UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1998.
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission file number 0-12697
DYNATRONICS CORPORATION
(Name of Small Business Issuer in its Charter)
Utah 87-0398434
- -------------------------- ------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
7030 Park Centre Drive
Salt Lake City, Utah 84121
(801) 568-7000
(Address of Principal Executive Offices, Telephone Number)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or Section 15(d) of the Securities Exchange Act of 1934
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 or No
The aggregate market value of the voting stock held by non-affiliates of
the issuer was approximately $22,466,000 as of September 16, 1998.
The number of shares outstanding of each of the issuer's classes of
common stock as of September 16, 1998 was:
Class Shares Outstanding
------------------- ------------------
Common Stock, no par value 8,681,402
The Company hereby incorporates by reference the Company's 1998 Proxy
Statement into Items 11 and 12 of this Report on Form 10-KSB. The Proxy
Statement will be provided to shareholders subsequent to the filing of
this Report.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
Transitional Small Business Disclosure
Format (Check One):
Yes No X
<PAGE>
PART I
Item 1. Description of the Business
Dynatronics Corporation, formerly Dynatronics Laser Corporation
("Dynatronics" or the "Company"), a Utah corporation, was organized
April 29, 1983 to acquire its affiliates, Dynatronics Research
Corporation, and Dynatronics Marketing Company which were incorporated
in Utah in 1979 and 1980, respectively. The principal business of the
Company is the design, manufacture and sale of: 1) medical devices for
therapeutic and aesthetic applications, 2) medical supplies and soft
goods, 3) treatment tables and rehabilitation products for use by
practitioners and 4) nutritional supplements. The Company distributes
its products through independent dealers nationwide and internationally
as well as through its own full-line catalog.
On May 1, 1996, the Company acquired the assets of Superior
Orthopaedics Supplies, Inc. ("Superior"), a manufacturer and distributor
of medical soft goods, supplies, wood therapy tables and rehabilitation
products for the physical medicine market. Superior is located in
Ooltewah, Tennessee, a suburb of Chattanooga, Tennessee. The addition
of Superior's products to the Company's existing line of capital
equipment significantly broadened the Company's product line and
strengthened channels of distribution, allowing for greater market
penetration both domestically and internationally.
In August 1996, the Company entered into a five-year agreement
with Life-Tech, Inc. of Houston, Texas, which appoints the Company as
exclusive distributor of Life-Tech's iontophoresis products to the
physical medicine market throughout the United States and Canada and as
a non-exclusive distributor internationally. Iontophoresis is a process
by which anti-inflammatory drugs and local anesthetics are delivered
transdermally without the use of injection needles. The acceptance of
iontophoresis as a method of treatment among physical therapists has
grown significantly over the past decade.
In December 1996, the Company acquired certain assets in Columbia,
South Carolina to begin manufacturing physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation
products. Agreements were signed with Mr. Charlton "Stoney" Floyd,
founder and past president of Midland Table Company to lease equipment
and real property for the venture as well as to provide consulting
services. In May 1997, Mr. Floyd was named General Manager of the
Company's Columbia operations. Mr. Floyd has an extensive background in
the design, manufacture and sale of rehabilitation tables and equipment.
The addition of treatment tables and related products is of strategic
importance in that the Company believes it is now able to offer the
broadest line of manufactured products in the industry.
In fiscal year 1998, the Company developed a new product line
called the Synergie Lifestyle System which combines therapeutic
massage treatments using the new Synergie AMS device with diet,
exercise and proper nutrition for improving health and skin tone
quality. This new product line has opened new market opportunities for
the Company in the fields of plastic surgery, and dermatology, as well
as related aesthetic markets. Initial shipments of the new Synergie
product line began in July 1998.
<PAGE>
Description of Products Manufactured
and/or Distributed by the Company
The Company's product line can be divided into four primary
categories: (1) Therapy Devices including Electrotherapy and Therapeutic
Ultrasound; (2) Medical Supplies and Soft Goods; (3) Treatment Tables
and Rehabilitation Equipment; and (4) Aesthetic Products related to the
Synergie Lifestyle System. The Company's products are used primarily by
physical therapists, chiropractors, sports medicine practitioners,
podiatrists, plastic surgeons, dermatologists, and other aesthetic
services providers.
Therapy Devices
Electrotherapy - The therapeutic effects of electrical energy have
occupied an important position in physical medicine for over three
decades. There has been an evolution through the years to use the most
effective and painless wave forms and frequencies for patient comfort
and for success in the treatment of pain and related physical ailments.
Medium frequency alternating currents, which are used in the Company's
electrotherapy devices, are believed to be the most effective and
comfortable for patients. Electrotherapy is commonly used for treating
chronic, intractable pain and/or acute, post-traumatic pain, increasing
local blood circulation, relaxation of muscle spasms, prevention or
retardation of disuse atrophy, and muscle re-education.
Therapeutic Ultrasound - Ultrasound therapy is a process of
providing therapeutic deep heat to muscle tissues through the
introduction of soundwaves into the body. It is the most common
modality used in physical therapy today for the treatment of pain
relief, muscle spasms and joint contractures.
"50 Series" and "50 Series Plus" Products
With industry trends toward managed care, the Company anticipated
an increased market demand for lower cost devices that did not sacrifice
important features. The result was the introduction in fiscal years
1994-1996 of the "50 Series" product line. This line incorporates the
latest technology and allows the Company to reduce the size of these
devices by 50% compared to their predecessor devices. These changes
also reduce the price of these products without eliminating key features
of the more expensive models.
During fiscal year 1997, the Company introduced seven new devices
including the Dynatron 125 and 525 which target the low-priced segment
of the market, together with five new "50 Series Plus" products which
add additional features and capabilities to the popular "50 Series" line
of products while at the same time reducing the cost of manufacturing
the products. (See Schedule of Therapy Products below.) Dynatronics
intends to continue development of its electrotherapy and ultrasound
technology and remain a leader in the design, manufacture and sale of
therapy devices. Therapy devices and related products accounted for
over half of total sales revenue in fiscal year 1998.
Iontophoresis
In fiscal 1997, the Company added Life-Tech's line of
iontophoresis products to its family of therapy devices offered to
practitioners. These products include the Iontophor II and Microphor
devices which are used in physical medicine applications primarily for
treating inflammation. The devices use electrical current to deliver
drugs such as lidocaine and dexamethasone through the skin for localized
<PAGE>
treatment of inflammation. The drug is placed in a disposable
electrode. The products sold by the Company include the electrical
current generating device (Microphor and Iontophor II) and the
disposable electrodes into which the drug of choice is placed by the
practitioner.
The chart below lists the therapy device products manufactured
and marketed by the Company which materially contributed to total
Company sales in fiscal year 1998.
Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
When
Product Name Description Introduced
- ------------ ----------- ----------
Dynatron 150* Ultrasound 3rd quarter fiscal year 1994
Dynatron 550* Multi-modality 1st quarter fiscal year 1995
Electrotherapy
Dynatron 850* Combination Electrotherapy/ 1st quarter fiscal year 1995
Ultrasound
Dynatron 650* Multi-modality 2nd quarter fiscal year 1996
Electrotherapy
Dynatron 950* Combination Electrotherapy/ 2nd quarter fiscal year 1996
Ultrasound
Dynatron 125 Ultrasound 1st quarter fiscal year 1997
Dynatron 525 Electrotherapy 1st quarter fiscal year 1997
Iontophor II & Iontophoresis 1st quarter fiscal year 1997
Microphor +
Dynatron 150 Plus** Ultrasound 3rd quarter fiscal year 1997
Dynatron 550 Plus** Multi-modality 3rd quarter fiscal year 1997
Electrotherapy
Dynatron 650 Plus** Multi-modality 3rd quarter fiscal year 1997
Electrotherapy
Dynatron 850 Plus** Combination Electrotherapy/ 3rd quarter fiscal year 1997
Ultrasound
Dynatron 950 Plus** Combination Electrotherapy/ 3rd quarter fiscal year 1997
Ultrasound
_____________________
Dynatron is a registered trademark (#1280629) owned by Dynatronics
<PAGE>
* "50 Series" Product Line
** "50 Series Plus" Product Line
+ Both Manufactured by Life-Tech
Medical Supplies and Soft Goods
In March 1998, the Company introduced its 1998 product catalog
containing 300 new products effectively doubling the number of products
offered in the 1997 catalog. Some of the products which are new to the
catalog this year include: treadmills, wheelchairs, walkers, splinting
supplies, wound care products, athletic trainer supplies, work hardening
and exercise products, and occupational therapy tables. With the
introduction of the expanded 1998 catalog, the Company has created a
virtual "one-stop shop" for rehabilitation professionals.
Medical supplies and soft goods currently manufactured by the
Company include: hot packs, therapy wraps, wrist splints, neoprene
braces and supports, lumbar supports, cervical collars, slings, cervical
pillows, back cushions, weight racks, and wood and metal treatment
tables. Products distributed by the Company include: cold packs, skin
cleanser, lotions and gels, paper products, athletic tape, canes and
crutches, reflex hammers, stethoscopes, splints, elastic wraps, exercise
weights, theraband tubing, wheelchairs, walkers, treadmills, stair
climbers, hydrocollators, whirlpools, gloves, electrodes, tens devices,
and traction equipment. The Company is continually seeking to expand
its line of medical supplies and soft goods.
Treatment Tables and Rehabilitation Equipment
In January, 1997, the Company acquired a treatment table
manufacturing operation in Columbia, South Carolina. The Company now
manufactures and distributes a line of physical therapy treatment
tables, rehabilitation parallel bars, and other specialty rehabilitation
products. The products manufactured at the Columbia operations are
primarily of metal construction. The product line includes motorized
and manually-operated products. The Company offers over 30 varieties of
treatment tables and rehabilitation equipment.
As a result of the acquisitions of Superior Orthopaedic Supplies
and the treatment table manufacturing operation, the Company has become
a broad-line supplier in the physical medicine market. The target
markets for these products are physical therapy, chiropractic, podiatry,
sports medicine, industrial and occupational medicine, family practice,
long-term care facilities, and the sub-groups of each of these
specialties.
Synergie Lifestyle System
In June 1998, the Company introduced a new product line called the
Synergie Lifestyle System which provides a comprehensive, non-invasive
treatment program consisting of three elements: 1) Synergie treatments
featuring the new Synergie AMS therapeutic massage device, 2), regular
exercise, and 3) proper nutrition.
The Synergie AMS device provides massage treatments to skin and
subcutaneous tissues in common problem areas where heredity, inactive
lifestyle, or poor diet tend to create undesirable effects for women.
According to the U.S. Food and Drug Administration ("FDA"), therapeutic
massagers, like the Synergie AMS device, are considered Class I devices.
<PAGE>
Dynatronics has complied with FDA requirements for marketing the Synergy
AMS device and therefore began shipments in July 1998. Recently, FDA
expanded allowed claims for this type of treatment to include "temporary
reduction in the appearance of cellulite". Dynatronics has formally
submitted documentation to the FDA to qualify the Synergie AMS device
for this new expanded labeling.
As part of the Synergie Lifestyle System, the Company, with the
assistance of expert consultants, developed and introduced a line of 19
nutritional supplements including such items as a Multivitamin/Mineral
compound, St Johns Wort formulation, Anti Oxidant Complex, Herbal
Calmative, and Calcium formula. Trademarked "SynergieNSP" (Nutritional
Supplement Program), these nutritional supplements will be marketed
through clinics offering Synergie AMS treatments, and by other
professionals interested in quality nutritional supplements. Other
components of the Synergie product line include a treatment body suit,
treatment tables, and other related accessories.
Other Products
In addition to the products already mentioned, the Company
continues to sell on a limited basis other products such as the Dynatron
2000 Patient Testing and Management System, Dynatron 360 Range of Motion
Inclinometer, Dynatron 320 Grip Strength Analyzer, and the Dynatron 330
Body Composition Analyzer.
Allocation of Sales Among Key Products
No product accounted for more than 15 percent of the Company's
revenues during any of the last two fiscal years. Therapy devices and
related products represented approximately 64 percent and 52 percent of
total sales in 1997 and 1998, respectively. Medical supplies and soft
goods accounted for 34 percent and 40 percent of total sales in 1997 and
1998, respectively. Metal therapy tables and related rehabilitation
products represented approximately 3 percent and 8 percent of total
sales in 1997 and 1998 respectively.
Low Power Laser
The use of low-power laser stimulation (biostimulation) in
medicine is in sharp contrast to the surgical, cauterizing, or cutting
uses for which laser has been most commonly known in the past. In
biostimulation, the power output of the laser emitting device is reduced
to a point of providing a mild stimulation to body tissues and
functions. Biostimulation is a claimed therapeutic application of laser
as opposed to the surgical or burning effect achieved by higher-power
units.
Low-power laser therapy is used extensively in countries around
the world as an adjunctive therapy in pain management, wound healing and
certain immune system responses. However, the FDA has not cleared these
devices for general sale in the United States. The process by which
such clearance is granted is known as Pre- market Approval (PMA).
Obtaining a PMA requires a significant investment of time and resources.
In the 1980's, Dynatronics filed a PMA with the FDA for its
Dynatron 1120 low-power laser device. In spite of the Company's
expenditure of substantial effort and resources, the FDA refused to
clear the laser for general marketing due to inconclusive evidence of
the effectiveness of the device. Due to the subjective nature of the
process and the required commitment of human and monetary resources, the
Company is not currently seeking FDA clearance of its low-power laser
device. Instead, the Company continues to seek indications of efficacy
<PAGE>
of the devices that can be more easily demonstrated in a PMA. Should
such an indication of efficacy be identified, the Company would again
give consideration to actively seeking FDA approval of its low- power
laser devices.
The most current laser device developed by the Company is the
Dynatron 1650. This device is smaller and more compact in keeping with
the "50 Series" design of products. The Dynatron 1650 has the ability
to deliver multiple wavelengths by simply changing the probe.
Presently, the device is offered in 3 mW and 15 mW power outputs at 633
nm wavelength (red) and at 50 mW and 100 mW power outputs at 830 nm
wavelengths (infrared). Since no low-power laser has been cleared for
marketing in the United States, the Dynatron 1650 is only sold
domestically for research purposes under approved Investigational Device
Exemptions pursuant to FDA guidelines.
Description of the Company's
Marketing and Manufacturing Operations
Patents and Trademarks
The Company currently holds a patent on the "Target" feature of
its electrotherapy products which will remain in effect until July 18,
2006 and a patent on the Company's multi-frequency ultrasound technology
which will remain in effect until June, 2013. A design patent is also
held on the Dynatron Equalizer which will remain in effect until July
21, 2006. This design patent covers the device's appearance. The
Company does not hold any other patents, however, a patent on the new
Synergie AMS device is in process of being filed with the United States
Patent Office.
The trademark "Dynatron" has been registered with the United
States Patent and Trademark Office and the appropriate government
offices in Japan. In addition, registration applications have been
filed for the trademark and service mark "Synergie," and for the
trademark "Synergie NSP." The Company's other copyrightable material is
protected under U.S. copyright laws.
Warranty Service
The Company warrants all products it manufactures for time periods
ranging in length from 90 days to five years after the sale. The
Company also sells accessory items supplied by other manufacturers.
These accessory products carry warranties similar to those offered by
the Company. Warranty service is provided from the Salt Lake City,
Chattanooga, and Columbia facilities, according to the service required.
These warranty policies are comparable to warranties generally available
in the industry. Warranty claims as a percentage of gross sales were
not material in fiscal years 1997 and 1998 and were covered by the
Company's reserve for such claims.
Customers/Market
With the acquisition of Superior and the introduction of the new
Synergie product line, the Company has expanded its dealer network to
over 320 wholesale dealers throughout the United States and
internationally. These dealers are the primary customers of the Company.
The dealers purchase and take title to the products. Products are sold
by dealers primarily to chiropractors, podiatrists, physical therapists,
sports medicine specialists, medical doctors, hospitals, plastic
surgeons, dermatologists, aesthetic and cosmetic practitioners and other
medical institutions.
<PAGE>
In addition, the Company has entered into a number of preferred
vendor relationships with certain national chains of physical therapy
clinics and hospitals. The national account market represents a strong
growth segment within the physical medicine industry as national and
regional companies acquire individual physical therapy clinics
throughout the country. No single dealer or national account or group
of related accounts was responsible for 10% or more of total sales in
fiscal years 1997 or 1998.
The Company exports products to approximately 25 different
countries. International sales (i.e., sales outside North America)
represented approximately $717,194, or 7 percent of the Company's total
sales in fiscal 1997 and $652,431, or 5 percent of sales in fiscal 1998.
