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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, 1999.
[ ] 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
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(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, zip code, 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 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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registraut'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]
The issuer's revenues for the fiscal year ended June 30, 1999 were
$15,956,798. The aggregate market value of the voting common stock held by
non-affiliates of the issuer was approximately $7,160,000 as of September 22,
1999, based on the average bid and asked price on that date.
The number of shares outstanding of each of the issuer's classes of common
stock as of September 22, 1999 was:
Class Shares Outstanding
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Common Stock, no par value 8,738,294
The Company hereby incorporates information required by Part III (Items 11 and
12) of this report by reference to the Company's definitive proxy statement to
be filed pursuant to Regulation14A and provided to shareholders subsequent to
the filing of this report.
Transitional Small Business Disclosure
Format (Check One):
Yes No X
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PART I
Item 1. Description of the Business
Dynatronics Corporation ("Dynatronics" or the "Company"), a Utah
corporation, was organized April 29, 1983. The principal business of the
Company is the design, manufacture and sale of medical and aesthetic products
including: 1) medical devices for therapeutic applications, 2) medical
supplies and soft goods, 3) treatment tables and rehabilitation products for
use by practitioners and 4) aesthetic products and 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 January 1997, the Company acquired certain assets in Columbia, South
Carolina to begin manufacturing physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products. In
July 1999, the Company consolidated this operation into its Chattanooga,
Tennessee facility to increase efficiencies.
In fiscal year 1999, the Company expanded into the aesthetic products
market with the introduction of the new Synergie AMS device. This new product
incorporates therapeutic massage technology to achieve, among other things, a
temporary reduction in the appearance of cellulite-a claim for which the
Company received clearance by the U.S. Food and Drug Administration during
fiscal year 1999. This claim is strongly supported by a Company-sponsored
research study in which 91% of participants reported favorable reductions in
the appearance of cellulite. In conjunction with the Synergie AMS device, the
Company markets accessory items as well as a line of nutritional supplements
manufactured to proprietary specifications. These devices, accessories and
nutritional supplements comprise the Synergie Lifestyle System.
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. The Company's products are used
primarily by physical therapists, chiropractors, sports medicine
practitioners, podiatrists, plastic surgeons, dermatologists, and other
aesthetic services providers.
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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 one of the most common modalities used in physical
therapy today for the treatment of pain relief, muscle spasms and joint
contractures.
"50 Series Plus" Products
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 further 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 35% of total sales revenue in
fiscal year 1999.
Iontophoresis
In fiscal year 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 IIr and Microphorr 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 treatment of inflammation through
the use of a disposable electrode. The products sold by the Company include
the electrical current generating device (Microphorr and Iontophor IIr) 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 1999.
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Schedule of Therapy Products
Manufactured and/or Distributed by Dynatronics
[CAPTION]
<TABLE>
When
Product Name Description Introduced
- ------------ ----------- ----------
<S> <C> <C>
Dynatron 125 Ultrasound 1st quarter fiscal year 1997
Dynatron 525 Electrotherapy 1st quarter fiscal year 1997
Iontopho II & Iontophoresis 1st quarter fiscal year 1997
Microphor +
Dynatron 150 Plus** Ultrasound 3rd quarter fiscal year 1997
Dynatron 550 Plus** Multi-modality Electrotherapy 3rd quarter fiscal year 1997
Dynatron 650 Plus** Multi-modality Electrotherapy 3rd quarter fiscal year 1997
Dynatron 850 Plus** Combination Electrotherapy/ 3rd quarter fiscal year 1997
Ultrasound
Dynatron 950 Plus** Combination Electrotherapy/ 3rd quarter fiscal year 1997
Ultrasound
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</TABLE>
Dynatron is a registered trademark (#1280629) owned by Dynatronics
Iontophor II and Microphor are registered trademarks owned by Life Tech, Inc.
