<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31,
1997.
[ ] 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
---------------------------------------------------------------
(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) (Zip Code)
(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.
X Yes No
----- -----
The number of shares outstanding of the issuer's common stock, no
par value, as of February 5, 1998 is 8,427,847 shares.
Transitional Small Business Disclosure Format.
(Check One) : Yes X No
---- ----
<PAGE>
DYNATRONICS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
-----------
Condensed Balance Sheet
December 31, 1997 1
Condensed Statements of Income
Three Months and Six Months Ended December 31, 1997,
and December 31, 1996 2
Condensed Statements of Cash Flows
Six Months Ended December 31, 1997,
and December 31, 1996 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis
Or Plan of Operation 6
Part II. OTHER INFORMATION 10
<PAGE>
DYNATRONICS CORPORATION
Condensed Balance Sheet
(Unaudited)
December 31
ASSETS 1997
-----------
Current assets:
Cash and cash equivalents $ 292,963
Trade accounts receivable, less allowance for doubtful
accounts of $74,615 2,209,721
Other receivables 100,856
Inventories 2,642,464
Prepaid expenses 88,997
Deferred tax asset-current 91,757
-----------
Total current assets 5,426,758
Net property and equipment 2,655,974
Excess of cost over book value, net of accumulated
amortication of $253,310 1,185,865
Deferred tax asset-noncurrent 228,365
Other assets 535,984
-----------
$10,032,946
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 161,993
Current installments of capital lease obligations 1,273
Line of credit 977,615
Accounts payable 329,811
Accrued expenses 724,559
-----------
Total current liabilities 2,195,252
Long-term debt, excluding current installments 2,009,558
Deferred compensation 489,072
-----------
Total long-term liabilities, excluding
current installments 2,498,630
-----------
Total liabilities 4,693,882
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 8,427,847 shares 1,984,026
Retained earnings 3,355,038
-----------
Total stockholders' equity 5,339,064
-----------
$10,032,946
===========
See accompanying notes to condensed financial statements.
1
<PAGE>
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 3,000,648 2,222,630 6,028,427 4,605,301
Cost of sales 1,741,754 1,267,917 3,477,745 2,633,366
----------- ----------- ----------- -----------
Gross profit 1,258,894 954,713 2,550,682 1,971,935
Selling, general, and
administrative expenses 902,845 683,438 1,745,861 1,420,938
Research and development expenses 121,514 151,245 244,916 289,472
----------- ----------- ----------- -----------
Operating income 234,535 120,030 559,905 261,525
Other income (expense):
Interest income 13 4,229 81 7,215
Interest expense (47,881) (49,027) (92,349) (99,637)
Other income, net 21,146 20,566 43,244 49,611
----------- ----------- ----------- -----------
Total other income (expense) (26,722) (24,232) (49,024) (42,811)
Income before income taxes 207,813 95,798 510,881 218,714
Income tax expense 73,535 37,289 184,378 84,753
----------- ----------- ----------- -----------
Net income 134,278 58,509 326,503 133,961
=========== =========== =========== ===========
Earnings Per Share - Basic (note 2) 0.02 0.01 0.04 0.02
=========== =========== =========== ===========
Earnings Per Share - Diluted (note 2) 0.02 0.01 0.04 0.02
=========== =========== =========== ===========
Weighted average number of common shares 8,427,847 8,424,747 8,427,847 8,424,747
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
DYNATRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
[CAPTION]
<TABLE>
Six Months Ended
December 31
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 326,503 133,962
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of property and equipment 84,926 91,036
Other amortization 34,894 43,435
Provision for doubtful accounts 8,400 6,000
Provision for inventory obsolescence 57,000 48,000
Provision for warranty reserve 79,528 54,944
Decrease (increase) in operating assets:
Receivables (62,223) (215,865)
Inventories (519,204) (60,383)
Prepaid expenses and other assets (52,483) (59,109)
Deferred tax assets (58,456) 14,447
Increase (decrease) in operating liabilities:
Trade accounts payable and accrued expenses (302,199) (219,868)
Deferred compensation 42,042 40,092
Income taxes payables (80,866) 94,763
----------- -----------
Net cash provided by (used in) operating activities (442,138) (28,546)
----------- -----------
Cash flows from investing activities:
Capital expenditures (134,973) (88,571)
----------- -----------
Net cash provided by (used in) investing activities (134,973) (88,571)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligations (3,695) (13,485)
Principal payments on long-term debt (77,933) (81,071)
Net change in line of credit 407,087 (129,168)
----------- -----------
Net cash provided by (used in) financing activities 325,459 (223,724)
----------- -----------
Net increase (decrease) in cash and cash equivalents (251,652) (340,841)
Cash and cash equivalents at beginning of period 544,615 416,854
----------- -----------
Cash and cash equivalents at end of period $ 292,963 76,013
----------- -----------
Supplemental cash flow information
Cash paid for interest (net of amounts capitalized) 92,349 99,636
Cash paid for income taxes 321,700 52,100
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 1997 and for the
six 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-KSB under the name of
Dynatronics Corporation which included audited financial
statements for the two years ending June 30, 1997 and 1996. 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. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128). SFAS 128 became effective for
financial statements with interim and annual periods ending
after December 15, 1997. Accordingly, the Company has adopted
SFAS 128 for the quarter ended December 31, 1997.