This reduction is directly related to Asia's economic and financial
troubles which have affected sales in that region. In January 1997, the
Company began sales of two of its devices to Japan. Efforts are
currently underway to obtain marketing clearance for the Company's
products in the European Union, as well as other countries. However,
access to foreign markets is sometimes barred or more difficult for
devices such as those manufactured by the Company because of tariff
restrictions, foreign currency fluctuations, currency control
regulations, competing or conflicting manufacturing standards,
governmental regulation and approval policies for medical testing and
therapy devices and licensing requirements. The Company has no foreign
manufacturing operations.
Competition
Despite significant competition, the Company has distinguished key
products by using the latest technology, such as its patented Target
feature and patented multi-frequency ultrasound technology. The Company
believes that these features, along with integration of cutting edge
technology in the design of each product, have made the Company a
leader in technologically advanced electrotherapy, ultrasound, and
therapeutic massage devices. In addition, manufacturing many of the
medical supplies, soft goods and tables sold by the Company allows the
Company to focus on quality manufacturing at competitive prices. The
Company believes this gives it an edge over many competitors who are
solely distributors of such products.
Electrotherapy/Ultrasound. The competition in the clinical market
for electrotherapy and ultrasound devices is from both domestic and
foreign companies. No fewer than a dozen companies produce devices
similar to those of the Company. Some of these competitors are larger
and better established, and have greater resources than the Company.
Few companies, domestic or foreign, provide multiple-modality devices,
and none offer all the features found in the Dynatron 950 Plus. No
competitor offers the ultrasound feature of three frequencies on
multiple-sized soundheads for which the Company holds a patent. The
primary competitors in the electrotherapy and ultrasound products sales
include: Chattanooga Group, Excel-Tech, Rich-Mar, Mettler Electronics,
and Williams Healthcare.
Medical Supplies & Soft Goods. The Company competes against
various manufacturers and distributors of medical supplies and soft
goods, some of whom are larger, more established and have greater
resources than the Company. Excellent customer service along with
providing value to customers is of key importance in this segment of the
market. While there are many specialized manufacturers in this area,
only a few such as Chattanooga Group, Fabrication Enterprises, and
Bailey Manufacturing actually manufacture a broad line of competitive
products. Other competitors are primarily distributors such as EMPI,
Graham Field, Sammons Preston, Meyers Distributing and AliMed Inc.
Iontophoresis. Competition in the iontophoresis market is
primarily from IOMED and EMPI. Both of these competitors have a much
larger market share than Life-Tech, the manufacturer of the
iontophoresis products marketed and sold by the Company. The Company
<PAGE>
believes that Dynatronics' strong distribution network is important to
its continued ability to compete against these larger companies.
Treatment Tables. The primary competition in the treatment table
market is from domestic manufacturers including Hausmaun Industries,
Sammons Preston, Bailey Manufacturing, S&W Enterprises, Tri-W-G,
Chattanooga Group, Henley Healthcare, Medfit, and Clinton Industries.
Dynatronics' combination of industry experience, quality and competitive
pricing provide the foundation for the Company to compete in this
marketplace. In addition, some foreign competitors may gain pricing
advantages from time to time due to currency fluctuations related to the
U.S. dollar.
Synergie. The Company has two primary competitors in the
therapeutic massage industry: LPG Systems and Luxar Corporation. The
Synergie device is unique in that it is much less expensive than
competitive units. In addition, the Synergie Lifestyle System
incorporates a complete program including treatments, exercise, and
nutrition for optimal results. Dynatronics' well-established network of
distributors provides another competitive advantage in the marketplace
for these products.
The distribution of nutritional supplements is highly competitive.
The Company competes directly with other entities that manufacture
and/or distribute similar products. Many of these competitors are
substantially larger than the Company and enjoy greater financial
resources, broader name recognition and stronger market penetration.
Leading distributors of nutritional supplements include Herbalife
International, Inc., Nature's Sunshine Products, Inc., Rexall, Inc.,
Twinlab Corporation, Shaklee Corporation, NuSkin International, Inc.,
and General Nutrition Centers.
Information necessary to determine or reasonably estimate the
Company's, and its competitors', market share in any of these markets is
not available.
Manufacturing and Quality Assurance
Manufacturing of the Company's therapy devices, soft goods and
other medical products is conducted at the Company's facilities in Salt
Lake City, Utah, Chattanooga, Tennessee and Columbia, South Carolina.
The Company sub-contracts the production of certain components, but all
work is performed to Dynatronics' specifications. Sub-assembly, final
assembly and quality assurance procedures are all performed by trained
staff at the Company's manufacturing facilities in Salt Lake City,
Chattanooga, and Columbia. All component parts used in Dynatronics'
device designs and all raw materials for medical supplies and soft goods
manufacturing are readily available from suppliers.
Dynatronics conforms to Good Manufacturing Practices as outlined
by the FDA. This includes a comprehensive program for processing
customer feedback and analyzing product performance trends. By insuring
prompt processing of timely information, the Company is better able to
respond to customer needs and insure proper operation of its products.
All products are marketed pursuant to FDA clearance regulations.
The Company adheres to a Quality First Program, a concept for
total quality management designed to involve each employee in the
quality assurance process. Under this program, employees are not only
expected to inspect for quality, but they are empowered to stop any
process and make any changes necessary to insure that quality is not
compromised. An incentive program is established to insure the
continual flow of ideas and to reward those who show extraordinary
commitment to the Quality First concept. Quality First has not only
become the Company motto, but it is the standard by which all decisions
are made. The results of this program are manifested in the low
warranty expense associated with the Company's "50 Series" and "50
<PAGE>
Series Plus" products. The Quality First Program reinforces employee
pride, increases customer satisfaction, and improves overall operations
of the Company.
The Company is working to achieve ISO 9001 Certification which is
an internationally recognized standard for quality systems adopted by
over 90 countries. In addition, the Company is in the process of
obtaining CE Mark Certification on selected products. Once certified,
the Company will be able to market these products throughout the
European Union and in other countries. Management anticipates the
Company will complete its ISO 9001 and CE Mark Certifications within the
next 12 months.
Research and Development
The Company has historically been very committed to research and
development. In 1997 and 1998 the Company expended $653,413 and
$574,822, respectively, for research and development which represented
approximately 5 to 6 percent of the gross revenues of the Company in
those years. Substantially all of the research and development
expenditures were for the development of new products, including the new
Synergie product line, or the upgrading of existing products. Because
of its strong commitment to the future and to providing the most current
technology in its medical devices, the Company projects it will continue
to invest in research and development at amounts similar to those
indicated above.
Regulatory Matters
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of the Company's products are subject to
regulation by numerous national and local governmental agencies in the
United States and other countries. In the United States, the FDA
regulates the Company's products under the Food, Drug, and Cosmetic Act
("FDC Act") and regulations promulgated thereunder. Advertising and
other forms of promotion and methods of marketing of the Company's
products are subject to regulation by the Federal Trade Commission
("FTC") under the Federal Trade Commission Act ("FTC Act").
With the exception of the Company's low power laser devices, all
of the Company's therapeutic and aesthetic treatment devices as
currently designed have been cleared for marketing under section 510(k)
of the FDC Act or are considered 510(k) exempt. If a device is subject
to section 510 (k), the FDA must receive premarket notification from the
manufacturer of its intent to market the device. The FDA must find that
the device is substantially equivalent to a legally marketed device
before the agency will clear the device for marketing. In addition,
certain modifications to the Company's marketed devices may require a
premarket notification and clearance under section 510(k) before the
changed device may be marketed, if the change or modification could
significantly affect safety or effectiveness. All the Company's
devices, unless specifically exempted by regulation, are subject to the
FDC Act's general controls, which include, among other things,
registration and listing, adherence to the Quality System Regulation
requirements for manufacturing, Medical Device Reporting and the
potential for voluntary and mandatory recalls.
The Company's Synergie NSP products generally are regulated as
dietary supplements under the FDC Act, and therefore are not subject to
premarket approval by the FDA. Dietary supplements are also regulated
under the Dietary Supplement Health and Education Act of 1994 ("DSHEA").
The DSHEA revised provisions of the FDC Act concerning the regulation of
<PAGE>
these products, for the first time defining "dietary supplements" and
establishing specific rules for their manufacture and labeling.
Statements of nutritional support or product performance, which
are permitted on labeling of dietary supplements without FDA pre-
approval, are defined to include statements that: (i) claim a benefit
related to a classical nutrient deficiency disease and discloses the
prevalence of such disease in the United States; (ii) describe the role
of a nutrient or dietary ingredient intended to affect the structure or
function in humans; (iii) characterize the documented mechanism by which
a dietary ingredient acts to maintain such structure or function; or
(iv) describe general well-being from consumption of a nutrient or
dietary ingredient.
The FDA issued final dietary supplement labeling regulations in
1997 that require a new format for product labels and may necessitate
revising dietary supplement product labels by March 23, 1999. All
companies in the dietary supplement industry are required to comply with
these labeling regulations. The Company believes its current labeling
is substantially in compliance with this new regulation.
Failure of the Company to comply with applicable FDA regulatory
requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines, and criminal
prosecutions. Any such action by the FDA could materially adversely
affect the Company's ability to successfully market its products.
The Company's advertising of its products is subject to regulation
by the FTC under the FTC Act. Section 5 of the FTC Act prohibits unfair
methods of competition and unfair or deceptive acts or practices in or
affecting commerce. Section 12 of the FTC Act provides that the
dissemination or the causing to be disseminated of any false
advertisement pertaining to, among other things, drugs, cosmetics,
devices or foods, which include dietary supplements, is an unfair or
deceptive act or practice. Pursuant to this FTC requirement, the
Company is required to have adequate substantiation for all advertising
claims made about its products. The type of substantiation will be
dependent upon the product claims made.
If the FTC has reason to believe the law is being violated (e.g.,
the manufacturer or distributor does not possess adequate substantiation
for product claims), it can initiate an enforcement action. The FTC has
a variety of processes and remedies available to it for enforcement,
both administratively and judicially, including compulsory process
authority, cease and desist orders, and injunctions. FTC enforcement
could result in orders requiring, among other things, limits on
advertising, consumer redress, divestiture of assets, rescission of
contracts, and such other relief as may be deemed necessary. Violation
of such orders could result in substantial financial or other penalties.
Any such action by the FTC could materially adversely affect the
Company's ability to successfully market its products.
The Company cannot predict the nature of any future laws,
regulations, interpretations, or applications, nor can it determine what
effect additional governmental regulations or administrative orders,
when and if promulgated, would have on its business in the future. They
could include, however, requirements for the reformulation of certain
products to meet new standards, the recall or discontinuance of certain
products, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling, and
additional scientific substantiation. Any or all such requirements
could have a material adverse effect on the Company.
<PAGE>
Environment
The Company's operations are not subject to material compliance
with Federal, State and Local provisions enacted or relating to
protection of the environment or discharge of materials into the
environment.
Employees
On June 30, 1998, the Company had a total of 124 full-time
employees and 7 part-time employees, as compared to 97 full-time and 6
part-time employees as of June 30, 1997. This increase in number of
employees is primarily the result of increased sales volumes of the
Company's products as well as the hiring of employees for the new
Synergie product line.
Item 2. Properties
The Company's headquarters and principal place of business is
located at 7030 Park Centre Drive, Salt Lake City, Utah 84121. The
Company's headquarters consist of a single facility housing
administrative offices and a plant facility totaling approximately
36,000 square feet. The Company owns the land and building, subject to
a mortgage requiring a monthly payment of approximately $19,700. The
mortgage matures in 2013.
During 1997, the Company sold 2.25 acres of land in Salt Lake City
and acquired 3.38 acres of land and the 22,500 sq. ft. facility
previously leased in Ooltewah, Tennessee in a tax-free exchange. In
March 1998, the Company completed the construction of an additional
20,000 sq. ft. warehouse facility at the Ooltewah, Tennessee location.
This new facility was financed through a mortgage requiring monthly
payments of $7,716. The mortgage matures in 2013. Incorporated in this
construction was completion of site work for a 20,000 sq. ft. addition
to the new building. As part of the overall expansion, the wood shop
operations were moved from a 4,000 sq. ft. leased facility to the 10,000
sq. ft. building that formerly served as the warehouse. This campus
comprises the Company's Tennessee operations.
For its Columbia operations, the Company leases two facilities in
Columbia, South Carolina with total manufacturing space of approximately
12,000 sq. ft. During 1998, the Company completed the construction of
an addition to one of the buildings which increased the building's size
from 5,800 sq. ft. to 8,200 sq. ft. The lease payments for both
facilities total approximately $1,900 per month. The Company believes
the expanded facilities together with the Company's existing facilities
are adequate to accommodate presently expected growth and needs of the
Company for its operations.
The Company owns or leases equipment used in the manufacture and
assembly of the Company's products. During 1998, the Company purchased
and/or leased approximately $376,200 of additional manufacturing and
assembly equipment to meet increased demand for its products and to
improve manufacturing efficiency. The nature of this equipment is not
specialized and replacements may be readily obtained from any of a
number of suppliers. The Company also owns and leases computer
equipment and engineering and design equipment used in its research and
development programs.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the
Company is a party or of which any of its property is the subject.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
Market Information. The common stock of the Company is listed on
the Nasdaq Small Cap Market (symbol: DYNT). The following table shows
the range of high and low sale prices for the Company's common stock as
quoted on the Nasdaq system for the quarterly periods indicated.
Year Ended June 30,
1998 1997
High Low High Low
1st Quarter (July-September) $1.40 $ .78 $1.25 $.62
2nd Quarter (October-December) 1.47 .88 1.12 .84
3rd Quarter (January-March) 1.47 .88 1.21 .78
4th Quarter (April-June) 3.88 1.34 1.12 .65
Holders. As of September 16, 1998, the approximate number of
common stock shareholders of record was 537. This number does not
include beneficial owners of shares held in "nominee" or "street" name.
Including beneficial owners, the Company estimates that the total number
of shareholders exceeds 2,000.
Dividends. The Company has never paid cash dividends on its
common stock. At the present time, the Company's anticipated capital
requirements are such that it intends to follow a policy of retaining
earnings in order to finance the development of its business.
Sale of Unregistered Securities. The Company has not sold any
securities during the past three years in a private or public offer and
sale. In connection with the acquisition of Superior on May 1, 1996,
the Company issued a total of 440,000 shares of common stock to former
Superior stockholders in exchange for their Superior shares. These
shares were restricted securities and were issued without registration
in reliance upon exemption from registration under Section 4(2) and
other provisions of the Securities Act of 1933, as amended and the rules
and regulations promulgated thereunder.
Stock Options. In 1997, the Company granted options to certain
officers, directors and employees for the purchase of a total of 256,206
shares of Common Stock. These options are exercisable from time to time
over the next seven years at an average price of $1.04. The options
were issued without registration under the Securities Act in reliance
upon exemptions relating to grants of securities made pursuant to
certain written plans.
In 1998, the Company granted options pursuant to stock option
plans or employment or other agreements. The total number of shares
issuable under such options is 404,037 shares. The options are
exercisable at an average price of $1.00.
<PAGE>
Item 6.
Management's Discussion and Analysis or Plan of Operation
Selected Financial Data
The table listed below summarizes selected financial data for the
Company contained in the financial statements forming a part of this
report.
SELECTED FINANCIAL DATA
Fiscal Year Ended June 30
[CAPTION]
<TABLE>
1998 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 12,283,064 10,160,467 6,784,748 6,112,241 4,900,408
Net Income (loss) $ 664,788 612,539 (193,892) 217,083 290,059
Net Income (loss)
Per share (basic) $ .08 .07 (.02) .03 .04
Working Capital $ 3,502,777 3,027,119 2,616,464 3,319,272 2,899,196
Total Assets $ 11,641,948 9,642,479 8,508,609 7,187,328 7,176,641
Long-term Obligations $ 3,376,017 2,534,553 2,856,302 2,399,371 2,454,148
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Results of Operations
Sales for the fiscal year ended June 30, 1998 increased 21 percent
to a record $12,283,064 as compared to $10,160,467 in fiscal year 1997.
Strong increases in the sales of medical supplies, soft goods, and
treatment tables were primarily responsible for the boost in sales for
the fiscal year 1998. Since being acquired in May, 1996, the Company's
Tennessee operation has grown from $2.1 million in sales annually to
approximately $5 million in fiscal year 1998. In addition, the
Company's Columbia operations exceeded the goal of $1 million in sales
during its first full year of operations. During fiscal year 1998, the
Company introduced its new product catalog with over 300 new medical
supply products which added impetus to sales for the year. The Company
anticipates fiscal year 1999 will be another record year for the Company
with the introduction of the new Synergie product line.
The Company's gross margin as a percent of sales remained
relatively constant at 42.3 percent in fiscal year 1998 compared to 42.5
percent in fiscal year 1997. Higher margins associated with the
Company's "50 Series Plus" electrotherapy and ultrasound products during
the year were offset by the increased sales of medical supplies, soft
goods, and treatment tables which carry lower margins. The Company
anticipates margins will improve in fiscal year 1999 with sales of the
new Synergie product line.