** "50 Series Plus" Product Line
+ Both manufactured by Life-Tech
Medical Supplies and Soft Goods
In May 1999, the Company introduced its 1999-2000 product catalog
containing 300 new products. In all, this catalog contains an extensive line
of approximately 900 products. With the introduction of the expanded 1999-
2000 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, 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, Thera-Band? 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.
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Thera-Band is a registered trademark of Hygenic Corp.
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Treatment Tables and Rehabilitation Equipment
In January 1997, the Company acquired a metal treatment table
manufacturing operation in Columbia, South Carolina. In July 1999, the
Company consolidated this operation into its Chattanooga facilities in order
to improve efficiencies. Products currently manufactured and distributed
include motorized and manually-operated physical therapy treatment tables,
rehabilitation parallel bars, and other specialty rehabilitation products.
As a result of the acquisitions of Superior 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.
Aesthetic Products
In July 1998, the Company began shipments of its new Synergie line of
products, referred to as the Synergie Lifestyle System. The centerpiece of
this new line of aesthetic products is the Synergie AMS device which applies
therapeutic massage to skin and subcutaneous tissues to, among other things,
achieve a temporary reduction in the appearance of cellulite-a claim for
which the Company received U.S. Food and Drug Administration clearance during
the fiscal year.
In December 1999, the Company released the results of a Company-
sponsored study which revealed that 91% of participants reported experiencing
a reduction in the appearance of cellulite. In addition, participants, on
average, showed a six inch composite loss in girth around the hips, thighs,
buttocks and arms.
While undergoing treatments, a patient wears a special body suit to
facilitate proper technique and to insure modesty. This body suit is part of
the line of accessory products sold by the Company to Synergie practitioners.
In addition, the Company offers a special motorized treatment table designed
specifically to accommodate Synergie treatments.
The Synergie Lifestyle System incorporates Synergie AMS treatments with
proper exercise and nutrition to achieve optimal results. To assist in proper
nutrition, the Company, with the assistance of knowledgeable consultants,
developed and introduced as part of the Synergie Lifestyle System, a line of
nutritional supplements including an Anti-Oxidant complex,
Multivitamin/Mineral compound, St. John's Wort formulations and a Calcium
supplement. Trademarked "SynergieNSP," these nutritional supplements will
be marketed through clinics offering the Synergie Lifestyle System treatments,
and through other direct marketing channels.
The Synergie line of products is the Company's first foray into
aesthetic products. In the opinion of management, the aesthetic products
market carries much potential for future development and growth.
Allocation of Sales Among Key Products
The Synergie AMS device and related products accounted for approximately
23% of the Company's sales in fiscal year 1999. No other single product
accounted for more than 15% of the Company's revenues during any of the last
two fiscal years. Therapy devices and related products represented
approximately 52% and 35% of total sales in 1998 and 1999, respectively.
Medical supplies and soft goods accounted for 40% and 35% of total sales in
1998 and 1999, respectively.
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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 the emitting device is reduced to a point of providing a
mild stimulation to body tissues and functions. Biostimulation is a claimed
therapeutic application of the low-power 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 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 a
low-power laser device. Instead, the Company continues to seek indications of
efficacy 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 a low-power laser device.
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 its multi-frequency ultrasound technology which will remain in
effect until June 2013. A patent pertaining to the Company's new Synergie AMS
device was filed with the patent office during this past year and is currently
pending.
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 one year 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 Company's Salt Lake City and Chattanooga
facilities, according to the service required. These warranty policies are
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comparable to warranties generally available in the industry. Warranty
claims as a percentage of gross sales were not material in fiscal years 1998
and 1999.
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 250
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 and
aestheticians.
The Company has entered into preferred vendor relationships with certain
national chains of physical therapy clinics and hospitals. No single dealer
or national account or group of related accounts was responsible for 10% or
more of total sales in fiscal years 1998 or 1999.
The Company exports products to approximately 25 different countries.
