of this expense reduction is a decrease in labor expense.
While most of this reduction is explained by a one time bonus of $180,000
paid to the Chairman of the Board in 1994, the Company anticipates seeing
additional cost savings in the future related to reductions in personnel
and elimination of certain overhead approved by the Board of Directors as
reported in the 10Q for the quarter ended December 31, 1994. The direct
benefit of the cost cutting measures is only beginning to be fully manifest
in this reporting quarter.
Research and development expenses in the reporting quarter decreased by
$36,223 over the same period last year. This decrease is partly due to
internal company restructuring and also to the cycle of product
development. The Company continues to remain committed to developing new
8
products as well as technologically improving existing devices in order to
maintain the Company's competitive edge in the marketplace.
Operating income for the reporting quarter totalled $63,378 as compared to
$33,577 for the same quarter last year, an increase of 89 percent.
Operating profits for the nine month period ending March 31, 1995 increased
by $596,006.
In the current reporting quarter, other income includes approximately
$17,000 of income associated with the sale of a former subsidiary company
of American Consolidated Industries, Dynatronics' former parent company
that was merged into Dynatronics in November, 1992. In the nine month
period currently reported there is $55,745 of this income reflected. There
was no income for this item in the corresponding periods of 1994.
Income before income tax for the reporting quarter equalled $62,691, an
increase of 429 percent when compared to $11,853 during the same quarter of
the prior year. This increase is attributed to the increased sales revenue
from the "50 Series" products, as mentioned above, as well as a reduction
in overall expenses.
Net income for the reporting quarter was $20,292 as compared to $35,379 for
the same quarter last year. Income tax accruals for the reporting quarter
reflect a 67 percent tax rate. This unusually high percentage was
necessary to adjust year-to-date tax accruals to be more reflective of
expected tax expenses. Management anticipates tax expense of approximately
44 percent for fiscal 1995 which is the rate currently reflected for the
nine months ended March 31, 1995. During the same quarter last year, the
Company recorded a relatively large tax benefit. The unusually high
accrual for this quarter, combined with booking a tax benefit for the same
quarter last year results in net income for the current reporting quarter
being lower than earnings for the same quarter last year in spite of pre-
tax income being 429 percent higher than last year. Had a standard
combined tax rate of 39 percent been applied in both quarters, net income
for the third quarter of fiscal 1995 would have exceeded net income for the
same quarter in fiscal 1994 by $31,000.
Liquidity and Capital Resources
-------------------------------
The Company expects that revenues from operations, together with available
sources of borrowing, will be adequate to meet 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 current ratio at
March 31, 1995 was 6.3 to 1 and at June 30, 1994 was 4.7 to 1. Current
assets represent 53% of total assets.
The 66 percent increase in accounts receivable from June 30, 1994 to March
31, 1995 is directly attributable to increased sales. However, average
collection time for receivables has increased by approximately 20 percent
since the end of June which has also contributed to the increase in
receivables. All accounts payable are within term with the Company
continuing its policy of
9
taking advantage of any and all payment discounts available. During the
nine month period, income from purchase discounts increased to $50,000, up
from $32,000 for the same period a year ago.
The Company increased its revolving line of credit to $1,000,000 with a
commercial bank in October 1994. No amounts were outstanding on this line
of credit at March 31, 1995. However, $500,000 of the line of credit is
restricted in relation to a guarantee by Dynatronics of a loan from a
commercial bank to ITEC Attractions, the Company's 36 percent owned
subsidiary.
Inventory levels increased approximately $32,000 to $1,827,374 on March 31,
1995 as compared to $1,795,359 at June 30, 1994. Management expects
inventories may increase slightly in upcoming quarters as efforts are made
to increase inventories of finished goods to better service customer demand
and to accommodate introduction of additional new products.
Cash balances decreased by $555,094 from June 30, 1994 to March 31, 1995.
This decrease is directly related to the $694,078 increase in trade and
other receivables during the same period. Accounts receivable are
typically reduced, and cash balances are usually greater at June 30.
Long-term debt and capital lease obligations at March 31, 1995 totalled
$2,291,382 comprised primarily of the mortgage loan on the Company's new
office and manufacturing facility.