The Company's 1998 selling, general and administrative (SG&A)
expenses were $3,542,531 compared to $2,989,431 in fiscal year 1997.
SG&A expenses as a percentage of sales decreased from 29.4 percent in
fiscal year 1997 to 28.8 percent in fiscal year 1998. The increase in
total SG&A expenses was associated with the increase in sales volumes
and initial marketing efforts for the new Synergie product line.
<PAGE>
During fiscal year 1998, the Company maintained its commitment to
research and development (R&D), expending $574,822 for the year,
compared to $653,413 in fiscal year 1997. R&D expenses for fiscal year
1998 were related primarily to sustaining engineering for existing
products as well as the development of new products, including the new
Synergie product line, which did not begin shipments until July 1998.
Operating income in fiscal year 1998 increased 60 percent to a
record $1,082,477 compared to $675,836 in fiscal year 1997. This
increase is due to the Company's higher sales volume together with
management's containment of operating expenses at the higher sales
level.
In the year ended June 30, 1998, the Company's effective tax rate
was 27.8 percent compared to 34.8 percent in fiscal year 1997. Due to
improved profitability, the Company determined in fiscal year 1998 that
it would no longer maintain a reserve for deferred tax assets, which
resulted in lower tax expense in 1998 than in fiscal year 1997.
Net income for fiscal year 1998 increased 9 percent to $664,788,
compared to $612,539 in fiscal year 1997. Net income for fiscal year
1998 included recognition of more than $200,000 in pre-tax expenses
associated with the development of the new Synergie product line, which
were first shipped after the end of the fiscal year. Net income for
fiscal year 1997 included gain recognition of approximately $349,000
(pre-tax) from non-operating transactions associated with the sale of
real property and the recapture of bad debt. Excluding these one-time
items, the Company's pre-tax profits from operations increased
approximately 85 percent from $591,000 in 1997 to a record $1.1 million
in 1998. This improvement was a direct result of the strong increase in
sales and containment of operating expenses at the higher sales level.
The Company has not been materially affected by seasonality
factors in its business operations.
Liquidity and Capital Resources
Significant growth of the Company in 1998 also resulted in growth
in inventories and capital expenditures. The Company has financed its
growth primarily through cash flow from operations. With the addition
of over 300 new products in the Company's 1998 product catalog,
inventories increased during the year by $542,890 to $2,723,150 at June
30, 1998. Management expects that inventory levels will increase during
fiscal 1999 as a result of the introduction of the new Synergie product
line and an anticipated increase in overall sales.
Capital expenditures during fiscal year 1998 totaled approximately
$1.2 million and were related primarily to the Company's capital
equipment purchases associated with the expansion of its facilities in
Tennessee and South Carolina as discussed above. In addition, line of
credit balances, net of cash balances, increased approximately $341,600
over the same period. While the Company anticipates continued growth in
fiscal year 1999, it is expected that revenues from operations, together
with available sources of borrowing, will be adequate to meet the
Company's working capital needs related to its business and its planned
capital expenditures for the same period.
Working capital at June 30, 1998, totaled $3,502,777. The
Company's current ratio at June 30, 1998 was 2.4 to 1.
<PAGE>
The Company maintains an open line of credit with a commercial
bank in the amount of $2.5 million. Interest on the line of credit is
based on the bank's index rate plus one-half percent which at June 30,
1998, equaled 9.0 percent. The line of credit is collateralized by
certain accounts receivable and inventories. As of June 30, 1998, $1.1
million was outstanding on the line of credit and the Company had $1.4
million available under the line, which is renewable annually. The
current line is up for renewal in November, 1999. The line of credit
agreement also contains restrictive covenants requiring the Company to
maintain certain financial ratios. As of June 30, 1998, the Company was
in compliance with these covenants.
Long-term debt at June 30, 1998 was $2,844,903, a $757,380
increase compared to June 30, 1997. The increase is directly related to
the expansion of facilities in Tennessee and South Carolina and capital
equipment purchases made during fiscal year 1998 as discussed above.
Accounts receivable represent amounts due from the Company's
dealer network and from medical practitioners and clinics. The
historical relationship with these customers indicates that the
allowance for doubtful accounts is adequate. Accounts receivable are
generally collected within 30 days of the terms extended. Management
anticipates accounts receivable will increase in future years with
increased company sales.
For additional information with respect to sources and uses of
cash, refer to the statements of cash flows included in the Company's
financial statements.
The Company's revenues and net income from continuing operations
have not been unusually impacted by inflation or price increases for raw
materials and parts from vendors.
The Company believes that its current cash balances, amounts
available under its line of credit and cash provided by operations will
be sufficient to cover its operating needs in the ordinary course of
business for the next twelve months. If the Company experiences an
adverse operating environment or unusual capital expenditure
requirements, additional financing may be required; however, no
assurance can be given that additional financing, if required, would be
available on favorable terms.
Outlook
Over the past four fiscal years, Dynatronics has experienced double
digit growth in sales and increased profitability. This growth has been the
result of business strategies targeted to position Dynatronics as a leading
manufacturer in the various disciplines of physical medicine.
During this growth phase, Dynatronics has upgraded and redesigned
its core product line of electrotherapy and ultrasound products to
incorporate the latest technology. Two acquisitions were made to
broaden the Company's line of products, both manufactured and distributed.
Strategic alliances were formed to give the Company proprietary access
to valuable products that could further broaden the Company's product line.
As a result, the Company introduced the most comprehensive catalog
in its history in February 1998, offering more than 600 products. The
Company believes these strategies have laid the foundation for
Dynatronics to become a one-stop supplier for physical medicine practitioners
nationwide.
<PAGE>
Maintaining manufacturing control over the most important products
in the catalog has allowed Dynatronics to achieve higher customer
satisfaction by insuring quality of product and competitive pricing.
This has been a key to the successful growth of the Company.
Going forward, the Company expects to continue to pursue the
fundamental growth strategies that have yielded the success of the past
four years. Those strategies include:
- Continued expansion of the core physical medicine product line
- Introduction of new, innovative products both in and out of the physical
medicine field
- Increased distribution into international markets
- Pursuit of strategic acquisitions and business alliances
To further enhance the Company's position as a single source
supplier to physical medicine practitioners, Dynatronics seeks to
establish favorable terms as a master distributor of products for other
manufacturers. A team of product specialists negotiate these terms and
seek to further expand the breadth of products offered through the
Company's catalog. In addition, the Company engineers new products and
continually re-engineers old products in order to remain competitive and
meet changing market needs. The Company expects its catalog of physical
medicine products to continue to grow each year as the team of product
specialists identify new items that are most in demand by Dynatronics'
customers.
The most exciting component of the Company's near-term growth is
the recent introduction of the Synergie Lifestyle System. This new product
line incorporates a therapeutic massage device, the Synergie AMS, as the
centerpiece of the line. This type of device has become popular among
aesthetic practitioners in treating certain problem areas around the
thighs, hips and buttocks where heredity, inactive lifestyle and poor
diet have caused an undesirable effect in the appearance and tone of the
skin.
Another part of the Synergie product line is the introduction of
19 nutritional supplements that aesthetic practitioners can market as part
of the overall Synergie Lifestyle System. The popularity and use of
nutritional supplements are growing rapidly as more and more people
strive to maintain healthy lifestyles. Other products that are included in the
Synergie line are a special treatment table for practitioners and
special treatment bodysuits. The bodysuit, made of a thin nylon spandex
material, is purchased by each client that receives Synergie treatments, thus
providing an ongoing demand for accessory sales after the initial sale
of the Synergie AMS device.
As a result of the new Synergie product line, Dynatronics has been
introduced to several new aesthetic medicine disciplines which are
expected to lead to new ideas for future products and for sales of
current products into new markets. More importantly, the Company
expects the increase in sales and profitability from the Synergie
product line to make fiscal 1999 a record year, in both sales and
profitability.
As with any new product, there have been a few delays in the
manufacturing process and unforseen challenges associated with the sales
and marketing of the Synergie product line during the first quarter of
fiscal 1999. As a result, earnings may not be as strong as originally
expected in that quarter. Nevertheless, the Company remains optimistic
that as production processes and sales methodologies smooth out over the
first two quarters, the fiscal year will yield a strong increase in
earnings, compared to 1998.
Providing additional impetus to the growth for the next fiscal
year is the potential of opening more international markets. With the
anticipated successful completion of ISO 9001 and CE Mark Certifications
during fiscal year 1999, the European markets can be accessed for the
first time in the history of the Company. The Company recognizes that some of
these markets are slower to develop and must be approached with caution.
Yet the tremendous potential of the global marketplace makes the effort
worthwhile.
<PAGE>
Finally, a key component of the Company's long-term growth
strategy is the pursuit of strategic acquisitions and business alliances. The
growth of the past four years and the anticipation of profits from the
Synergie product line have resulted in improved value of the Company's
common stock. This stock can become a currency with which to make
acquisitions. The Company utilizes very strict criteria in evaluating
potential acquisitions and alliances. This criteria insures that the
acquisition candidate is a proper fit. Acquisitions are viewed by the
Company as a key component in maintaining long-term growth and achieving
strategic marketing objectives.
The business strategies of the Company have yielded steady growth
over the past four years. Greater growth is anticipated in fiscal year
1999 primarily due to the introduction of the new Synergie product line.
By pursuing its growth objectives, Dynatronics expects to become a
leading supplier of physical medicine products and to maintain a strong growth
rate into the future. Of course, the business of the Company is subject to
risks such as those outlined elsewhere in this report, many of which are
outside the Company's control. These and other risks may cause the
actual operating results to vary from the Company's expectations.
Forward-Looking Statements
When used in this Report on Form 10-KSB, the words "believes",
"anticipates", "expects", and similar expressions are intended to
identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those described in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this Report or to
reflect the occurrence of unanticipated events. Risks and
circumstances that may cause actual results to vary from the Company's
expectations include, among others, the following:
Technological Obsolescence. The business of designing and
manufacturing medical products is characterized by rapid technological
change. Although the Company has obtained patents on certain aspects of
its technology, there can be no assurance that the Company's competitors
will not develop or manufacture products technologically superior to
those of the Company.
Extensive Government Regulation. The manufacture, packaging,
labeling, advertising, promotion, distribution and sale of the Company's
products are subject to regulation by numerous national and local
governmental agencies in the United States and other countries. For a
discussion of government regulations affecting the Company's business,
please see "Regulatory Matters," above.
Health Care Reform. Governments are continually reviewing and
considering expansive legislation that may lead to significant reforms
in health care delivery systems. The pressure for reform stems largely
from the rising cost of health care in recent years. The Company cannot
predict whether or when new or proposed legislation will be enacted and
there can be no assurance that such legislation, when enacted, will not
impose additional restrictions on part or all of the Company's business
or its intended business, which might adversely affect such business.
<PAGE>
Product Liability. Manufacturers and distributors of products
used in the medical device and nutritional supplements industries are
from time to time subject to lawsuits alleging product liability,
negligence or related theories of recovery, which have become an
increasingly frequent risk of doing business in these industries.
Although from time to time lawsuits may arise or claims asserted based
on product liability or other legal theories against the Company, all
such actions have been insured against. Such claims and losses, and the
expense of defending against such claims, would be costly and could have
a material adverse effect on the Company's results of operations.
Although the Company presently maintains product liability insurance
coverage which it deems adequate based on historical experience, there
can be no assurance that such coverage will be available for such risks
in the future or that, if available, it would prove sufficient to cover
potential claims or that the present amount of insurance can be
maintained in force at an acceptable cost. Furthermore, the assertion
of such claims, regardless of their merit or eventual outcome, also may
have a material adverse effect on the Company, its business reputation
and its operations.
Ability to Sustain and Manage Growth. The Company has experienced
significant growth in the last several years. To effectively manage the
challenges resulting from growth, the Company may be required to hire
additional management and operations personnel and make additional
expenditures to improve and to expand its operational, financial,
information and management systems and its production capacity, which
may significantly increase its future operating expenses. No assurance
can be given that the Company's business will grow in the future or that
the Company will be able to effectively manage such growth. Any failure
by the Company to appropriately manage its growth could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Manufacturing. The Company's results of
operations are dependent upon the continued operation of its
manufacturing facilities in Utah, Tennessee and South Carolina. The
operation of a manufacturing facility involves many risks, including
power failures, the breakdown, failure or substandard performance of
equipment, failure to perform by key suppliers, the improper
installation or operation of equipment, natural or other disasters and
the need to comply with the requirements or directives of government
agencies, including the FDA. There can be no assurance that the
occurrence of these or any other operational problems at the Company's
facility would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Reliance on Information Technology. The Company's success is
dependent in large part on the accuracy, reliability and proper use of
sophisticated and dependable information processing systems and
management information technology. The Company's information technology
systems are designed and selected in order to facilitate order entry and
customer billing, maintain records, accurately track purchases, accounts
receivable and accounts payable, manage accounting, finance and
manufacturing operations, generate reports and provide customer service
and technical support. Any interruption in these systems could have a
material adverse effect on the Company's business, financial condition
and results of operations.
Competition. The business of the Company is highly competitive.
Numerous manufacturers, distributors and retailers compete actively for
consumers and customers. The Company competes directly with other
entities that manufacture, market and distribute products in each of its
product lines. Many of the Company's competitors are substantially
larger than the Company and have greater financial resources and broader
name recognition. The market is highly sensitive to the introduction of
new products that may rapidly capture a significant share of the market.
There can be no assurance that the Company will be able to compete in
this intensely competitive environment.
<PAGE>
Dependence on Patents and Proprietary Rights. The Company has
three patents and is currently in the process of filing another patent
relating to its products. In addition, certain of the Company's
trademarks have been registered in the United States and in other
countries. There can be no assurance that the Company's patents will
not be challenged or circumvented or will provide the Company with any
competitive advantages or that any patents will issue from pending
patent applications. The Company also relies upon copyright protection
for its proprietary software and other property. There can be no
assurance that any copyright obtained will not be circumvented or
challenged. The Company also relies on trade secrets that it seeks to
protect, in part, through confidentiality agreements with employees and
other parties. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. The Company may
become involved from time to time in litigation to determine the
enforceability, scope and validity of proprietary rights. Any such
litigation could result in substantial cost to the Company and divert
the efforts of its management and technical personnel.
Limited Availability of Conclusive Clinical Studies. The
Company's products include nutritional supplements that are made from
vitamins, minerals, herbs and other substances for which there is a long
history of human consumption. Although the Company believes all of its
products to be safe when taken as directed, there is little long-term
experience with human consumption of certain of these product
ingredients or combinations of ingredients in concentrated form. The
Company relies primarily on the research of consultants and others for
the formulation and manufacture of its products. Some of these
consultants and suppliers may have performed or sponsored only limited
clinical studies relating to these products. Furthermore, because these
products are or will be highly dependent on consumers' perception of the
efficacy, safety and quality of the supplement products, as well as
similar products distributed by other companies, the Company could be
adversely affected in the event such products should prove or be
asserted to be ineffective or harmful to consumers or in the event of
adverse publicity associated with illness or other adverse effects
resulting from consumers' use or misuse of the Company's products or
similar products.
Foreign Duties and Import Restrictions. Some of the Company's
products are exported to the countries in which they ultimately are
sold. The countries in which the Company operates may impose various
legal restrictions on imports, impose duties of varying amounts, or
enact regulatory requirements, adverse to the Company's products. There
can be no assurances that changes in legal restrictions, increased
duties or taxes, or stricter health and safety requirements would not
have a material adverse effect in the Company's ability to market its
products in a given country.
Effect of Exchange Rate Fluctuations. Exchange rate fluctuations
may have a significant effect on the Company's sales and gross margins
in a given foreign country. If exchange rates fluctuate dramatically,
it may become uneconomical for the Company to establish or continue
activities in certain countries. Differences in the exchange rates may
also create a marketing advantage for foreign competitors, making the
purchase price of their products lower than prices originally
denominated in U.S. dollars. As the Company's business expands outside
the United States, an increasing share of its revenues and expenses will
be transacted in currencies other than the U.S. dollar. Accounting
practices require that the Company's non-U.S. sales and selling, general
and administrative expenses be converted to U.S. dollars for reporting
purposes. Consequently, the reported earnings of the Company in future
periods may be significantly affected by fluctuations in currency
exchange rates, with earnings generally increasing with a weaker U.S.
dollar and decreasing with a strengthening U.S. dollar.
<PAGE>
Year 2000 Risks. Please refer to the discussion entitled "Year
2000 Issues" in "Management Discussion and Analysis or Plan of
Operation."
Volatility of Stock Price. The trading price of the Common Stock
has been and is likely to continue to be subject to wide fluctuations in
response to the quarter-to-quarter variations in the Company's operating
results, material announcements by the Company or its competitors,
governmental regulatory action or other events or factors, many of which
are beyond the Company's control. The Company's operating results in
future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the Common Stock would likely
decline, perhaps substantially. Moreover, the Company's Common Stock
may be even more prone to volatility than the securities of other
businesses in similar industries in light of the relatively small number
of shares of Common Stock not held by affiliates. Given such a
relatively small "public float," there can be no assurance that the
prevailing market price of Common Stock will not be artificially
inflated or deflated by trading even of relatively small amounts of
Common Stock.