International sales (i.e., sales outside North America) represented
approximately $652,400, or 5% of the Company's total sales in fiscal 1998 and
approximately $522,200, or 3% of sales in fiscal 1999. The reduction in
foreign sales is directly related to Asia's economic and financial troubles
which have affected sales in that region.
In June 1999, the Company completed requirements to market its 50
Series Plus products in the European Union and anticipates sales ramping up in
that region in fiscal year 2000. 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, Rich-Mar, Mettler Electronics,
Excel Tech, Ltd., Amrex and Williams Healthcare.
Medical Supplies & Soft Goods. The Company competes against various
manufacturers and distributors of medical supplies and soft goods, some of
which 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
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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 believes that Dynatronics' strong
distribution network is important to its continued ability to compete against
these larger companies. In addition, the Life-Tech products are
conspicuously priced lower than either IOMED or EMPI.
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.
Aesthetic Products. 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 utilizes unique processes
and technology which are the subject of a patent applied for by the Company,
and also 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 which are part of the
Synergie Lifestyle System 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 and Chattanooga, Tennessee. 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 and Chattanooga. 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 regulations.
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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 Quality First Program reinforces employee pride, increases
customer satisfaction, and improves overall operations of the Company.
During fiscal year 1999, the Company qualified for ISO 9002 Registration
which is an internationally recognized standard for quality systems and
manufacturing processes adopted by over 90 countries. In addition, the
Company qualified for the CE Mark Certification on its 50 Series Plus
products. The Company is now able to market these products throughout the
European Union and in other countries. It is anticipated that during the
coming fiscal year, Dynatronics will qualify for full ISO 9001 certification-
a recognized world-wide standard for quality systems.
Research and Development
The Company has historically been very committed to research and
development. In 1998 and 1999 the Company expended $574,822 and $581,186,
respectively, for research and development which represented approximately
4.7% and 3.6% of the gross revenues of the Company in those years,
respectively. 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 in fiscal year 2000.
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 Food and Drug Administration (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 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, as amended ("DSHEA"). The
<PAGE>
DSHEA revised provisions of the FDC Act concerning the regulation of 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 which became effective in March
1999. All companies in the dietary supplement industry are required to comply
with these labeling regulations. The Company believes it is 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.
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.
<PAGE>
Employees
On June 30, 1999, the Company had a total of 134 full-time employees and
8 part-time employees, compared to 124 full-time and 7 part-time employees as
of June 30, 1998. The increase in number emloyees is primarily the result of
the introduction of 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 $16,325. 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 $7,182. The mortgage matures in 2012.
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.
The Company believes the facilities described above 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 its products. 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.
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 1999
---- ----
High Low High Low
--------------------------------------------
1st Quarter (July-September) $1.40 $ .78 $5.88 $2.31
2nd Quarter (October-December) $1.47 $ .88 $3.88 $1.88
3rd Quarter (January-March) $1.47 $ .88 $3.25 $1.50
4th Quarter (April-June) $3.88 $1.34 $1.72 $1.00
Holders. As of September 22, 1999, the approximate number of common
stock shareholders of record was 540. 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. 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 1998, the Company granted options pursuant to stock
option plans or employment or other agreements. The total number of shares of
common stock issuable under such options is 404,037 shares with an average
exercise price of $1.00. In 1999, the Company granted options pursuant to
stock plans. The total number of shares of common stock issuable under such
options is 195,791 shares with an average exercise price of $2.03. These
options were issued without registration under the Securities Act in reliance
upon exemptions relating to grants of securities made pursuant to certain
written plans.
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.