SFAS 128 establishes a different method of computing earnings
(loss) per share than was required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS 128,
entities with publicly held common stock are required to
present basic earnings (loss) per share and diluted earnings
(loss) per share. Basic earnings per share is the amount of
earnings (loss) for the period available to each share of
common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings (loss) 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.
Prior periods have been restated for presentation in accordance
with SFAS 128.
<PAGE>
NOTE 3. INVENTORIES
Inventories consisted of the following:
December 31
1997
------------
Raw Materials $ 1,429,724
Finished Goods 1,337,721
Inventory Reserve (124,981)
--------------
$ 2,642,464
==============
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31
1997
-------------
Land $ 354,744
Buildings 2,072,157
Machinery and equipment, and
equipment under capital lease 1,237,737
-------------
3,664,638
Less accumulated depreciation
and amortization. 1,008,664
-------------
$ 2,655,974
=============
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations
- ---------------------
Sales for the quarter ended December 31, 1997 reached a record
second quarter high $3,000,648, up 35 percent as compared to
$2,222,630 in the same period of the prior year. Net income for
the reporting quarter climbed to $134,278, up 129 percent over
last year's second quarter results of $58,509. Sales for the
six-month period ended December 31, 1997 increased 31 percent
to $6,028,427 as compared to $4,605,301 in the prior year
period. Net income for the six-month period increased 144
percent to $326,503 compared to $133,961 in the prior year
period.
Over the past two years, the Company has embarked on a strategic
plan to broaden its product line and expand its distribution
network. This has been accomplished through such activities as
the May 1996 acquisition of Superior Orthopaedic Supplies, the
introduction of the "50 Series Plus" line of electrotherapy and
ultrasound products during fiscal year 1997, the January 1997
acquisition of assets to begin the manufacture of therapy tables
and rehab equipment in Columbia, South Carolina and the exclusive
marketing agreement with Life-Tech to distribute their
iontophoresis products to the physical therapy market. These
strategic achievements are the basis and cause for the increased
sales and profitability during the reporting quarter.
The Company continues to gain market share both domestically and
internationally through increased sales of the new "50 Series
Plus" line of electrotherapy and ultrasound products. By
incorporating state-of-the-art technology to reduce manufacturing
costs, profit margins for these products are the highest of any
devices manufactured by the Company.
Increased sales of medical supplies and soft goods accounts for
the majority of increased revenues for the reporting period and
continues to be a focal point of the Company's overall strategy.
Sales of these products increased 55 percent over the same six-
month period last year. The publication of Dynatronics' first
full-line catalogue in January 1997, provided an important tool
in effectively marketing these products. Management anticipates
continued sales growth in future periods with the introduction of
the Company's new, expanded catalogue in February 1998.
In January 1997, the Company announced it had acquired assets to
begin manufacturing physical therapy treatment tables, parallel
bars, and other specialty rehabilitation equipment at a facility
in Columbia, South Carolina. This facility currently
manufactures over 30 varieties of products and plans to almost
double the number of products offered during fiscal year 1998.
These products are being manufactured under the direction of a
seasoned management team with 30 years of experience in this
industry. This division is on track to generate $1 million in
sales during fiscal year 1998.