Year 2000 Issues
Many existing computer programs use only two digits to identify a
year in the date field and were designed, developed and modified without
considering the impact of the upcoming change in the century. If not
corrected, such computer applications could fail or create erroneous
results by or after the Year 2000 by erroneously identifying the year
"00" as 1900, rather than 2000. The Company is in the process of
insuring that all of its internal computer systems are Year 2000
compliant. The Company has selected a team of employees to assess the
readiness of the Company for meeting the Year 2000 problem. As a result
of the assessment efforts of this team to date, the Company has
identified one product component requiring modification and has engaged
the services of a consultant to make this product Year 2000 compliant.
It is expected that the assessment and remediation, if any, of Year 2000
issues affecting the Company's internal systems or products, including
any issues involving embedded technology, will be completed by June 30,
1999.
Independent of those efforts, the Company determined in fiscal
year 1998 that certain efficiencies could be achieved by the purchase
and installation of an upgrade to the Company's integrated enterprise
resource planning ("ERP") system. The upgraded ERP system will replace
all of the Company's existing resource planning systems and will be Year
2000 compliant. Therefore, the Company does not expect any material
Year 2000 compliance issues to arise related to its primary internal
business information systems.
With respect to third-party providers whose services are critical
to the Company, the Company intends to monitor the efforts of such
providers as they become Year 2000 compliant. The Company is presently
not aware of any Year 2000 issues that have been encountered by any such
third party which could materially affect the Company's operations.
Notwithstanding the foregoing, there can be no assurance that the
Company will not experience operational difficulties as a result of Year
2000 issues, either arising out of internal operations or caused by
third-party service providers, which individually or collectively could
have a material adverse effect on the Company's business, financial
condition or results of operations.
Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 requires entities presenting a complete set of financial
statements to include details of comprehensive income that arise in the
<PAGE>
reporting period. Comprehensive income consists of net earnings or loss
for the current period and other comprehensive income, which consists of
revenue, expenses, gains and losses that bypass the statement of
earnings and are reported directly in a separate component of equity.
Other comprehensive income includes, for example, foreign currency
items, minimum pension liability adjustments and unrealized gains and
losses on certain investment securities.
SFAS 130 requires that components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS is effective for fiscal
years beginning after December 15, 1997 and requires restatement of
prior period financial statements presented for comparative purposes.
Adoption of SFAS 130 is not required for reporting on interim periods
prior to the close of the fiscal year beginning after December 15, 1997.
The Company will adopt SFAS 130 commencing with the year ending June 30,
1999.
During January 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-5 "Reporting on
the Costs of Start-up Activities" ("SOP 98-5). SOP 98-5 becomes
effective for all fiscal years beginning after December 15, 1998. The
Company will adopt SOP 98-5 in its fiscal year beginning July 1, 1999.
Because the current amortization periods of the product development
costs and start-up costs averaging 12 months, the Company does not
expect the adoption of SOP 98-5 to have a material impact on the
Company's financial statements.
Item 7. Financial Statements
The Financial Statements of the Company required by this Item are attached
as a separate section of this report and are listed in Part IV, Item 13 of
this Form 10-KSB.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the Company's two most recent fiscal years and the
subsequent interim period, there have been no disagreements on financial
disclosures or accounting matters and no resignation by or dismissal of
the independent public accountants engaged by the Company.
PART III
Item 9. Directors and Executive Officers of the Company; Compliance With
Section 16(a) of the Exchange Act
The directors and executive officers of the Company at September
16, 1998 are:
Director
or Officer Position
Name Age Since with Company
Kelvyn H. Cullimore 63 1983 Chairman of the Board
Kelvyn H. Cullimore, Jr. 42 1983 President, CEO and Director
Larry K. Beardall 42 1986 Executive Vice President
of Sales and Marketing and
Director
E. Keith Hansen, M.D. 53 1983 Director
V. LeRoy Hansen 60 1987 Director
Joseph H. Barton 70 1996 Director
Howard L. Edwards 67 1997 Director
John S. Ramey 47 1992 Sr. Vice President of Operations
John L. Hales 54 1996 Chief Financial Officer/Treasurer
Kelvyn H. Cullimore is the father of Kelvyn H. Cullimore, Jr.
LeRoy Hansen and Keith Hansen are cousins.
Directors of the Company hold office until the next annual meeting
of the Company's shareholders and until their successors have been
elected and duly qualified. In the event of the resignation of a Board
Member, the Board of Directors may elect an individual to fill the
remainder of the term. Executive officers are elected by the Board of
Directors of the Company at the first meeting after each annual meeting
of shareholders and hold office until their successors are elected and
duly qualified. The Company has an audit committee and a compensation
committee composed of the outside directors of the board. The
compensation committee reviews and approves compensation matters for
executive officers of the Company.
<PAGE>
Kelvyn H. Cullimore has served as Chairman of the Board of the
Company since its incorporation in April, 1983. From 1983 until 1992,
Mr. Cullimore served as President of the Company. Mr. Cullimore
received a B.S. degree in Marketing from Brigham Young University in
1957, and following graduation, worked for a number of years as a
partner in a family-owned home furnishings business in Oklahoma City,
Oklahoma. Mr. Cullimore has participated in the organization and
management of various enterprises, becoming the president or general
partner in several business entities, including real estate, motion
picture, and equipment partnerships. From 1979 until 1992, Mr. Cullimore
served as Chairman of the Board of American Consolidated Industries
(ACI), the former parent company of Dynatronics. Since 1986, Mr.
Cullimore has served as President of ITEC Attractions and from 1986 to
1997, he served as ITEC's Chairman, President and CEO. Presently, Mr.
Cullimore serves as President/CEO of ITEC.
Kelvyn H. Cullimore, Jr. was elected President and Chief Executive
Officer of the Company in December of 1992. He has been a Director
since the incorporation of the Company. He served as
Secretary/Treasurer of the Company from 1983 until 1992 and
Administrative Vice President from 1988 until 1992. Mr. Cullimore
graduated from Brigham Young University with a degree in Financial and
Estate Planning in 1980. Mr. Cullimore has served on the board of
directors of several businesses, including Dynatronics Marketing
Company, ACI and currently serves on the board of ITEC Attractions. In
addition, he has served as Secretary/Treasurer of ACI and Dynatronics
Marketing Company. From 1983 until 1992 Mr. Cullimore served as
Executive Vice President and Chief Operating Officer of ACI.
Larry K. Beardall was elected Executive Vice President of the
Company in December of 1992. He has served as a Director and the Vice
President of Sales and Marketing for the Company since July of 1986.
Mr. Beardall joined Dynatronics in February of 1986 as Director of
Marketing. He graduated from Brigham Young University with a degree in
Finance in 1979. Prior to his employment with Dynatronics, Mr. Beardall
worked with GTE Corporation in Durham, North Carolina as the Manager of
Mergers and Acquisitions and then with Donzis Protective Equipment in
Houston, Texas as National Sales Manager. He also served on the Board
of Directors of Nielsen & Nielsen, Inc., the marketing arm for Donzis, a
supplier of protective sports equipment.
E. Keith Hansen, M.D. has been a Director of the Company since
1983. Dr. Hansen obtained a Bachelor of Arts degree from the University
of Utah in 1966 and an M.D. from Temple University in 1972. He has been
in private practice in Sandy, Utah since 1976. Dr. Hansen was also a
Director of ACI until 1992; and he is Vice President and Director of
Mountain Resources Corporation and a Director of Accent Publishers, each
of which is based in Salt Lake City, Utah.
V. LeRoy Hansen has been a Director of the Company since 1987.
Mr. Hansen received a Bachelor of Science degree in Economics from the
University of Utah in 1965. From 1960-1980, Mr. Hansen was employed by
AT&T in numerous management positions. From 1976-1978, he served at
AT&T headquarters in Market Management Concept Development and
Implementation as well as Long Range Financial Planning. From 1980 to
1988, he co-founded Mountain Resources Corporation, an energy
development company and served as vice president. Since 1988, Mr.
Hansen founded and serves as president of Associated Enterprises, Inc.,
a corporation providing management and business development consulting
services. In May of 1992, Mr. Hansen founded Silver Summit, L.C., a
real estate development company.
Joseph H. Barton was elected a Director in November, 1995 and
began serving in January, 1996. Mr. Barton received a Civil Engineering
degree from the University of California at Berkeley and has held
various executive positions including President of J.H. Barton
<PAGE>
Construction Company, Senior Vice President of Beverly Enterprises, and
President of KB Industries, a building and land development company.
Most recently, Mr. Barton served as Senior Vice President of GranCare,
Inc. from 1989 to 1994 and currently is a consultant for Covenant Care,
a company which owns and manages long-term care facilities throughout
the United States.
Howard L. Edwards was elected a Director in January, 1997. From
1968 to 1995 Mr. Edwards served in various capacities at Atlantic
Richfield Company (ARCO) and its predecessor, the Anaconda Company,
including corporate secretary, vice president, treasurer and general
attorney. In addition, Mr. Edwards served for a number of years as a
partner in the law firm of VanCott, Bagley, Cornwall and McCarthy, based
in Salt Lake City, Utah. He graduated from the George Washington
University School of Law in 1959 and received a bachelor's degree in
Finance and Banking from Brigham Young University in 1955.
John S. Ramey joined the Company in December, 1992 as Vice
President of Research and Development and currently serves as Vice
President of Operations. Prior to joining the Company, Mr. Ramey worked
for 16 years with Phillips Semi-conductors--Signetics, an integrated
circuit manufacturing company as Manager of Product Engineering. From
1983 to 1989 Mr. Ramey also served as President of Enertronix, a small
public corporation. Since 1989 Mr. Ramey has served as Vice President
of JRH Technology, a private engineering firm. Mr. Ramey earned his MBA
degree in 1991 from the University of Phoenix (in Salt Lake City, Utah)
and a BS degree in electronics in 1977 from Brigham Young University.
John L. Hales joined the Company and was elected Chief Financial
Officer and Treasurer in November, 1996. 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. Mr. Hales
received his B.S. degree in Finance from Brigham Young University in
1968 and his MBA from Utah State University in 1970.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Officers, directors and greater than ten-
percent shareholders are required by regulation of the Securities and
Exchange Commission to furnish the Company with copies of all Section
16(a) forms which they file.
Based solely on review of the copies of such forms furnished to
the Company during and with respect to the year ended June 30, 1998, the
Company believes that during its 1998 fiscal year all Section 16(a)
filings applicable to its officers, directors and greater than ten-
percent beneficial owners were filed.
Item 10. Executive Compensation. The Company hereby incorporates by
reference into and makes a part of this Report the information and
disclosure set forth under Item 8 of Schedule 14A, "Compensation of
Directors and Executive Officers," contained in the Company's definitive
proxy statement for 1998, to be sent to shareholders of the Company
subsequent to the filing of this Report on Form 10-KSB.
Item 11. Security Ownership of Certain Beneficial Owners and
Management. The Company hereby incorporates by reference into and makes
a part of this Report the information and disclosure set forth under
Item 6 of Schedule 14A, "Voting Securities and Principal Holders
<PAGE>
Thereof," contained in the Company's definitive proxy statement for
1998, to be sent to shareholders of the Company subsequent to the filing
of this Report on Form 10-KSB.
Item 12. Certain Relationships and Related Transactions
In April 1998, the Company concluded its services agreement with
ITEC Attractions and no longer provides administrative services to ITEC
which included secretarial, administrative, and accounting functions.
During fiscal 1997 and 1998 the Company charged ITEC $72,000 and $61,500
respectively for services provided by the Company. In fiscal 1997, the
Company received approximately $89,000 pursuant to ITEC's Plan of
Reorganization payout to creditors. The Company retains a nominal
(approximately 3%) ownership in ITEC. The Company's Chairman, Kelvyn H.
Cullimore, is also the President and CEO of ITEC. The Company's
President and CEO, Kelvyn H. Cullimore, Jr., is also a director of ITEC.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and documents required by Item 601 of Regulation S-B:
1. Financial Statements (included in Part II, Item 8):
Independent Auditors' Report F-1
Balance Sheet at June 30, 1998 F-2
Statements of Income for years ended
June 30, 1998 and 1997 F-3
Statements of Stockholders'
Equity for years ended June 30, 1998
and 1997 F-4
Statements of Cash Flows for
years ended June 30, 1998 and 1997 F-5
Notes to Financial Statements F-7
Exhibits:
Reg. S-B
Exhibit No. Description
3 Articles of Incorporation and Bylaws of Dynatronics
Laser Corporation. Incorporated by reference to a
Registration Statement on Form S-1 (No. 2-85045) filed
with the Securities and Exchange Commission and
effective November 2, 1984, as amended by Articles of
Amendment dated November 18, 1993.
4 Form of certificate representing Dynatronics Laser
Corporation common shares, no par value. Incorporated
by reference to a Registration Statement on Form S-1
(No. 2-85045) filed with the Securities and Exchange
Commission and effective November 2, 1984.
<PAGE>
10.1 Employment contract with Kelvyn H. Cullimore, Jr.
10.2 Employment contract with Larry K. Beardall
(b) Reports on Form 8-K: No report on Form 8-K has been filed by the
Company during the last quarter of the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNATRONICS CORPORATION
By /s/ Kelvyn H. Cullimore, Jr.
----------------------------------
Kelvyn H. Cullimore, Jr.
Chief Executive Officer and President
Date: September 23, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Kelvyn H. Cullimore Chairman of the Board 9/23 , 1998
- --------------------------- ----------
Kelvyn H. Cullimore
/s/ Kelvyn H. Cullimore, Jr. Director, President, CEO 9/23 , 1998
- --------------------------- (Principal Executive Officer) ----------
Kelvyn H. Cullimore, Jr.
/s/ John L. Hales Chief Financial Officer 9/23 , 1998
- --------------------------- (Principal Financial and ----------
John L. Hales Accounting Officer)