<PAGE>
SELECTED FINANCIAL DATA
Fiscal Year Ended June 30
[CAPTION]
<TABLE>
1999 1998 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 15,956,798 12,283,064 10,160,467 6,784,748 6,112,241
Net Income (loss) $ 718,080 664,788 612,539 (193,892) 217,083
Net Income (loss)
Per share (diluted) $ .08 .07 .07 (.02) .03
Working Capital $ 4,251,703 3,502,777 3,027,119 2,616,464 3,319,272
Total Assets $ 13,854,197 11,641,948 9,642,479 8,508,609 7,187,328
Long-term Obligations $ 2,984,041 3,376,017 2,534,553 2,856,302 2,399,371
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Results of Operations
Sales for the fiscal year ended June 30, 1999 increased 30% to a record
$15,956,798, compared to $12,283,064 in fiscal year 1998, which was also a
record to that point. Sales of the Company's new Synergie products together
with increased sales of medical supplies and soft goods were primarily
responsible for the increase in sales for the fiscal year 1999. The Company
sold more than $3.5 million worth of Synergie products during the year, making
Synergie the most successful new product introduction in Dynatronics' history.
The Company's Tennessee operation has grown from $2.1 million in sales
annually to approximately $6 million in fiscal year 1999, since the Company
acquired it in May 1996.
The Company's gross margin as a percent of sales increased to 43% in
fiscal year 1999 compared to 42.3% in fiscal year 1998. Higher margins
associated with the Company's Synergie products increased overall margins.
Based on current forecasts, the Company anticipates margins will remain
relatively constant in fiscal year 2000 compared to fiscal year 1999.
The Company's 1999 selling, general and administrative (SG&A) expenses
were $4,815,287 compared to $3,542,531 in fiscal year 1998. The increase in
total SG&A expense can be attributed to two factors. First, the introduction
of the new Synergie product line required adding new personnel and the
expenditure of additional resources in sales and marketing efforts, including
advertising expense designed to familiarize the market with these innovative
products. Second, the Company's operations in Columbia, South Carolina,
encountered significant challenges in achieving efficiencies associated with
the transition to more sophisticated methods of manufacturing. The Company
incurred operating losses of approximately $330,000 for the fiscal year. As a
result, in June 1999, the Company consolidated these operations with its
Tennessee operations. This consolidation required the recognition of another
$107,000 in one-time write offs associated with the closure of the Columbia
facility. Overall, the losses associated with the Columbia operations during
fiscal year 1999 were approximately $437,000, which is reflected in the higher
SG&A expenses for the year.
During fiscal year 1999, the Company maintained its commitment to
research and development (R&D), expending $581,186 for the year, compared to
$574,822 in fiscal year 1998. R&D expenses for fiscal year 1999 were related
primarily to sustaining engineering for existing products as well as the
development of new products, including the new Synergie product line.
<PAGE>
Operating income in fiscal year 1999 increased 36% to a record
$1,472,392 compared to $1,082,477 in fiscal year 1998. This increase is due
to increased gross margin dollars generated by the 30% increase in sales.
In the year ended June 30, 1999, the Company's effective tax rate was
38% compared to 27.8% in fiscal year 1998. In fiscal year 1998, the Company
benefited from the recognition of certain tax attributes including a
determination to eliminate its reserve for deferred tax assets, which alone
lowered overall tax expense in fiscal year 1998 by approximately $37,000.
Net income for fiscal year 1999 increased 8% to a record $718,080,
compared to $664,788 in fiscal year 1998. This improvement was a direct
result of the increase in sales particularly from the introduction of the new
Synergie product line.
The Company has not been materially affected by seasonality factors in
its business operations.
Liquidity and Capital Resources
Significant growth of the Company in 1999 also resulted in growth in
inventories and accounts receivable. The Company has financed its growth
primarily through cash flow from operations and from its line of credit
facility. Inventories increased during the year by $1,807,963 to $4,492,274
at June 30, 1999. Based on initial indications of interest from the Company's
dealer network, demand for the new Synergie line of products was anticipated
to be much higher than was actually realized. Inventory levels were escalated
to meet that anticipated demand. Management expects that inventory levels
related to Synergie products will decrease during fiscal year 2000 as sales of
the new Synergie product line reduce existing inventories, which are higher
than currently required.