The development of new marketing strategies emphasizing
Dynatronics' position as the low-cost provider of iontophoresis
products has been the main factor in increasing sales of
iontophoresis products during the past four quarters.
<PAGE>
Iontophoresis is a process of transdermally delivering certain
anti-inflammatory and anesthetic drugs into a localized area
without the use of needles. Management anticipates sales of
iontophoresis products in fiscal year 1998 will approach
$1,000,000 - nearly double their fiscal year 1997 level.
Total gross margin for the reporting quarter increased 32
percent to $1,258,894 as compared to $954,713 in the prior year
period. Total gross margin for the six-month period increased
29 percent to $2,550,682 as compared to $1,971,935 in the prior
year period. These increases are directly attributable to the
increase in sales volume as mentioned above. Gross margins as
a percentage of sales were 42 percent for the reporting quarter
compared to 43 percent in the same quarter in the prior year
period. This decrease reflects the significant increase in
sales of medical supplies, soft goods and tables, which carry
lower margins than the Company's device products.
Selling, General and Administrative (SG&A) expenses for the
three and six-month periods increased to $902,845 and
$1,745,861, respectively, as compared to $683,438 and
$1,420,938, respectively, in the same periods last year. These
increases are mostly related to additional SG&A expenses
associated with the new treatment table manufacturing operation
acquired in Columbia, South Carolina. Labor expense also
increased due to staffing needs created by the higher sales
volume and the anticipation of and preparation for further
sales increases in the future.
Research and development expenses in the three and six-month
periods totaled $121,514 and $244,916, respectively, compared
to $151,245 and $289,472, respectively, in the prior year
periods. Management anticipates R&D expenses for fiscal year
1998 will not exceed fiscal year 1997 levels.
Operating income nearly doubled to $234,535 in the three-month
period ended December 31, 1997 compared to $120,030 in the same
period of the prior year. Operating income for the six-month
period more than doubled to $559,905 as compare to $261,525 in
the previous year. The increased sales volumes and higher
margins associated with the new "50 Series Plus" products were
the primary reason for the increases in operating income.
Income before tax for the quarter ended December 31, 1997
increased 117 percent to $207,813 compared to $95,798 during
the similar period of the prior year. Income before tax for
the six-month period increased 134 percent to $510,881 as
compared to $218,714 in the previous year period. Increased
sales together with lower SG&A and R&D expenses as a percent of
sales and the higher margins associated with the new "50 Series
Plus" products contributed to the increased profit from
operations. Income tax expense for the three and six-month
period ended December 31, 1997 equaled $73,535 and $184,378,
respectively, as compared to $37,289 and $84,753 respectively,
in the prior year periods.
Net income for the three-month period increased 129 percent to
$134,278 compared to $58,509 for the same period in the prior
year. Net income for the six-month period increased 144
percent to $326,503 compared to $133,961 in the previous year.
These increases are a result of the factors discussed above and
reflect the successful implementation of the Company's
strategic plan to broaden its product offerings and increase
distribution.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company expects 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 year.
The Company continues to maintain a liquid position. The
Company's current ratio at December 31, 1997 was 2.5 to 1.
Current assets represent 54 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.
During the reporting quarter the Company increased its
revolving line of credit with a commercial bank to $2,500,000.
The outstanding balance on this line of credit at December 31,
1997 was $977,615, with approximately $1.5 million available
to the Company.
Inventory levels, net of reserves, at December 31, 1997 totaled
$2,642,464 while net accounts receivable were $2,209,721. Over
the past two years inventories and accounts receivable have
increased to support the Company's increased sales volumes and
as a result of management's efforts to reduce backorders.
Financing for these increases has been provided through net
profits from operations together with the Company's line of
credit facility.
Long-term debt excluding current installments at December 31,
1997 totaled $2,009,558 comprised primarily of the mortgage
loan on the Company's office and manufacturing facility and the
note payable associated with the acquisition of Superior
Orthopaedic Supplies. The balance on the mortgage loan is
approximately $1.6 million with monthly principal and interest
payments of $19,700.
Business Plan
- -------------
With the introduction of the new "50 Series Plus" product line,
the Company increased its market share in the most profitable
segment of its market. This product line offers the greatest
number of features at the lowest price of any previous products
offered by the Company.