/s/ Larry K. Beardall Director, Executive 9/23 , 1998
- --------------------------- Vice President ----------
Larry K. Beardall
/s/ E. Keith Hansen, M.D. Director 9/23 , 1998
- --------------------------- ----------
E. Keith Hansen, M.D.
/s/ V. LeRoy Hansen Director 9/23 , 1998
- --------------------------- ----------
V. LeRoy Hansen
/s/ Joseph H. Barton Director 9/23 , 1998
- --------------------------- ----------
Joseph H. Barton
Director 9/23 , 1998
- --------------------------- ----------
Howard L. Edwards
<PAGE>
DYNATRONICS CORPORATION
Financial Statements
June 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
Dynatronics Corporation:
We have audited the accompanying balance sheet of Dynatronics Corporation as of
June 30, 1998 and the related statements of income, stockholders' equity, and
cash flows for each of the years in the two-year period ended June 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dynatronics
Corporation as of June 30, 1998, and the results of its operations and its
cash flows for each of the years in the two-year period ended June 30, 1998,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
August 14, 1998
<PAGE>
<TABLE>
<CAPTION>
DYNATRONICS CORPORATION
Balance Sheet
June 30, 1998
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 748,099
Trade accounts receivable, less allowance for doubtful accounts of $90,238 (note 5) 2,215,974
Related party and other receivables (note 9) 28,204
Inventories (notes 2 and 5) 2,723,150
Prepaid expenses 240,127
Deferred tax asset - current (note 10) 119,614
------------
Total current assets 6,075,168
Property and equipment, net (notes 3 and 6) 3,583,841
Excess of cost over fair value of net assets acquired, net of accumulated amortization of
$311,722 1,152,452
Deferred tax asset - noncurrent (note 10) 180,410
Other assets 650,077
============
$ 11,641,948
============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 6) $ 268,180
Line of credit (note 5) 1,115,641
Accounts payable 501,328
Accrued expenses (note 8) 687,242
------------
Total current liabilities 2,572,391
Long-term debt, excluding current installments (note 6) 2,844,903
Deferred compensation (note 14) 531,114
------------
Total liabilities 5,948,408
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares; issued and outstanding
8,447,343 shares 2,000,217
Retained earnings 3,693,323
------------
Total stockholders' equity 5,693,540
Commitments and contingencies (notes 7 and 14) -
------------
$ 11,641,948
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DYNATRONICS CORPORATION
Statements of Income
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net sales $ 12,283,064 10,160,467
Cost of sales 7,083,234 5,841,787
------------- -------------
Gross profit 5,199,830 4,318,680
Selling, general, and administrative expenses 3,542,531 2,989,431
Research and development expense 574,822 653,413
------------- -------------
Operating income 1,082,477 675,836
Other income (expense):
Interest income 825 8,743
Interest expense (238,191) (187,613)
Other income, net (notes 3, 4, and 9) 75,984 443,026
------------- -------------
Total other income (expense), net (161,382) 264,156
------------- -------------
Income before income taxes 921,095 939,992
Income tax expense (note 10) 256,307 327,453
------------- -------------
Net income $ 664,788 612,539
============= =============
Basic net income per share $ 0.08 0.07
============= =============
Diluted net income per share $ 0.07 0.07
============= =============
Weighted average number of common shares and potential common
stock outstanding 8,432,462 8,425,027
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATRONICS CORPORATION
Statements of Stockholders' Equity
Years ended June 30, 1998 and 1997
Total
stock-holders'
Common Retained equity
stock earnings
------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1996 $ 1,981,204 2,415,996 4,397,200
Issuance of 3,100 shares of common stock upon
exercise of employee stock options (note 12) 2,713 - 2,713
Income tax benefit from disqualifying disposition of
employee stock options 109 - 109
Net income - 612,539 612,539
------------ ------------ ------------
Balances at June 30, 1997 1,984,026 3,028,535 5,012,561
Issuance of 19,496 shares of common stock upon
exercise of employee stock options (note 12) 14,279 - 14,279
Income tax benefit from disqualifying disposition of
employee stock options 1,912 - 1,912
Net income - 664,788 664,788
============ ============ ============
Balances at June 30, 1998 $ 2,000,217 3,693,323 5,693,540
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
DYNATRONICS CORPORATION
Statements of Cash Flows
Years ended June 30, 1998 and 1997
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 664,788 612,539
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of property and equipment 195,518 182,757
Other amortization 97,707 91,873
Gain on disposal of assets - 270,580
Provision for doubtful accounts 16,800 16,800
Provision for inventory obsolescence 114,000 108,000
Provision for warranty reserve 163,306 125,265
Deferred compensation 84,084 80,184
Changes in operating assets and liabilities:
Receivables (4,224) (776,740)
Inventories (656,890) (670,425)
Prepaid expenses and other assets (347,106) (96,625)
Deferred tax assets (38,358) 59,591
Income taxes payable (99,250) 231,632
Accounts payable and accrued expenses (231,482) 429,922
----------- -----------
Net cash provided by (used in) operating activities (41,107) 665,353
----------- -----------
Cash flows from investing activities - capital expenditures (135,286) (406,658)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligations (4,968) (17,703)
Principal payments on long-term debt (174,547) (400,561)
Net change in line of credit 545,113 284,617
Proceeds from issuance of common stock 14,279 2,713
----------- -----------
Net cash provided by (used in) financing activities 379,877 (130,934)
----------- -----------
Net increase in cash and cash equivalents 203,484 127,761
Cash and cash equivalents at beginning of year 544,615 416,854
----------- -----------
Cash and cash equivalents at end of year $ 748,099 544,615
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest, net of amounts capitalized $ 229,552 187,613
Cash paid during the year for income taxes 387,700 153,400
Supplemental Disclosures of Noncash Investing and Financing Activities
Long-term debt incurred for fixed assets $ 1,038,146 16,785
Income tax benefit from nonemployee exercise of stock options 1,912 109
See accompanying notes to financial statements.
</TABLE>
<PAGE>
DYNATRONICS CORPORATION
Notes to Financial Statements
June 30, 1998 and 1997
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures and markets
products for the physical medicine market, which constitutes a
single line of business. The products are distributed primarily
through dealers in the United States and Canada, with increasing
distribution in foreign countries.
(b) Cash Equivalents
Cash equivalents include all cash and investments with original
maturities to the Company of three months or less. Cash equivalents
consist of money market funds of $352,547 at June 30, 1998. At June
30, 1998, the book value of cash equivalents approximates fair
value.
(c) Inventories
Finished goods inventories are stated 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.
(d) Property and Equipment
Property and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of related
assets. The building and its component parts are being depreciated
over their estimated useful lives that range from 5 to 31. 5 years.
Estimated lives for all other depreciable assets range from three to
seven years. Equipment under capital leases is amortized using the
straight-line method over the lesser of the term of the related
leases or the estimated useful lives of the assets.
(e) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over 15 and 30 years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the balance over its
remaining life can be recovered through undiscounted future
operating cash flows of the acquired operations. The amount of
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of this
asset will be impacted if estimated future operating cash flows are
not achieved.
(f) Revenue Recognition
Sales revenues are generally recorded at the time products are
shipped to the customer.
<PAGE>
2
DYNATRONICS CORPORATION
Notes to Financial Statements
(g) Research and Development Costs
Research and development costs are expensed as incurred.
(h) Product Warranty Reserve
Anticipated costs estimated to be incurred in connection with the
Company's product warranty programs are charged to expense as
products are sold.
(i) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets
and deferred tax liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and deferred tax
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(j) Net Income Per Share
Per share amounts are computed by dividing net income or loss by the
weighted average number of common shares outstanding and potential
common stock outstanding (if dilutive).
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues, and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles.
Actual results could differ from those estimates.
(l) Financial Instruments
The carrying value of accounts receivable, accounts payable, accrued
expenses, and notes payable approximates their estimated fair value
due to the relative short maturity of these instruments. The
carrying value of long-term debt approximates its estimated fair
value due to recent issuance of the debt.
(m) 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 establishes a different method of
computing earnings per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS
128, the Company is required to present both basic earnings per
share and diluted earnings per share.
<PAGE>
3
DYNATRONICS CORPORATION
Notes to Financial Statements
(m) Earnings Per Share (continued)
The Company adopted SFAS 128 in the quarter ended December 31, 1997.
Accordingly, all historical earnings per share data presented has
been restated to conform to the provisions of SFAS 128.
(2) Inventories
Inventories consist of the following:
Raw materials $ 2,132,310
Finished goods 667,000
Inventory reserve (76,160)
-----------
$ 2,723,150
===========
(3) Property and Equipment
Property and equipment consist of the following:
Land $ 354,744
Buildings 2,783,679
Leasehold improvements 15,312
Machinery and equipment 1,310,401
Office equipment 214,207
Vehicles 24,754
----------
4,703,097
Less accumulated depreciation and amortization 1,119,256
----------
$3,583,841
==========
On March 25, 1997, the Company sold 2.25 acres of land adjacent to its
Utah manufacturing and office facility as part of a like-kind tax-free
exchange of property under Internal Revenue Code Section 1031. Proceeds
from the land sale were used to acquire 3.4 acres of land and two 11,000
square foot buildings which currently house part of the Company's
Tennessee manufacturing and distribution operations. Additionally,
proceeds were used to reduce long-term debt, pay expenses related to the
sale, and to provide additional working capital for the Company. The
Company has expanded its Tennessee operations on a portion of the vacant
land acquired in the transaction with land remaining for further
expansion.
<PAGE>
4
DYNATRONICS CORPORATION
Notes to Financial Statements
(3) Property and Equipment (continued)
A summary of the use of the proceeds from this transaction is as
follows:
Sale price $ 1,000,000
Commissions (60,000)
Reduction of long-term debt (239,000)
Purchase of Tennessee property (575,000)
Property taxes, title, and miscellaneous expense (8,060)
===========
Cash proceeds to Company
$ 117,940
===========
A gain of approximately $260,000 resulting from this transaction is
included in other income, net in the fiscal 1997 statement of operations.
(4) Investment
Included in "other income, net" in the fiscal 1997 statement of
operations is $89,768 received as bankruptcy settlement for $720,103
which had been paid and written off in 1996 related to the Company's
investment in International Tourist Entertainment Corporation (ITEC). The
Company currently holds three percent of ITEC and carries the investment
at $-0-.
(5) Line of Credit
The Company has available with a commercial bank a revolving line of
credit agreement totaling $2.5 million at June 30, 1998, secured by
accounts receivable and inventories. The line requires the monthly
payment of interest on outstanding balances at prime plus one-half
percent (9.0 percent at June 30, 1998). The line expires on November 30,
1998.
(6) Long-term Debt
Long-term debt consists of the following:
<TABLE>
<S> <C>
7.64% promissory note secured by a trust deed on real property, payable in monthly
installments of $12,155 through November 1998 then adjusted through November
2003 $ 782,676
6.21% promissory note secured by a trust deed on real property, maturing November
2013, payable in decreasing installments beginning at
$7,545 monthly 839,797
7% promissory note secured by fixed assets, payable in monthly
installments of $6,386 through April 1999, then a balloon payment
of $427,012 457,375
9.9% promissory note secured by a vehicle, payable in monthly installments of $534
through April 2000 10,777
</TABLE>
<PAGE>
5
DYNATRONICS CORPORATION
Notes to Financial Statements
(6) Long-term Debt (continued)
<TABLE>
<S> <C>
8.65% promissory note secured by a trust deed on real property, payable in monthly
installments of $7,182 through January 2012 $ 688,145
9.06% promissory note secured by fixed assets, payable in monthly installments of
$483 through April 2001 14,394
9.07% promissory note secured by fixed assets payable in monthly installments of
$1,342 through April 2003 62,623
9.07% promissory note secured by fixed assets payable in monthly installments of
$1,026 through April 2003 47,862
9.07% promissory note secured by fixed assets payable in monthly installments of
$2,502 through July 2003 116,753
8.96% promissory note secured by fixed assets payable in monthly installments of
$938 through July 2001 29,448
8.96% promissory note secured by fixed assets payable in monthly installments of
$853 through July 2003 41,000
8.96% promissory note secured by fixed assets payable in monthly installments of
$245 through July 2003 11,753
8.96% promissory note secured by fixed assets payable in monthly installments of
$218 through July 2003 10,480
-----------
Total long-term debt 3,113,083
Less current installments 268,180
-----------
Long-term debt, excluding current installments $ 2,844,903
===========
</TABLE>
The aggregate maturities of long-term debt for each of the years
subsequent to June 30, 1998 are as follow: 1999, $268,180; 2000,
$290,590; 2001, $307,592; 2002, $316,683; and thereafter $1,930,038.
<PAGE>
DYNATRONICS CORPORATION
Notes to Financial Statements
(7) Leases
The Company leases equipment and vehicles under noncancelable operating
lease agreements. Rent expense for the years ended June 30, 1998 and
1997, was $41,746 and $20,659, respectively. A schedule of future minimum
rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of June 30,
1998, appears in the table below.
Years ending June 30:
1999 $ 31,504
2000 24,559
2001 9,600
2002 9,600
2003 4,800
-----------
Total minimum lease payments $ 80,063
===========
(8) Accrued Expenses
Accrued expenses consist of the following at June 30, 1998:
Warranty reserve $ 64,000
Bonuses payable 82,964
Commissions payable 63,516
Dealer costs and incentives 43,034
Payroll related accruals 208,694
Real property tax accrual 5,750
Professional fees accrued 8,835
Other 210,449
--------
$687,242
========
(9) Related Party Transactions
The Company had a services agreement to provide certain administrative
and accounting services for ITEC. Estimated costs for services are
prorated based upon personnel time, facilities, and services used.
Management believes the method used to allocate the costs of services
provided is reasonable. Such charges resulted in other income to the
Company of $61,500 and $72,000 in 1998 and 1997, respectively.
The agreement ended May 1998.
<PAGE>
7
DYNATRONICS CORPORATION
Notes to Financial Statements
(10) Income Taxes
<TABLE>
<CAPTION>
Income tax expense for the years ended June 30 consists of:
Stock
option
Current Deferred benefit Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998:
U.S. federal $ 242,367 (29,192) 1,656 214,831
State and local 50,386 (9,166) 256 41,476
---------- ----------- ----------- -----------
$ 292,753 (38,358) 1,912 256,307
========== =========== =========== ===========
1997:
U.S. federal $ 215,057 64,464 94 279,615
State and local 52,696 (4,873) 15 47,838
---------- ----------- ----------- -----------
$ 267,753 59,591 109 327,453
========== =========== =========== ===========
</TABLE>
Actual income tax expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34
percent to income or loss before income taxes) as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Expected tax expense (benefit) $ 313,172 319,598
State taxes, net of federal tax benefit 27,374 31,583
Amortization of goodwill not deductible 2,985 2,985
Research and development credits (22,942) (20,509)
Reduction in valuation allowance (37,300) -
Other, net (26,982) (6,204)
----------- ----------
$ 256,307 327,453
=========== ==========
</TABLE>
Deferred income tax assets related to the tax effects of temporary
differences are as follows:
<TABLE>
<S> <C>
Net deferred tax asset - current:
Inventory capitalization for income tax purposes $ 29,946
Obsolete inventory reserve 28,408
Vacation reserve 3,730
Warranty reserve 23,872
Bad debt reserve 33,658
------------
Total deferred tax asset - current $ 119,614
============
Net deferred tax asset - noncurrent:
Salary continuation agreements $ 198,106
Net operating loss carryforwards 107,545
Property and equipment, principally due to
differences in depreciation (129,950)
Noncompete and goodwill amortization 4,709
------------
Total deferred tax asset - noncurrent $ 180,410
============
</TABLE>
<PAGE>
8
DYNATRONICS CORPORATION
Notes to Financial Statements
(10) Income Taxes (continued)
The valuation allowance for deferred tax assets as of July 1, 1997, was
$100,000 and was reduced to $-0- as of June 30, 1998. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the gross deferred tax assets, the
Company will need to generate future taxable income of approximately
$1,153,000 in increments sufficient to recognize net operating loss
carryforwards prior to expiration as described below. Based upon the
level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize
the benefits of these deductible differences.
The Company benefits from the tax net operating loss (NOL) carryovers
acquired in the November 1992 merger with ACI, the former parent of the
Company. There is an annual limitation of $88,356 on the use of the NOL
carryovers. Amounts and expiration dates of carryforwards are as follows:
Expiration Amount
------------------------------------------- --------
2002 $221,961
2004 63,383
2005 1,899
2006 60
2007 29,007
--------
$316,310
========
(11) Major Customers
During the fiscal years ended June 30, 1998 and 1997, sales to any single
customer did not exceed ten percent of total revenues.
<PAGE>
9
DYNATRONICS CORPORATION
Notes to Financial Statements
(12) Common Stock
The Company has had activity under two qualified stock option plans (the
1987 plan and the 1992 plan) whereby options are granted to officers,
directors, and employees to acquire shares of the Company's common stock.
The options are to be granted at not less than 100 percent of the market
price of the stock at the date of grant. Option terms are determined by
the Board of Directors, and exercise dates may range from six months to
five years from the date of grant.
Summary of activity follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Weighted Weighted
average average
Number exercise Number exercise
of shares price of shares price
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 532,321 $ .91 525,641 $ .95
Options granted 404,037 1.00 256,206 1.04
Options exercised 19,496 .73 3,100 .875
Options canceled or expired 30,030 1.02 246,426 1.00
============ ============
Options outstanding at end of year 886,832 .95 532,321 .94
============ ============
Options exercisable at end of year 391,855 .86 274,655 .91
============ ============
Range of exercise prices at end of year .72-1.28 .72-1.28
</TABLE>
Under the terms of the stock option plans, 20,072 shares of common stock
were authorized and reserved for issuance, but were not granted at June
30, 1998.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123) which established
financial accounting and reporting standards for stock-based
compensation. The new standard defines a fair-value method of accounting
for an employee stock option or similar equity instrument. This statement
gives entities the choice between adopting the fair value method or
continuing to use the intrinsic-value method under Accounting Principles
Board (APB) Opinion No. 25 with footnote disclosures of the pro forma
effects if the fair-value method had been adopted. The Company has opted
for the latter approach. Accordingly, no compensation expense has been
recognized for the stock option plans.
<PAGE>
10
DYNATRONICS CORPORATION
Notes to Financial Statements
(12) Common Stock (continued)
Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1998
and 1997, consistent with the provisions of SFAS 123, the Company's
results of operations would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net income - as reported $ 664,788 612,539
Net income - pro forma 624,957 597,218
Earnings per share - as reported .08 .07
Earning per share - pro forma .08 .07
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
June 30,
------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Expected dividend yield $ 0% 0%
Expected stock price volatility 90.4% 55.5%
Risk-free interest rate 5.25% 6.39%
Expected life of options 3.5 & 5.0 years 4.5 & 6.5 years
</TABLE>
The weighted average fair value of options granted during 1998 and 1997
are $.725 and $.393, respectively.
(13) Employee Benefit Plan
During 1991, the Company established a deferred savings plan which
qualifies under Internal Revenue Code Section 401(k). The plan covers all
employees of the Company who have at least six months of service and who
are age 20 or older. For 1998 and 1997, the Company made matching
contributions of 25 percent of the first $2,000 of each employee's
contribution. The Company's contributions to the plan for 1998 and 1997
were $14,259 and $11,939, respectively. Company matching contributions
for future years are at the discretion of the Board of Directors.