Trade accounts receivable during fiscal year 1999 increased $563,512 to
$2,779,486 primarily due to the introduction of the new Synergie product line.
As a result of the growth in inventories and accounts receivable, line of
credit balances increased $1,495,997 during the year. Management expects
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 upcoming year.
Working capital at June 30, 1999, totaled $4,251,703. The Company's
current ratio at June 30, 1999 was 2.0 to 1.
The Company maintains an open line of credit with a commercial bank in
the amount of $3.5 million. Interest on the line of credit is based on the
bank's index rate plus one-half percent which at June 30, 1999, equaled 8%.
The line of credit is collateralized by certain accounts receivable and
inventories. As of June 30, 1999, $2.6 million was outstanding on the line of
credit, which is renewable annually in November of each year. The line of
credit agreement contains restrictive covenants requiring the Company to
maintain certain financial ratios. As of June 30, 1999, the Company was in
compliance with these covenants.
Long-term debt excluding current installments at June 30, 1999 was
$2,364,593. This debt represents primarily the mortgages against real
property owned by the Company.
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.
<PAGE>
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 five years, Dynatronics has annually experienced double digit
growth in sales. This growth is the result of many factors including
acquisitions, strategic alliances and the introduction of new products. These
efforts culminated in fiscal year 1999 reflecting not only record sales of
almost $16,000,000, but record profits as well.
During the year, the Company introduced the most comprehensive catalog in its
history offering more than 900 products. This catalog represents years of
efforts to position Dynatronics as one of the broadest line suppliers in the
physical medicine market. More importantly, Dynatronics manufactures the most
strategic of these products, which allows the Company to achieve greater
customer satisfaction by insuring quality products and competitive pricing.
A major component of the Company's growth has been the introduction of
aesthetic products associated with the Synergie product line. Diversification
into the aesthetic products market is a key element in the Company's future
growth strategy. This potentially lucrative market is not subject to many of
the regulatory restrictions or limitations associated with capitated
reimbursement and managed care in the medical sector, which affect other
product lines offered by the Company.
The Company intends to introduce additional aesthetic products during the
coming fiscal year and make significant efforts to broaden and strengthen its
channels of distribution in this market. Management believes it has the capital
and human resources necessary to make solid progress in better establishing
the Company in this new and exciting market.
Based on first year sales, the Synergie AMS device has been the most successful
product ever introduced by the Company, despite the fact that sales did not
reach levels originally anticipated. The expectation of higher sales led to
over-purchasing of inventory and resulting increases in the Company's line of
credit to finance the higher level of inventories. Nevertheless, the proven
effectiveness of the Synergie AMS device and the increasing acceptance of the
market has caused management to remain enthusiastic about the future
potential of this unique line of products.
The Company has determined that it will expand its sales effort by establishing
a direct sales force for the Synergie line and other products designed
specifically for the aesthetics market. By having Company representatives in
the field there will be a more focused effort in the sales of these products,
which are expected to result in increased revenues and profits. In the regions
where existing dealers have been committed to Synergie and have established
separate sales representatives for the product line, the Company will not make
any changes. However, Company representatives eventually will be placed in all
other parts of the country. These efforts have already begun, and it is felt
that it will require at least a year to put the full sales force in place.
<PAGE>
Establishing the new sales organization will be costly, which will negatively
impact earnings during fiscal 2000. Management feels that the long-term
benefit of establishing a major distribution channel to the aesthetics market
will justify the short-term disadvantage. Shareholder value should be
significantly affected in a very positive way by the financial benefits which
are projected to accrue from this reorganization.
The Company's commitment to this method of sales and distribution is
underscored by the fact that Kelvyn H. Cullimore Sr., the Company's Chairman,
is personally taking the responsibility of establishing the direct sales
network.