Business Plan
-------------
The Company developed the new "50 Series" product line to address the
specific market need for lower cost, high value products. The first in
this series, the Dynatron 150 Ultrasound device, was introduced in
February, 1994. The next two devices, the Dynatron 550 and Dynatron 850
were introduced in August, 1994. The Company plans to continue the
expansion of the "50 Series" product line by adding two new devices
currently scheduled for release in the first quarter of fiscal 1996. As
anticipated, the "50 Series" devices have dramatically improved sales and
operating profits with nine month sales increasing 26 percent and operating
profit increasing by $596,006 over last year.
The "50 Series" has also been a particularly attractive product line for
the international market. Due to its low price and compact size, the
Company has received inquiries from around the world. Some of the new
markets to which product has been shipped include South Africa, Mexico,
Philippines, Argentina, Brazil, Chile, Israel, Kuwait, Lebanon, Vietnam and
Australia. While international markets are slower to cultivate and
develop, the Company feels it can expand its international presence
significantly with the "50 Series".
Recently, the Company has pursued international marketing contacts and made
preliminary trips to Japan and Europe for the purpose of establishing
importers and distributors. Negotiations are currently in progress with
one of the largest importers of physical therapy equipment in Japan. The
Company's goal is to increase its marketing efforts in foreign countries by
promoting the
10
new 50 Series product line. During the reporting quarter, the Company
hired a sales manager who will focus more directly on international sales.
The Company anticipates significant progress in the foreign arena during
the first two quarters of fiscal 1996.
The Company recognizes the need to continually upgrade and re-engineer
existing products as well as introduce new products. The ongoing effort to
accomplish these objectives is reflected in the Research and Development
expenditures which are running at approximately 9.3 percent of sales this
fiscal year. As a result, the Company anticipates being able to reduce
costs of manufacturing without sacrificing value or features. The
continuing commitment to Research and Development enables Dynatronics to be
a technological leader in the market.
The Company remains committed to the concept of Quality First. No cost
reductions have been implemented that would negatively impact quality of
product or customer service. Efforts to improve quality in every aspect of
the Company is an ongoing quest that involves every employee. Employee
incentive programs implemented during the first quarter of the current year
under the masthead "Quality First" have been very successful and engendered
a pride and sense of individual responsibility that continues to assure
that the Company puts Quality First both in the manufacture of products and
in service to its customers.
Another of the Company's objectives is to evaluate potential acquisitions
that would favorably enhance shareholder value and Company growth. Strict
criteria for such acquisitions have been set and management continues to
evaluate acquisition candidates fitting the set criteria.
Exploring research opportunities into areas of potential efficacy of the
Company's low-power laser device remains the focus for development of laser
products. To that end, Company engineers have developed a new Dynatron
1650 laser device that provides varying wavelengths of laser light. While
this device may only be used for research purposes in the United States, if
priced competitively, it may prove a desirable product in international
markets the Company is currently exploring. Should any 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 to obtain marketing
clearance for its laser device in the United States.
The Company currently owns approximately 2.3 million shares of ITEC
Attractions common stock which, based on the current trading price as
quoted on NASDAQ as of May 9, 1995, was valued at approximately $2.9
million. During the last fiscal year, ITEC opened its first facility in
Branson, Missouri, in October, 1993. ITEC recently completed production of
its theme film "Ozarks: Legacy and Legend" for the Branson facility. The
film premiere was held on April 28, 1995 with standing room only crowds at
the Ozarks Discovery IMAX(R) Theater. Over 10,000 people attended the
premiere activities over a three day period. The film was well received by
those in attendance and the reviews have been very positive. "Ozarks:
Legacy and Legend" will be exhibited continuously at the theater.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A) Not applicable.
B) Not applicable.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATRONICS CORPORATION
-----------------------
Registrant
Date 5/15/95 /s/ Kelvyn H. Cullimore, Jr.
----------------------- -------------------------------
Kelvyn H. Cullimore, Jr.
President
Chief Executive Officer
Date 5/15/95 /s/ Keith E. Turner
----------------------- -------------------------------
Keith E. Turner
Treasurer
Chief Accounting Officer and
Principal Financial Officer
13