<PAGE>
11
DYNATRONICS CORPORATION
Notes to Financial Statements
(14) Salary Continuation Agreements
The Company has Salary Continuation Agreements (the Agreements) with
three key employees. The Agreements provide for a pre-retirement salary
continuation income to the employee's designated beneficiary in the event
that the employee dies before reaching age 65. This death benefit amount
is the lesser of $75,000 per year or 50 percent of the employee's salary
at the time of death, and continues until the employee would have reached
age 65. The Agreements also provide the employee with a supplemental
retirement benefit if the employee remains in the employment of the
Company until age 65. Estimated amounts to be paid under the Agreements
are being accrued over the period of the employees' active employment. As
of June 30, 1998, the Company has accrued $531,114 of deferred
compensation under the terms of the Agreements.
64
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF INCOME 6-30-98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 748,099
<SECURITIES> 0
<RECEIVABLES> 2,334,416
<ALLOWANCES> 90,238
<INVENTORY> 2,723,150
<CURRENT-ASSETS> 6,075,168
<PP&E> 4,703,097
<DEPRECIATION> 1,119,256
<TOTAL-ASSETS> 11,641,948
<CURRENT-LIABILITIES> 2,572,391
<BONDS> 2,844,903
0
0
<COMMON> 2,000,217
<OTHER-SE> 3,693,323
<TOTAL-LIABILITY-AND-EQUITY> 11,641,948
<SALES> 12,283,064
<TOTAL-REVENUES> 12,283,064
<CGS> 7,083,234
<TOTAL-COSTS> 7,083,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16,800
<INTEREST-EXPENSE> 238,191
<INCOME-PRETAX> 921,095
<INCOME-TAX> 256,307
<INCOME-CONTINUING> 664,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664,788
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") executed and entered
into this 1st day of July, 1998 (the "Effective Date"), by and between
DYNATRONICS CORPORATION, a Utah corporation having its principal place of
business in Salt Lake City, Utah (the "Company"), and KELVYN H.
CULLIMORE, JR., a resident of Utah (the "Executive").
R E C I T A L S :
1. The Company desires to retain the services of the Executive,
presently a shareholder, officer and director of the Company, and the
Executive desires to render such services, upon the terms and conditions
contained herein.
2. The Board of Directors of the Company (the "Board"), by
appropriate resolutions, authorized the employment of the Executive as
provided for in this Agreement.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the covenants contained herein,
the above recitals and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DUTIES
1.1 Duties. The Company hereby employs the Executive, and the
Executive hereby accepts employment, as the Company's President and Chief
Executive Officer upon the terms and conditions contained herein. The
Executive will exercise the authority and assume the responsibilities:
(i) specified in the Company's Bylaws; (ii) of a President and Chief
Executive Officer of a corporation of the size and nature of the Company;
and (iii) prescribed by the Board from time to time, with the current
description set forth in Exhibit A, attached hereto and by reference made
a part hereof. Executive currently serves as a director on the Board and
the Board shall use its reasonable best efforts to cause the Executive to
remain as a director during the entire Contract Term, as such term is
defined under Article II.
1.2 Other Business. During the Contract Term, and excluding any
periods of vacation, sick leave or disability to which the Executive is
entitled, the Executive agrees to devote the Executive's full attention
and time to the business and affairs of the Company and, to the extent
necessary to discharge the duties assigned to the Executive hereunder, to
use the Executive's best efforts to perform faithfully and efficiently
such duties. Notwithstanding the foregoing, but subject to (i) the
advance approval of the Chairman of the Board, and (ii) the provisions of
Article VI hereof, the Executive shall be entitled to serve on the board
of directors of up to two (2) publicly held companies other than the
Company and a reasonable number of privately held companies including
companies operated or controlled by the Executive or a relative or family
member of the Executive.
<PAGE>
ARTICLE 2
TERM OF AGREEMENT
The initial term of this Agreement shall commence on the Effective Date
and shall terminate at 11:59 p.m. Mountain Standard Time on June 30, 2003 (the
"Initial Contract Term") unless sooner terminated hereunder. Thereafter, the
term of this Agreement shall be automatically renewed for five (5) successive
two year terms (the "Renewal Contract Term") without action by either party;
provided, however, that either party may terminate its obligations hereunder
at the end of any Renewal Contract Term by giving the other party written
notice of termination at least 90 days before the end of said Renewal Contract
Term. The Initial Contract Term and Renewal Contract Term are hereinafter
collectively referred to as the "Contract Term."
ARTICLE 3
COMPENSATION
During the Contract Term, the Company shall pay, or cause to be paid to
the Executive in cash in accordance with the normal payroll practices of the
Company for senior executive officers (including deductions, withholdings and
collections as required by law), the following:
3.1 Annual Base Salary. Executive's current annual base salary
("Annual Base Salary") is equal to One Hundred Seven Thousand One Hundred
Ninety One Dollars ($107,191) for the period commencing on the Effective Date
and ending on June 30, 1998. Thereafter, the Compensation Committee will
determine Executive's salary hereunder on in its sole discretion.
Notwithstanding the foregoing, in the event of a Change of Control (as defined
in Article V, below), the annual increase to the Annual Base Salary hereunder
will be an amount equal to the greater of 5 percent of the Annual Base Salary
in the preceding year or the amount determined by the Compensation Committee,
with such increase to become effective July 1st of each fiscal year.
3.2 Annual Bonus. A cash bonus (the "Annual Bonus") shall be paid each
year in an amount determined by the Compensation Committee, from the pre-tax
operating profits of the Company. The current Annual Bonus level for
Executive is 3 percent of pre-tax operating profits. Operating profits shall
exclude extraordinary items such as the sale of assets or the recognition of
gains or losses not associated with operations. The Compensation Committee of
the Board of Directors shall have sole discretion in determining whether an
amount in question shall be included in calculating operating profit.
Notwithstanding anything set forth above, the Compensation Committee may make
adjustments as deemed appropriate to the structure of the Annual Bonus program
from time to time. Bonuses shall be calculated and paid on a quarterly basis.
All accrued bonuses shall be paid to Executive within 45 days from the end of
a quarter except for the quarter ended June 30th for which any accrued bonus
shall be paid within 60 days. Notwithstanding the foregoing, in the event of
a Change in Control (as defined in Article V, below), the minimum Annual Bonus
will be an amount equal to 3 percent (or such greater amount as the
Compensation Committee may determine) of the Company's pre-tax operating
profits annually.
<PAGE>
ARTICLE 4
OTHER BENEFITS
4.1 Incentive Savings and Retirement Plans. The Executive shall be
entitled to participate, during the Contract Term, in all incentive (including
annual and long-term incentives), savings and retirement plans, practices,
policies and programs available to other senior executives of the Company.
4.2 Welfare Benefits. Immediately upon the Effective Date and
throughout the Contract Term, the Executive and/or the Executive's family, as
the case may be, shall be entitled to participate in, and shall receive all
benefits under, all welfare benefit plans, practices, policies and programs
provided by the Company (including without limitation, medical, prescription,
dental, disability, employee life, group life, dependent life, accidental
death and travel accident insurance plans and programs) at a level that is
equal to other senior executives of the Company.
4.3 Fringe Benefits. Immediately upon the Effective Date and
throughout the Contract Term, the Executive shall be entitled to participate
in all fringe benefit programs provided by the Company to its senior
executives. As of the Effective Date, those fringe benefits include (i) use
of a Company vehicle or a corresponding automobile allowance, including the
payment of gas, oil, maintenance and insurance in connection with such vehicle
or allowance, as the case may be, including approximately $1,820 of annual
compensation to mitigate the tax effect of this benefit, (ii) life insurance
benefit with a minimum face value of $100,000, with premiums paid by the
Company, (iii) additional disability insurance benefits paid by the Company at
levels not less than currently provided by group and individual policies in
effect as of the date hereof, and (iv) participation in a salary continuation
plan as set forth in that certain Salary Continuation Agreement (the "Salary
Continuation Agreement") between the Company and the Executive and entered
into in July 1989, as the same may be hereafter modified or amended, or any
successor plan provided by the Company.
4.4 Expenses. During the Contract Term, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment-related
expenses which are incurred by the Executive. The Executive shall be
reimbursed upon the Company's receipt of accountings in accordance with
practices, policies and procedures applicable to senior executives of the
Company.
4.5 Office and Support Staff. During the Contract Term, the Executive
shall be entitled to an office, furnishings, other appointments, personal
secretarial assistance and other assistance, commensurate with the position of
President and Chief Executive Officer of the Company, all of which shall be
adequate for the performance of the Executive's duties.
4.6 Vacation. The Executive shall be entitled to up to four (4) weeks
paid vacation per fiscal year commencing with the Effective Date. Such paid
vacation days shall accrue without cancellation, expiration or forfeiture,
subject however to the policy of the Company that only five (5) vacation days
may be carried over each year.
4.7 Stock Options. The Executive has previously been granted options
to purchase 177,000 shares (the "Options") of the Company's common voting
stock par value $.001 per share (the "Common Stock"). Subject to (i) the
terms of the Company's 1992 Amended and Restated Stock Option Plan or any
successor plan thereto (the "Stock Plan") and (ii) Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Options shall be qualified
Incentive Stock Options under Section 422 of the Code.
<PAGE>
ARTICLE 5
CHANGE OF CONTROL
5.1 Definitions. The following terms shall have the meaning set forth below:
(1) The term "Continuing Directors" shall mean those members of
the Board at any relevant time (i) who were directors on the Effective Date or
(ii) who subsequently were approved for nomination, election or appointment to
the Board by at least two-thirds of the Continuing Directors on the Board at
the time of such approval (the directors described in subsection (ii) are
referred to herein as the "Approved Directors"). "Approved Directors" shall
not include those appointed to the board as a term of a negotiated merger or
acquisition.
(2) The term "Change in Control" shall mean a change in control
of beneficial ownership of the Company's voting securities of a nature that
would be required to be reported pursuant to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or any similar item on a successor or revised form; provided,
however, that a Change in Control shall be deemed to have occurred when:
(1) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing thirty percent (30%) or more of the combined voting
power of the Company's then outstanding voting securities; or
(2) During any period of three consecutive years, the
individuals who at the beginning of such period constituted the Board,
together with any Approved Directors elected during such period, cease for any
reason to constitute at least a majority of the Board; or
(3) The shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
(3) The term "Good Reason," in connection with the termination
by the Executive of his employment with the Company subsequent to a Change of
Control, shall mean:
(1) A diminution in the responsibilities, title or office
of the Executive such that he does not serve as President or Chief Executive
Officer of the Company (which diminution was not for "Cause" (as defined
below) or the result of the Executive's disability), or the assignment
(without the Executive's express written consent) by the Company to the
Executive of any significant duties that are inconsistent with the Executive's
position, duties, responsibilities and status as President and Chief Executive
Officer of the Company;
<PAGE>
(2) The Company's transfer or assignment of the Executive,
without the Executive's prior express written consent, to any location other
than the Company's principal place of business in Salt Lake County, Utah,
except for required travel on Company business to an extent that does not
constitute a substantial abrupt departure from the Executive's normal business
travel obligations;
(3) The failure by the Company to continue in effect any
material benefit or compensation plan, life insurance plan, health and medical
benefit plan, disability plan or any other benefit plan in which the Executive
is a participant, or the taking of any action by the Company that would
adversely affect the Executive's right to participate in, or materially reduce
the Executive's benefits under, any of such plans or benefits, or deprive the
Executive of any material fringe benefit enjoyed by the Executive; or
(4) The failure of the Executive to serve as a director of
the Board (except if such decision not to serve was made voluntarily by the
Executive) at any time from his initial election to the Board through the end
of the Contract Term.
(4) The terms "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G
of the Code, or any successor section, and any regulations which may be
promulgated in connection with said section.
5.2 Severance Payments. During the Contract Term, if (a) within six
(6) months after a Change of Control occurs the Executive voluntarily
terminates his employment with the Company or (b) within twelve (12) months
after such Change in Control occurs, the Executive's employment is terminated
either (1) by the Company for any reason other than (A) for Cause (as defined
below), (B) as a result of the Executive's death or disability or (C) as a
result of the Executive's retirement in accordance with the Company's general
retirement policies, or (2) by the Executive for Good Reason, then:
(1) the Executive shall be paid, within thirty (30) days
after such termination, an amount in cash equal to all Annual Base Salary then
and thereafter payable hereunder through the shorter of the remainder of the
Contract Term or eighteen (18) full months;
(2) the Company shall maintain in full force and effect
for the shorter of the Contract Term or eighteen (18) months after
termination, all employee health and medical benefit plans and programs
including, without limitation, the Executive's 401(k) Plan, in which the
Executive, his family, or both, were participants immediately prior to
termination; provided that such continued participation is possible under the
general terms and provisions of such plans and programs; provided, however,
that if the Executive becomes eligible to participate in a health and medical
benefit plan or program of another employer which confers substantially
similar benefits, the Executive shall cease to receive benefits under this
subparagraph in respect of such plan or program;
(3) all of the Options and other stock options, warrants
and other similar rights granted by the Company to the Executive, if any,
shall immediately and entirely be vested and shall be immediately delivered to
the Executive without restriction or limitation of any kind (except for normal
transfer restrictions);
<PAGE>
(4) the Annual Bonus, if any, or portion thereof then
earned shall be paid within 45 days from the end of the quarter in which the
Executive terminates employment; provided, however, that if the Annual Bonus,
if any, has not been earned by the Executive at the date of termination, but
the Executive otherwise would have been entitled to the Annual Bonus at the
end of the Company's next fiscal year or the next period designated by the
Company for the determination of bonuses for senior executives (the "Bonus
Determination Date"), the Company shall pay the Annual Bonus to the Executive
within 45 days after the Bonus Determination Date, pro rated in amount to the
date of the Executive's termination; and
(5) the Executive shall be paid an amount equal to fifty
percent (50%) of the cash surrender value, if any, of those certain life
insurance policies underwritten by Southland Life (or such successor or
replacement policies) owned by the Company for the purpose of funding the
Company's obligations under the Salary Continuation Agreement.
Any obligation owed or amount payable pursuant to this Section together
with any compensation pursuant to Article III that is payable for services
rendered through the effective date of termination, shall constitute the sole
obligation of the Company payable with respect to the termination of the
Executive as provided in this Section.
5.3 Parachute Payment Limitation. Notwithstanding any other provision
of this Agreement, if the severance payments under Section 5.02 of this
Agreement, together with any other Parachute Payments made by the Company to
the Executive, if any, are characterized as Excess Parachute Payments, then
the following rules shall apply:
(1) The Company shall compute the net value to the Executive of
all such severance payments after reduction for the excise taxes imposed by
Section 4999, of the Code and for any normal income taxes that would be
imposed on the Executive if such severance payments constituted the
Executive's sole taxable income;
(2) The Company shall next compute the maximum amount of
severance payments that can be provided without any such payments being
characterized as Excess Parachute Payments, and reduce the result by the
amount of any normal income taxes that would be imposed on the Executive if
such reduced severance benefits constituted the Executive's sole taxable
income;
(3) If the amount derived in Section 5.03(a) is greater than the
amount derived in Section 5.03(b), then the Company shall pay the Executive
the full amount of severance payments without reduction. If the amount derived
in Section 5.03(a) is not greater than the amount derived in Section 5.03(b),
then the Company shall pay the Executive the maximum amount of severance
payments that can be provided without any such payments being characterized as
Excess Parachute Payments.
<PAGE>
5.4 No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in Section 5.02 by seeking other employment
or otherwise, nor shall the amount of any payment provided for in Section 5.02
be reduced by any compensation earned by the Executive as a result of
employment by another company, self-employment or otherwise.
ARTICLE 6
RESTRICTIVE COVENANTS
6.1 Trade Secrets. Confidential and Proprietary Business Information.
(1) The Company has advised the Executive and the Executive has
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to
the Company. "Protected Information" means trade secrets, confidential and
proprietary business information of the Company, any information of the
Company other than information which has entered the public domain (unless
such information entered the public domain through effects of or on account of
the Executive), and all valuable and unique information and techniques
acquired, developed or used by the Company relating to its business,
operations, employees, customers and suppliers, which give the Company a
competitive advantage over those who do not know the information and
techniques and which are protected by the Company from unauthorized
disclosure, including but not limited to, customer lists (including potential
customers), sources of supply, processes, plans, materials, pricing
information, internal memoranda, marketing plans, internal policies, and
products and services which may be developed from time to time by the Company
and its agent or employees.
(2) The Executive acknowledges that the Executive will acquire
Protected Information with respect to the Company and its successors in
interest, which information is a valuable, special and unique asset of the
Company's business and operations and that disclosure of such Protected
Information would cause irreparable damage to the Company.
(3) Either during or for a period of two (2) years following
termination of employment by the Company, the Executive shall not, directly or
indirectly, divulge, furnish or make accessible to any person, firm,
corporation, association or other entity (otherwise than as may be required in
the regular course of the Executive's employment) nor use in any manner, any
Protected Information, or cause any such information of the Company to enter
the public domain.