The introduction of new aesthetic products and these enhancements in the sales
and distribution methods will serve as the primary strategies in developing
this market in the coming year.
The past year was also challenging in the rehabilitation products market. In
January 1999, Medicare implemented new regulations which capitated
reimbursement for many types of therapy, including physical therapy. This
resulted in a temporary decline in demand for rehabilitation products such as
those marketed by Dynatronics.
The Company also experienced operating losses at its Columbia, South Carolina
facility, as described above. An attempt to change to more sophisticated
methods of manufacturing in that facility created inefficiencies that led to
unacceptable operating losses. Therefore, management decided to consolidate
the Columbia operations with the Tennessee facility. Arrangements have been
made with key vendors to sub-contract portions of the manufacturing process,
allowing the Company to retain a valued line of products and eliminating
overhead associated with the Columbia facility.
Some continuing expenses related to the shut down of the Columbia plant will be
recognized during fiscal year 2000 since the transition did not occur until
July 1999. The changes should result in the elimination of more than
$200,000 in losses from fiscal year 1999 to fiscal year 2000.
In response to the recent challenges of the rehabilitation products market, the
Company has made changes to reduce overhead and realign responsibilities.
These changes generated annual savings of $350,000. However, only about
half of the changes are expected to be permanent since anticipated growth
will require filling some positions in the latter half of fiscal year 2000.
Over the coming year, efforts will be focused on improving market share in the
rehabilitation products market through strengthening lines of distribution, re-
engineering key product lines and focusing on improving brand recognition of
the most important product lines.
Providing additional impetus to the growth for the next fiscal year is the
potential of opening more international markets in Europe. During the past
year, Dynatronics line of electrotherapy and ultrasound products were
certified for sale in European Union countries. This was made possible by
the completion of ISO 9002 registration and the awarding of the CE Mark to the
Company's "50 Series Plus" line of products. Even so, management recognizes
that success in foreign markets is not assured and will require sustained
effort over time.
A key component in the Company's past growth strategy has been the pursuit of
strategic acquisitions and business alliances. This component will continue to
be evaluated as part of the Company's ongoing strategy for growth. The Company
utilizes very strict criteria in evaluating potential acquisitions and
alliances to minimize risk and to improve the proper fit of any acquisition or
alliance.
<PAGE>
Looking forward, the Company will focus its resources in the following areas:
Improving distribution in the aesthetic products market
Introducing new aesthetic products
Strengthening distribution of rehabilitation products
Re-engineering key rehabilitation product lines
Initializing distribution of products in Europe
Evaluating key opportunities for growth through strategic acquisitions
and business alliances.
The business strategies of the past have yielded steady growth over the last
five years. Recent consolidations and reductions in overhead will allow for
more efficient and profitable operations in the coming year. Pursuit of
these key strategies will not come without a cost. Every effort will be
made to effectively manage those costs. The accomplishment of these
objectives is considered critical to achieving future growth of the Company
beyond fiscal year 2000.
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 and aesthetic 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 which adds to the expense of doing
business and, if violated, could adversely affect the Company's financial
condition and results of operations.
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.
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 matters, all such actions have
been insured against. 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
<PAGE>
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 and Tennessee. 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 facilities 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.
Dependence on Patents and Proprietary Rights. The Company has three
patents and one patent pending 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 a patent will issue from the pending patent
application. 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
<PAGE>
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 sells its products 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.
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 has carefully evaluated all of its internal
computer information technology (IT) systems and non-IT systems as well as
marketed products to insure they are Year 2000 compliant. As a result of the
evaluation efforts, the Company has identified one product component requiring
modification and has engaged the services of a consultant to make this product
Year 2000 compliant. The Company's total cost relating to these activities
has not been and is not expected to be material to the Company's financial
position.
With respect to third-party providers whose services are critical to the
Company, the Company has been monitoring 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
<PAGE>
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.