With the acquisition of Superior Orthopaedic Supplies in May
1996, the Company has been able to increase sales of Superior's
product line of soft goods and supply products through
Dynatronics' distribution network. The start-up of the
treatment table manufacturing operation in South Carolina has
further broadened the Company's product line. 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.
To capitalize on its broadened product line, the Company
published its first full-line catalogue in January 1997. In
<PAGE>
February 1998, the Company plans to introduce a new version of
it's catalogue with nearly twice the number of products as
compared to the Company's first catalogue. This new catalogue
is expected to support continued sales growth of the Company's
products.
Another avenue to increase sales and profits being pursued by
management is that of strategic business alliances such as the
exclusive distribution agreement signed with Life-Tech, Inc. in
August 1996. The Company continues to evaluate additional
strategic alliances and acquisition opportunities which could
enhance and broaden the Company's product line.
The Company's sales are expanding internationally with the
approval to market products in Japan being granted during
fiscal year 1997. Management anticipates initial marketing
efforts in Europe will begin this fiscal year which is expected
to continue the Company's international expansion.
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 continues to evaluate 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.
Forward-looking Statements
- --------------------------
This quarterly report contains forward-looking statements
relating to anticipated financial performance, product
development, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. With the exception of historical
information, statements in this report are forward-looking
within the meaning of the law, including statements regarding
future products, product development, research and development
spending, and the Company's business plan, as well as
statements regarding the levels of future international sales .
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,
the Company's ability to meet increasing demand, the ability to
introduce new products on a timely basis, changing customer
requirements, delays in new products qualifications, the timing
and extent of research and development expenses, the Company's
<PAGE>
access to and 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
-----------------
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
---------------------------------------------------
On November 18, 1997, the Company conducted its 1997
annual meeting of shareholders. At the annual
meeting, the following former members of the
Company's Board of Directors were elected for another
term of service: Kelvyn H. Cullimore, Kelvyn H.
Cullimore, Jr., E. Keith Hansen, M.D., Larry K.
Beardall, V. LeRoy Hansen, Joseph H. Barton, and
Howard L. Edwards. At the annual meeting, the
Company's shareholders also ratified the Board's
selection of KPMG Peat Marwick, as the Company's
independent public accountants. The following table
summarizes the voting at the annual meeting.
Issue For Against Abstention
----- --- ------- ----------
Ratify selection of
Accountants 6,149,588 9,205 26,300
Board Nominee For Against Abstention
------------- --- ------- ----------
Kelvyn H. Cullimore 6,147,808 6,530 30,755
Kelvyn H. Cullimore, Jr. 6,153,808 530 30,755
Keith Hansen, M.D. 6,152,338 2,000 30,755
<PAGE>
Board Nominee For Against Abstention
------------- --- ------- ----------
Larry K. Beardall 6,154,338 0 30,755
V. LeRoy Hansen 6,150,338 4,000 30,755
Joseph H. Barton 6,152,338 2,000 30,755
Howard L. Edwards 6,154,338 0 30,755
Item 5. Other Information
-----------------
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A) Exhibits
No. Description
-------- -----------
27 Financial Data Schedule
B) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNATRONICS CORPORATION
-----------------------
Registrant
Date 2/13/98 /s/ Kelvyn H. Cullimore, Jr.
----------------- ------------------------------
Kelvyn H. Cullimore, Jr.
President
Chief Executive Officer
Date 2/13/98 /s/ John L. Hales
----------------- ------------------------------
John L. Hales
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF INCOME 12-31-97 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 292,963
<SECURITIES> 0
<RECEIVABLES> 2,284,336
<ALLOWANCES> 74,615
<INVENTORY> 2,642,464
<CURRENT-ASSETS> 5,426,758
<PP&E> 3,664,638
<DEPRECIATION> 1,008,664
<TOTAL-ASSETS> 10,032,946
<CURRENT-LIABILITIES> 2,195,252
<BONDS> 2,009,558
0
0
<COMMON> 1,984,026
<OTHER-SE> 3,355,038
<TOTAL-LIABILITY-AND-EQUITY> 10,032,946
<SALES> 6,028,427
<TOTAL-REVENUES> 6,028,427
<CGS> 3,477,745
<TOTAL-COSTS> 3,477,745
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,400
<INTEREST-EXPENSE> 92,349
<INCOME-PRETAX> 510,881
<INCOME-TAX> 184,378
<INCOME-CONTINUING> 326,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,503
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