6.2 Non-Competition
(1) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of two (2) years
after the termination of this Agreement, directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory
or consulting or other services in connection with any Prohibited Business as
defined in Section 6.02(c).
<PAGE>
(2) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of two (2) years
after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b) shall,
however, restrict the Executive from making any investment in any company
whose stock is listed on a national securities exchange; provided that (i)
such investment does not give the Executive the right or ability to control or
influence the policy decisions of any Prohibited Business, and (ii) such
investment does not create a conflict of interest between the Executive's
duties hereunder and the Executive's interest in such investment.
(3) For purposes of this Section 6.02, "Prohibited Business"
shall be defined as any business and any branch, office or operation thereof,
which is a competitor of the Company and which has established or seeks to
establish contact, in whatever form (including, but not limited to
solicitation of sales, or the receipt or submission of bids), with any entity
who is at any time a client, customer or supplier of the Company (including
but not limited to all subdivisions of the federal government.)
6.3 Non-Solicitation. From the date hereof until two (2) years after
the Executive's termination of employment with the Company, the Executive
shall not, directly or indirectly (a) encourage any employee or supplier of
the Company or its successors in interest to leave his or her employment with
the Company or its successors in interest, (b) employ, hire, solicit or cause
to be employed, hired or solicited (other than by the Company or its
successors in interest), or encourage others to employ or hire any person who
within two (2) years prior thereto was employed by the Company or its
successors in interest, or (c) establish a business with, or encourage others
to establish a business with, any person who within two (2) years prior
thereto was an employee or supplier of the Company or its successors in
interest.
6.4 Survival of Undertakings and Injunctive Relief.
(1) The provisions of Sections 6.01, 6.02 and 6.03 shall survive
the termination of the Executive's employment with the Company irrespective of
the reasons therefor.
(2) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02 and 6.03 and the purpose of
such restrictions are reasonable and are designed to protect the Protected
Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to and in view of the
necessity of the restrictions contained in Sections 6.01, 6.02 and 6.03, any
violation of any provision of Sections 6.01, 6.02 and 6.03 hereof would cause
irreparable injury to the Company and its successors in interest with respect
to the resulting disruption in their operations. By reason of the foregoing
the Executive consents and agrees that if the Executive violates any of the
provisions of Sections 6.01, 6.02 or 6.03 of this Agreement, the Company and
its successors in interest as the case may be, shall be entitled, in addition
to any other remedies that they may have, including money damages, to an
injunction to be issued by a court of competent jurisdiction, restraining the
Executive from committing or continuing any violation of such Sections of this
Agreement.
<PAGE>
In the event of any such violation of Sections 6.01, 6.02 or 6.03 of
this Agreement, the Executive further agrees that the time periods set forth
in such Sections shall be extended by the period of such violation.
ARTICLE 7
TERMINATION
7.1 Termination of Employment. The Executive's employment may be
terminated (i) at any time during the Contract Term by mutual agreement of the
parties, (ii) at the end of any Renewal Contract Term if written notice of
non-renewal is given by either party to the other at least 90 days prior to
the end of said Renewal Contract Term or (iii) as otherwise provided in this
Article.
7.2 Termination for Cause. The Company may terminate the Executive's
employment for Cause by giving the Executive seven (7) days prior written
notice of such termination. For purposes of this Agreement, "Cause" for
termination shall mean
(1) the willful failure or refusal to carry out the
reasonable directions of the Board, which directions are consistent with the
Executive's duties as set forth under this Agreement and have been given to
the Executive in writing but which directions the Executive has failed to
follow or implement within thirty (30) days after said written notice, other
than a failure resulting from the Executive's complete or partial incapacity
due to physical or mental illness or impairment;
(2) a conviction for a violation of a state or federal
criminal law involving the commission of a felony;
(3) a willful act by the Executive that constitutes gross
negligence in the performance of the Executive's duties under this Agreement
and which materially injures the Company. No act, or failure to act, by the
Executive shall be considered "willful" unless committed without good faith
and without a reasonable belief that the act or omission was in the Company's
best interest;
(4) a material breach by the Executive of the terms of
this Agreement, which breach has not been cured by the Executive within
fifteen (15) days of written notice of said breach by the Company;
(5) repeated unethical business practices by the Executive
in connection with the Company's business, which unethical business practices
continue after fifteen (15) days after written notice thereof by the Company;
or
(6) habitual use of alcohol or drugs by the Executive.
<PAGE>
Upon termination for Cause, the Executive shall not be entitled to payment of
any compensation other than salary and benefits under this Agreement earned up
to the date of such termination and any stock options, warrants or similar
rights which have vested at the date of such termination.
7.3 Termination Without Cause. Should the Executive's employment be
terminated for a reason other than as specifically set forth in Sections 7.01
and 7.02 or Article V above the Company shall pay and/or provide to the
Executive each of the benefits and payments provided in Section 5.02 (i)-(v).
1.1
7.4 Employment Assistance, Office. In the event the Executive is
terminated for any reason other than Cause, for a period equal to the shorter
of (i) six (6) months after the Executive's termination or (ii) until the
Executive accepts an offer of full-time employment, the Company will make
available to the Executive at its headquarters, temporary office space and
reasonable administrative staff to assist the Executive in seeking employment.
ARTICLE 8
MISCELLANEOUS
8.1 Assignment, Successors. This Agreement may not be assigned by
either party hereto without the prior written consent of the other party. This
Agreement shall be binding upon and inure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
8.2 Beneficiary. If the Executive dies during the Contract Term, the
Company shall pay as an additional death benefit (and not in lieu of any other
such benefit to which Executive may be entitled at such time) the Annual Base
Salary under paragraph 3.01 for the remainder of the Contract Term in a lump
sum payment to the Executive's beneficiary or beneficiaries designated in
writing by the Executive (collectively the "Beneficiary") and if no such
Beneficiary is designated, to the Executive's estate; provided, however, that
such sum shall be reduced by the amounts, if any, that are paid to the
Beneficiary or the estate of Executive, as the case may be, under the Salary
Continuation Agreement during the remainder of the Contract Term.
8.3 Nonalienation of Benefits. Benefits payable under this Agreement
shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution or
levy of any kind, either voluntary or involuntary, prior to actually being
received by the Executive, and any such attempt to dispose of any right to
benefits payable hereunder shall be void.
8.4 Severability. If all or any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not serve to invalidate any portion of this
Agreement not declared to be unlawful or invalid. Any paragraph or part of a
paragraph so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such paragraph or
part of a paragraph to the fullest extent possible while remaining lawful and
valid.
<PAGE>
8.5 Amendment and Waiver. This Agreement shall not be altered,
amended or modified except by written instrument executed by the Company and
the Executive. A waiver of any term, covenant, agreement or condition
contained in this Agreement shall not be deemed a waiver of any other term,
covenant, agreement or condition and any waiver of any other term, covenant,
agreement or condition, and any waiver of any default in any such term,
covenant, agreement or condition shall not be deemed a waiver of any later
default thereof or of any other term, covenant, agreement or condition.
8.6 Notices. All notices and other communications hereunder shall be
in writing and delivered by hand or by first class registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: DYNATRONICS CORPORATION
7030 Park Centre Drive
Salt Lake City, Utah 84121
With a copy to: DURHAM, EVANS, JONES & PINEGAR
Attn: Kevin R. Pinegar, Esq.
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
If to the Executive: Kelvyn H. Cullimore, Jr.
2143 Worchester Drive
Salt Lake City, Utah 84121
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective
when actually received by the addressee.
8.7 Counterpart Originals. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.8 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in the Agreement.
8.9 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of Utah,
without regard to its choice of law principles.
8.10 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises and representations regarding employment by the
Company and severance or other payments contingent upon termination of
employment not referenced by this agreement. Notwithstanding the foregoing,
the Executive shall be entitled to any other severance plan applicable to
other senior executives of the Company.
<PAGE>
8.11 Extension or Renegotiation. The parties hereto agree that at any
time prior to the expiration of this Agreement, they may extend or renegotiate
this Agreement upon mutually agreeable terms and conditions.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Employment Agreement
on the date first written above.
DYNATRONICS CORPORATION,
a Utah corporation
By: /s/ John L. Hales
---------------------------
Name: John L. Hales
Title: Chief Financial Officer
KELVYN H. CULLIMORE, JR.,
an individual
/s/ Kelvyn H. Cullimore, Jr.
-------------------------------
Kelvyn H. Cullimore, Jr.
<PAGE>
EXHIBIT A
Responsibilities and Authority of President/Chief Executive Officer
Responsibility:
Overall strategic planning and corporate direction
General deployment of corporate assets
Hiring of Company officers
Approval of major Company Policies and Procedures and exceptions to same
Interfaces with stock brokerages
Approval of all corporate communications
Assure compliance with all applicable laws and regulations
(domestic/international) pertinent to the Company
Review and approval of all legal agreements to which the Company is a party
Management Team Chair
Member Board of Directors
Authority:
Broad in nature: limited by Board of Directors
Approves stock options with plan approval by the Board
Approves capital expenditures </= $25,000
Represents Company in strategic business transactions subject to the
approval of the Board
13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") executed and
effective the 1st day of July, 1998 (the "Effective Date"), by and
between DYNATRONICS CORPORATION, a Utah corporation having its principal
place of business in Salt Lake City, Utah (the "Company"), and LARRY K.
BEARDALL, a resident of Utah (the "Executive").
R E C I T A L S :
1. The Company desires to retain the services of the Executive,
presently a shareholder, officer and director of the Company, and the
Executive desires to render such services, upon the terms and conditions
contained herein.
2. The Board of Directors of the Company (the "Board"), by
appropriate resolutions, authorized the employment of the Executive as
provided for in this Agreement.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the covenants contained
herein, the above recitals and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
DUTIES
1.1 Duties. The Company hereby employs the Executive, and the
Executive hereby accepts employment, as the Company's Executive Vice
President upon the terms and conditions contained herein. The Executive
will exercise the authority and assume the responsibilities: (i)
specified in the Company's Bylaws; (ii) of an Executive Vice President
of a corporation of the size and nature of the Company; and (iii)
prescribed by the Board from time to time, with the current description
set forth in Exhibit A, attached hereto and by reference made a part
hereof. Executive currently serves as a director on the Board and the
Board shall use its reasonable best efforts to cause the Executive to
remain as a director during the entire Contract Term, as such term is
defined under Article II.
1.2 Other Business. During the Contract Term, and excluding any
periods of vacation, sick leave or disability to which the Executive is
entitled, the Executive agrees to devote the Executive's full attention
and time to the business and affairs of the Company and, to the extent
necessary to discharge the duties assigned to the Executive hereunder,
to use the Executive's best efforts to perform faithfully and
efficiently such duties. Notwithstanding the foregoing, but subject to
(i) the advance approval of the Chairman of the Board, and (ii) the
provisions of Article VI hereof, the Executive shall be entitled to
serve on the board of directors of up to two (2) publicly held companies
other than the Company and a reasonable number of privately held
companies including companies operated or controlled by the Executive or
a relative or family member of the Executive.
<PAGE>
ARTICLE 2
TERM OF AGREEMENT
The initial term of this Agreement shall commence on the Effective Date
and shall terminate at 11:59 p.m. Mountain Standard Time on June 30, 2003 (the
"Initial Contract Term") unless sooner terminated hereunder. Thereafter, the
term of this Agreement shall be automatically renewed for five (5) successive
two year terms (the "Renewal Contract Term") without action by either party;
provided, however, that either party may terminate its obligations hereunder
at the end of any Renewal Contract Term by giving the other party written
notice of termination at least 90 days before the end of said Renewal Contract
Term. The Initial Contract Term and Renewal Contract Term are hereinafter
collectively referred to as the "Contract Term."
ARTICLE 3
COMPENSATION
During the Contract Term, the Company shall pay, or cause to be paid to
the Executive in cash in accordance with the normal payroll practices of the
Company for senior executive officers (including deductions, withholdings and
collections as required by law), the following:
3.1 Annual Base Salary. Executive's current annual base salary
("Annual Base Salary") is equal to Ninety Seven Thousand Six Hundred Sixty
Three Dollars ($97,663) for the period commencing on the Effective Date and
ending on June 30, 1998. Thereafter, the Compensation Committee will
determine Executive's salary hereunder in the Committee's sole discretion.
Notwithstanding the foregoing, in the event of a Change of Control (as defined
in Article V, below), the annual increase to the Annual Base Salary hereunder
will be an amount equal to the greater of 5 percent of the Annual Base Salary
in the preceding year or the amount determined by the Compensation Committee,
with such increase to become effective July 1st of each fiscal year.
3.2 Annual Bonus. A cash bonus (the "Annual Bonus") shall be paid each
year in an amount determined by the Compensation Committee, from the pre-tax
operating profits of the Company. The current Annual Bonus level for
Executive is 4 percent of pre-tax operating profits. Operating profits shall
exclude extraordinary items such as the sale of assets or the recognition of
gains or losses not associated with operations. The Compensation Committee of
the Board of Directors shall have sole discretion in determining whether an
amount in question shall be included in calculating operating profit.
Notwithstanding anything set forth above, the Compensation Committee may make
adjustments as deemed appropriate to the structure of the Annual Bonus program
from time to time. Bonuses shall be calculated and paid on a quarterly basis.
All accrued bonuses shall be paid to Executive within 45 days from the end of
a quarter except for the quarter ended June 30th for which any accrued bonus
shall be paid within 60 days. Notwithstanding the foregoing, in the event of
a Change in Control (as defined in Article V, below), the minimum Annual Bonus
will be an amount equal to 4 percent (or such greater amount as the
Compensation Committee may determine) of the Company's pre-tax operating
profits annually.
<PAGE>
ARTICLE 4
OTHER BENEFITS
4.1 Incentive Savings and Retirement Plans. The Executive shall be
entitled to participate, during the Contract Term, in all incentive (including
annual and long-term incentives), savings and retirement plans, practices,
policies and programs available to other senior executives of the Company.
4.2 Welfare Benefits. Immediately upon the Effective Date and
throughout the Contract Term, the Executive and/or the Executive's family, as
the case may be, shall be entitled to participate in, and shall receive all
benefits under, all welfare benefit plans, practices, policies and programs
provided by the Company (including without limitation, medical, prescription,
dental, disability, employee life, group life, dependent life, accidental
death and travel accident insurance plans and programs) at a level that is
equal to other senior executives of the Company.
4.3 Fringe Benefits. Immediately upon the Effective Date and
throughout the Contract Term, the Executive shall be entitled to participate
in all fringe benefit programs provided by the Company to its senior
executives. As of the Effective Date, those fringe benefits include (i) use
of a Company vehicle or a corresponding automobile allowance, including the
payment of gas, oil, maintenance and insurance in connection with such vehicle
or allowance, as the case may be, including approximately $1,820 of annual
compensation to mitigate the tax effect of this benefit, (ii) life insurance
benefit with a minimum face value of $100,000, with premiums paid by the
Company, (iii) additional disability insurance benefits paid by the Company at
levels not less than currently provided by group and individual policies in
effect as of the date hereof, and (iv) participation in a salary continuation
plan as set forth in that certain Salary Continuation Agreement (the "Salary
Continuation Agreement") between the Company and the Executive and entered
into in July 1989, as the same may be hereafter modified or amended, or any
successor plan provided by the Company.
4.4 Expenses. During the Contract Term, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment-related
expenses which are incurred by the Executive. The Executive shall be
reimbursed upon the Company's receipt of accountings in accordance with
practices, policies and procedures applicable to senior executives of the
Company.
4.5 Office and Support Staff. During the Contract Term, the Executive
shall be entitled to an office, furnishings, other appointments, personal
secretarial assistance and other assistance, commensurate with the position
occupied by Executive, all of which shall be adequate for the performance of
the Executive's duties.
4.6 Vacation. The Executive shall be entitled to up to four (4) weeks
paid vacation per fiscal year commencing with the Effective Date. Such paid
vacation days shall accrue without cancellation, expiration or forfeiture,
subject however to the policy of the Company that only five (5) vacation days
may be carried over each year.
4.7 Stock Options. The Executive has previously been granted options
to purchase 151,000 shares (the "Options") of the Company's common voting
stock par value $.001 per share (the "Common Stock"). Subject to (i) the
terms of the Company's 1992 Amended and Restated Stock Option Plan or any
successor plan thereto (the "Stock Plan") and (ii) Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Options shall be qualified
Incentive Stock Options under Section 422 of the Code.
<PAGE>
ARTICLE 5
CHANGE OF CONTROL
5.1 Definitions. The following terms shall have the meaning set forth
below:
(1) The term "Continuing Directors" shall mean those members of
the Board at any relevant time (i) who were directors on the Effective Date or
(ii) who subsequently were approved for nomination, election or appointment to
the Board by at least two-thirds of the Continuing Directors on the Board at
the time of such approval (the directors described in subsection (ii) are
referred to herein as the "Approved Directors"). "Approved Directors" shall
not include those appointed to the board as a term of a negotiated merger or
acquisition.