Item 7. Financial Statements
The consolidated financial statements and accompanying report of the
Company's auditors follow immediately and form a part of this report.
<PAGE>
Independent Auditors' Report
The Board of Directors
Dynatronics Corporation:
We have audited the accompanying balance sheet of Dynatronics Corporation as
of June 30, 1999 and the related statements of income, stockholders' equity,
and cash flows for each of the years in the two-year period ended June 30,
1999. 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, 1999, and the results of its operations and its cash flows for
each of the years in the two-year period ended June 30, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Salt Lake City, Utah
August 13, 1999
<PAGE>
DYNATRONICS CORPORATION
Balance Sheet
June 30, 1999
[CAPTION]
<TABLE>
Assets
Current assets:
<S> <C>
Cash and cash equivalents $ 628,349
Trade accounts receivable, less allowance for
doubtful accounts of $114,238 (note 4) 2,779,486
Related party and other receivables (note 7) 84,159
Inventories (notes 2 and 4) 4,492,274
Prepaid expenses 109,626
Prepaid income taxes 170,793
Deferred tax asset - current (note 8) 174,039
-----------------
Total current assets 8,438,726
Property and equipment, net (notes 3 and 5) 3,529,685
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $403,937 1,060,237
Deferred tax asset - noncurrent (note 8) 155,606
Other assets 669,943
-----------------
$ 13,854,197
=================
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 5) $ 245,053
Line of credit (note 4) 2,611,638
Accounts payable 771,428
Accrued expenses 338,548
Accrued payroll and benefit expenses 220,356
-----------------
Total current liabilities 4,187,023
Long-term debt, excluding current installments (note 5) 2,364,593
Deferred compensation (note 12) 619,448
-----------------
Total liabilities 7,171,064
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued and outstanding 8,702,994 shares 2,391,826
Treasury stock, 35,584 common shares at cost (120,096)
Retained earnings 4,411,403
-----------------
Total stockholders' equity 6,683,133
-----------------
Commitments and contingencies (notes 6 and 12)
$ 13,854,197
=================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DYNATRONICS CORPORATION
Statement of Income
Years ended June 30, 1999 and 1998
[CAPTION]
<TABLE>
1999 1998
-------------- -------------
<S> <C> <C>
Net sales $ 15,956,798 12,283,064
Cost of sales 9,087,933 7,083,234
-------------- -------------
Gross profit 6,868,865 5,199,830
Selling, general, and administrative expenses 4,815,287 3,542,531
Research and development expense 581,186 574,822
-------------- -------------
Operating income 1,472,392 1,082,477
Other income (expense):
Interest income 11,412 825
Interest expense (384,577) (238,191)
Other income, net (note 7) 58,828 75,984
-------------- ------------
Total other income (expense), net (314,337) (161,382)
-------------- ------------
Income before income taxes 1,158,055 921,095
Income tax expense (note 8) 439,975 256,307
-------------- -------------
Net income $ 718,080 664,788
============== =============
Basic net income per share $ 0.08 0.08
============== =============
Diluted net income per share $ 0.08 0.07
============== =============
Weighted average basic and diluted common shares outstanding:
Basic 8,676,641 8,432,462
Diluted 9,025,809 9,076,528
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DYNATRONICS CORPORATION
Statements of Stockholders' Equity
Years ended June 30, 1999 and 1998
[CAPTION]
<TABLE> Total
Common Treasury Retained stockholders'
stock stock earnings equity
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1997 $ 1,984,026 0 3,028,535 5,012,561
Issuance of 19,496 shares of common stock upon
exercise of employee stock options (note 10) 14,279 0 0 14,279
Income tax benefit from disqualifying disposition
of employee stock options 1,912 0 0 1,912
Net income 0 0 664,788 664,788
----------- --------- ---------- -------------
Balances at June 30, 1998 2,000,217 0 3,693,323 5,693,540
Issuance of 291,235 shares of common stock upon
exercise of employee stock options (note 10) 260,628 0 0 260,628
Income tax benefit from disqualifying disposition
of employee stock options 130,981 0 0 130,981
Acquisition of 35,584 common shares 0 (120,096) 0 (120,096)