(2) The term "Change in Control" shall mean a change in control
of beneficial ownership of the Company's voting securities of a nature that
would be required to be reported pursuant to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or any similar item on a successor or revised form; provided,
however, that a Change in Control shall be deemed to have occurred when:
(1) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities representing thirty percent (30%) or more of the combined voting
power of the Company's then outstanding voting securities; or
(2) During any period of three consecutive years, the
individuals who at the beginning of such period constituted the Board,
together with any Approved Directors elected during such period, cease for any
reason to constitute at least a majority of the Board; or
(3) The shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
(3) The term "Good Reason," in connection with the termination
by the Executive of his employment with the Company subsequent to a Change of
Control, shall mean:
(1) A diminution in the responsibilities, title or office
of the Executive such that he does not serve as Executive Vice President of
the Company (which diminution was not for "Cause" (as defined below) or the
result of the Executive's disability), or the assignment (without the
Executive's express written consent) by the Company to the Executive of any
significant duties that are inconsistent with the Executive's position,
duties, responsibilities and status as Executive Vice President of the
Company;
<PAGE>
(2) The Company's transfer or assignment of the Executive,
without the Executive's prior express written consent, to any location other
than the Company's principal place of business in Salt Lake County, Utah,
except for required travel on Company business to an extent that does not
constitute a substantial abrupt departure from the Executive's normal business
travel obligations;
(3) The failure by the Company to continue in effect any
material benefit or compensation plan, life insurance plan, health and medical
benefit plan, disability plan or any other benefit plan in which the Executive
is a participant, or the taking of any action by the Company that would
adversely affect the Executive's right to participate in, or materially reduce
the Executive's benefits under, any of such plans or benefits, or deprive the
Executive of any material fringe benefit enjoyed by the Executive; or
(4) The failure of the Executive to serve as a director of
the Board (except if such decision not to serve was made voluntarily by the
Executive) at any time from his initial election to the Board through the end
of the Contract Term.
(4) The terms "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G
of the Code, or any successor section, and any regulations which may be
promulgated in connection with said section.
5.2 Severance Payments. During the Contract Term, if (a) within six
(6) months after a Change of Control occurs the Executive voluntarily
terminates his employment with the Company or (b) within twelve (12) months
after such Change in Control occurs, the Executive's employment is terminated
either (1) by the Company for any reason other than (A) for Cause (as defined
below), (B) as a result of the Executive's death or disability or (C) as a
result of the Executive's retirement in accordance with the Company's general
retirement policies, or (2) by the Executive for Good Reason, then:
(1) the Executive shall be paid, within thirty (30) days
after such termination, an amount in cash equal to all Annual Base Salary then
and thereafter payable hereunder through the shorter of the remainder of the
Contract Term or eighteen (18) full months;
(2) the Company shall maintain in full force and effect
for the shorter of the Contract Term or eighteen (18) months after
termination, all employee health and medical benefit plans and programs
including, without limitation, the Executive's 401(k) Plan, in which the
Executive, his family, or both, were participants immediately prior to
termination; provided that such continued participation is possible under the
general terms and provisions of such plans and programs; provided, however,
that if the Executive becomes eligible to participate in a health and medical
benefit plan or program of another employer which confers substantially
similar benefits, the Executive shall cease to receive benefits under this
subparagraph in respect of such plan or program;
(3) all of the Options and other stock options, warrants
and other similar rights granted by the Company to the Executive, if any,
shall immediately and entirely be vested and shall be immediately delivered to
the Executive without restriction or limitation of any kind (except for normal
transfer restrictions);
<PAGE>
(4) the Annual Bonus, if any, or portion thereof then
earned shall be paid within 45 days from the end of the quarter in which the
Executive terminates employment; provided, however, that if the Annual Bonus,
if any, has not been earned by the Executive at the date of termination, but
the Executive otherwise would have been entitled to the Annual Bonus at the
end of the Company's next fiscal year or the next period designated by the
Company for the determination of bonuses for senior executives (the "Bonus
Determination Date"), the Company shall pay the Annual Bonus to the Executive
within 45 days after the Bonus Determination Date, pro rated in amount to the
date of the Executive's termination; and
(5) the Executive shall be paid an amount equal to fifty
percent (50%) of the cash surrender value, if any, of those certain life
insurance policies underwritten by Southland Life (or such successor or
replacement policies) owned by the Company for the purpose of funding the
Company's obligations under the Salary Continuation Agreement.
Any obligation owed or amount payable pursuant to this Section together
with any compensation pursuant to Article III that is payable for services
rendered through the effective date of termination, shall constitute the sole
obligation of the Company payable with respect to the termination of the
Executive as provided in this Section.
5.3 Parachute Payment Limitation. Notwithstanding any other provision
of this Agreement, if the severance payments under Section 5.02 of this
Agreement, together with any other Parachute Payments made by the Company to
the Executive, if any, are characterized as Excess Parachute Payments, then
the following rules shall apply:
(1) The Company shall compute the net value to the Executive of
all such severance payments after reduction for the excise taxes imposed by
Section 4999, of the Code and for any normal income taxes that would be
imposed on the Executive if such severance payments constituted the
Executive's sole taxable income;
(2) The Company shall next compute the maximum amount of
severance payments that can be provided without any such payments being
characterized as Excess Parachute Payments, and reduce the result by the
amount of any normal income taxes that would be imposed on the Executive if
such reduced severance benefits constituted the Executive's sole taxable
income;
(3) If the amount derived in Section 5.03(a) is greater than the
amount derived in Section 5.03(b), then the Company shall pay the Executive
the full amount of severance payments without reduction. If the amount derived
in Section 5.03(a) is not greater than the amount derived in Section 5.03(b),
then the Company shall pay the Executive the maximum amount of severance
payments that can be provided without any such payments being characterized as
Excess Parachute Payments.
<PAGE>
5.4 No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in Section 5.02 by seeking other employment
or otherwise, nor shall the amount of any payment provided for in Section 5.02
be reduced by any compensation earned by the Executive as a result of
employment by another company, self-employment or otherwise.
ARTICLE 6
RESTRICTIVE COVENANTS
6.1 Trade Secrets. Confidential and Proprietary Business Information.
(1) The Company has advised the Executive and the Executive has
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to
the Company. "Protected Information" means trade secrets, confidential and
proprietary business information of the Company, any information of the
Company other than information which has entered the public domain (unless
such information entered the public domain through effects of or on account of
the Executive), and all valuable and unique information and techniques
acquired, developed or used by the Company relating to its business,
operations, employees, customers and suppliers, which give the Company a
competitive advantage over those who do not know the information and
techniques and which are protected by the Company from unauthorized
disclosure, including but not limited to, customer lists (including potential
customers), sources of supply, processes, plans, materials, pricing
information, internal memoranda, marketing plans, internal policies, and
products and services which may be developed from time to time by the Company
and its agent or employees.
(2) The Executive acknowledges that the Executive will acquire
Protected Information with respect to the Company and its successors in
interest, which information is a valuable, special and unique asset of the
Company's business and operations and that disclosure of such Protected
Information would cause irreparable damage to the Company.
(3) Either during or for a period of two (2) years following
termination of employment by the Company, the Executive shall not, directly or
indirectly, divulge, furnish or make accessible to any person, firm,
corporation, association or other entity (otherwise than as may be required in
the regular course of the Executive's employment) nor use in any manner, any
Protected Information, or cause any such information of the Company to enter
the public domain.
6.2 Non-Competition
(1) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of two (2) years
after the termination of this Agreement, directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory
or consulting or other services in connection with any Prohibited Business as
defined in Section 6.02(c).
<PAGE>
(2) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of two (2) years
after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b) shall,
however, restrict the Executive from making any investment in any company
whose stock is listed on a national securities exchange; provided that (i)
such investment does not give the Executive the right or ability to control or
influence the policy decisions of any Prohibited Business, and (ii) such
investment does not create a conflict of interest between the Executive's
duties hereunder and the Executive's interest in such investment.
(3) For purposes of this Section 6.02, "Prohibited Business"
shall be defined as any business and any branch, office or operation thereof,
which is a competitor of the Company and which has established or seeks to
establish contact, in whatever form (including, but not limited to
solicitation of sales, or the receipt or submission of bids), with any entity
who is at any time a client, customer or supplier of the Company (including
but not limited to all subdivisions of the federal government.)
6.3 Non-Solicitation. From the date hereof until two (2) years after
the Executive's termination of employment with the Company, the Executive
shall not, directly or indirectly (a) encourage any employee or supplier of
the Company or its successors in interest to leave his or her employment with
the Company or its successors in interest, (b) employ, hire, solicit or cause
to be employed, hired or solicited (other than by the Company or its
successors in interest), or encourage others to employ or hire any person who
within two (2) years prior thereto was employed by the Company or its
successors in interest, or (c) establish a business with, or encourage others
to establish a business with, any person who within two (2) years prior
thereto was an employee or supplier of the Company or its successors in
interest.
6.4 Survival of Undertakings and Injunctive Relief.
(1) The provisions of Sections 6.01, 6.02 and 6.03 shall survive
the termination of the Executive's employment with the Company irrespective of
the reasons therefor.
(2) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02 and 6.03 and the purpose of
such restrictions are reasonable and are designed to protect the Protected
Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to and in view of the
necessity of the restrictions contained in Sections 6.01, 6.02 and 6.03, any
violation of any provision of Sections 6.01, 6.02 and 6.03 hereof would cause
irreparable injury to the Company and its successors in interest with respect
to the resulting disruption in their operations. By reason of the foregoing
the Executive consents and agrees that if the Executive violates any of the
provisions of Sections 6.01, 6.02 or 6.03 of this Agreement, the Company and
its successors in interest as the case may be, shall be entitled, in addition
to any other remedies that they may have, including money damages, to an
injunction to be issued by a court of competent jurisdiction, restraining the
Executive from committing or continuing any violation of such Sections of this
Agreement.
<PAGE>
In the event of any such violation of Sections 6.01, 6.02 or 6.03 of
this Agreement, the Executive further agrees that the time periods set forth
in such Sections shall be extended by the period of such violation.
ARTICLE 7
TERMINATION
7.1 Termination of Employment. The Executive's employment may be
terminated (i) at any time during the Contract Term by mutual agreement of the
parties, (ii) at the end of any Renewal Contract Term if written notice of
non-renewal is given by either party to the other at least 90 days prior to
the end of said Renewal Contract Term or (iii) as otherwise provided in this
Article.
7.2 Termination for Cause. The Company may terminate the Executive's
employment for Cause by giving the Executive seven (7) days prior written
notice of such termination. For purposes of this Agreement, "Cause" for
termination shall mean
(1) the willful failure or refusal to carry out the
reasonable directions of the Board, which directions are consistent with the
Executive's duties as set forth under this Agreement and have been given to
the Executive in writing but which directions the Executive has failed to
follow or implement within thirty (30) days after said written notice, other
than a failure resulting from the Executive's complete or partial incapacity
due to physical or mental illness or impairment;
(2) a conviction for a violation of a state or federal
criminal law involving the commission of a felony;
(3) a willful act by the Executive that constitutes gross
negligence in the performance of the Executive's duties under this Agreement
and which materially injures the Company. No act, or failure to act, by the
Executive shall be considered "willful" unless committed without good faith
and without a reasonable belief that the act or omission was in the Company's
best interest;
(4) a material breach by the Executive of the terms of
this Agreement, which breach has not been cured by the Executive within
fifteen (15) days of written notice of said breach by the Company;
(5) repeated unethical business practices by the Executive
in connection with the Company's business, which unethical business practices
continue after fifteen (15) days after written notice thereof by the Company;
or
(6) habitual use of alcohol or drugs by the Executive.
<PAGE>
Upon termination for Cause, the Executive shall not be entitled to payment of
any compensation other than salary and benefits under this Agreement earned up
to the date of such termination and any stock options, warrants or similar
rights which have vested at the date of such termination.
7.3 Termination Without Cause. Should the Executive's employment be
terminated for a reason other than as specifically set forth in Sections 7.01
and 7.02 or Article V above the Company shall pay and/or provide to the
Executive each of the benefits and payments provided in Section 5.02 (i)-(v).
1.1
7.4 Employment Assistance, Office. In the event the Executive is
terminated for any reason other than Cause, for a period equal to the shorter
of (i) six (6) months after the Executive's termination or (ii) until the
Executive accepts an offer of full-time employment, the Company will make
available to the Executive at its headquarters, temporary office space and
reasonable administrative staff to assist the Executive in seeking employment.
ARTICLE 8
MISCELLANEOUS
8.1 Assignment, Successors. This Agreement may not be assigned by
either party hereto without the prior written consent of the other party. This
Agreement shall be binding upon and inure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
8.2 Beneficiary. If the Executive dies during the Contract Term, the
Company shall pay as an additional death benefit (and not in lieu of any other
such benefit to which Executive may be entitled at such time) the Annual Base
Salary under paragraph 3.01 for the remainder of the Contract Term in a lump
sum payment to the Executive's beneficiary or beneficiaries designated in
writing by the Executive (collectively the "Beneficiary") and if no such
Beneficiary is designated, to the Executive's estate; provided, however, that
such sum shall be reduced by the amounts, if any, that are paid to the
Beneficiary or the estate of Executive, as the case may be, under the Salary
Continuation Agreement during the remainder of the Contract Term.
8.3 Nonalienation of Benefits. Benefits payable under this Agreement
shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution or
levy of any kind, either voluntary or involuntary, prior to actually being
received by the Executive, and any such attempt to dispose of any right to
benefits payable hereunder shall be void.
8.4 Severability. If all or any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not serve to invalidate any portion of this
Agreement not declared to be unlawful or invalid. Any paragraph or part of a
paragraph so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such paragraph or
part of a paragraph to the fullest extent possible while remaining lawful and
valid.
<PAGE>
8.5 Amendment and Waiver. This Agreement shall not be altered,
amended or modified except by written instrument executed by the Company and
the Executive. A waiver of any term, covenant, agreement or condition
contained in this Agreement shall not be deemed a waiver of any other term,
covenant, agreement or condition and any waiver of any other term, covenant,
agreement or condition, and any waiver of any default in any such term,
covenant, agreement or condition shall not be deemed a waiver of any later
default thereof or of any other term, covenant, agreement or condition.
8.6 Notices. All notices and other communications hereunder shall be
in writing and delivered by hand or by first class registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: DYNATRONICS CORPORATION
7030 Park Centre Drive
Salt Lake City, Utah 84121
With a copy to: DURHAM, EVANS, JONES & PINEGAR
Attn: Kevin R. Pinegar, Esq.
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
If to the Executive: Larry K. Beardall
8898 Cobblestone Way
Sandy, Utah 84093
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective
when actually received by the addressee.
8.7 Counterpart Originals. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.8 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in the Agreement.
8.9 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of Utah,
without regard to its choice of law principles.
8.10 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises and representations regarding employment by the
Company and severance or other payments contingent upon termination of
employment not referenced by this agreement. Notwithstanding the foregoing,
the Executive shall be entitled to any other severance plan applicable to
other senior executives of the Company.
<PAGE>
8.11 Extension or Renegotiation. The parties hereto agree that at any
time prior to the expiration of this Agreement, they may extend or renegotiate
this Agreement upon mutually agreeable terms and conditions.
IN WITNESS WHEREOF the parties have executed this Employment Agreement
on the date first written above.
DYNATRONICS CORPORATION,
a Utah corporation
By: /s/ Kelvyn H. Cullmore, Jr.
----------------------------
Name: Kelvyn H. Cullimore, Jr.
Title: President
LARRY K. BEARDALL,
an individual
/s/ Larry K. Beardall
--------------------------------
Larry K. Beardall
<PAGE>
EXHIBIT A
Responsibilities and Authority of Executive Vice President, Sales and Marketing
Responsibilities:
Second in command of the Company
Assumes responsibility of President/CEO in the latter's absence
Manages and directs all Sales and Marketing functions
Hiring of personnel
Develops Sales and Marketing strategies
Develops product definition for all manufactured products
Drives for improvement of existing products
Establishes Customer Service Policies and Procedures
Evaluates products for distribution
Management Team Member
Member Board of Directors
Authority:
Acts in full stead of President/CEO in the latter's absence
Fully empowered to decide and implement Marketing and Sales strategies
including retaining and dismissing the services of dealers and sales
representatives
Establishment of incentive programs within allowed budgets
Hires needed personnel to meet the Marketing and Sales business plan
(compensation packages require advance approval of the President/CEO)
Approves expenditures for sales travel, trade shows, advertising and
other budget categories within his purview (as approved by the Board)
Latitude to discount sales as appropriate
May grant exceptions to Company policies for employees under his management
Signs Purchase Orders for equipment, supplies, and services for his
department: </= $5,000 (Higher amounts require approval of President/CEO)
Approves selling price of all Dynatronics for-sale product
Approves non-manufactured products for distribution
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