Net income 0 0 718,080 718,080
----------- --------- ---------- -------------
Balances at June 30, 1999 $ 2,391,826 (120,096) 4,411,403 6,683,133
=========== ========= ========== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DYNATRONICS CORPORATION
Statements of Cash Flows
Years ended June 30, 1999 and 1998
[CAPTION]
<TABLE>
1999 1998
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 718,080 664,788
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property and equipment 275,466 195,518
Other amortization 92,215 97,707
Loss on disposal of assets 40,639 0
Provision for doubtful accounts 24,000 16,800
Provision for inventory obsolescence 38,839 114,000
Provision for warranty reserve 221,179 163,306
Deferred compensation 88,334 84,084
Changes in operating assets and liabilities:
Receivables (670,454) (4,224)
Inventories (1,807,963) (656,890)
Prepaid expenses and other assets 110,635 (347,106)
Deferred tax assets (29,621) (38,358)
Income taxes payable 0 (99,250)
Accounts payable and accrued expenses (92,242) (231,482)
----------- ------------
Net cash used in operating activities (990,893) (41,107)
----------- ------------
Cash flows from investing activities - capital expenditures (103,898) (135,286)
----------- ------------
Cash flows from financing activities:
Principal payments under capital lease obligations 0 (4,968)
Principal payments on long-term debt (661,488) (174,547)
Net change in line of credit 1,495,997 545,113
Proceeds from issuance of common stock 140,532 14,279
----------- ------------
Net cash provided by financing activities 975,041 379,877
----------- ------------
Net increase (decrease) in cash and cash equivalents (119,750) 203,484
Cash and cash equivalents at beginning of year 748,099 544,615
----------- ------------
Cash and cash equivalents at end of year $ 628,349 748,099
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net of amounts capitalized $ 376,309 229,552
Cash paid during the year for income taxes 489,800 387,700
Supplemental disclosures of noncash investing and financing activities:
Long-term debt incurred for fixed assets $ 158,051 1,038,146
Income tax benefit from nonemployee exercise of stock options 130,981 1,912
Treasury stock acquired in consideration for common stock issued as
a result of a cashless stock option exercise 120,096 0
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DYNATRONICS CORPORATION
Notes to Financial Statements
June 30, 1999 and 1998
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) Basis of Presentation
Dynatronics Corporation (the Company) manufactures, markets, and
distributes a broad line of therapeutic, diagnostic, and
rehabilitation equipment, medical supplies and soft goods, treatment
tables, and aesthetic massage devices to an expanding market of
physical therapists, podiatrists, orthopedists, chiropractors,
plastic surgeons, dermatologists, and other medical professionals.
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 $2,680 at June 30, 1999. At
June 30, 1999, 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 2 to 7
years.
(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>
(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) Earnings Per Common Share
Basic earnings per common share is the amount of earnings for the
period available to each share of common stock outstanding during the
reporting period. Diluted earnings per common share is the amount of
earnings for the period available to each share of common stock
outstanding during the reporting period and to each share that would
have been outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
A reconciliation between the basic and diluted weighted average
number of common shares for 1999 and 1998 is summarized as follows:
June 30,
------------------------------
1999 1998
-------------- -------------
Basic weighted average number of common
shares outstanding during the period 8,676,641 8,432,462
Weighted-average number of dilutive common
stock options outstanding during the period 349,168 644,066
-------------- -------------
Diluted weighted average number of common and
common equivalent shares outstanding during
the period 9,025,809 9,076,528
============== =============
There were no potential common shares outstanding during the twelve
month periods ended June 30, 1999 and 1998, that could potentially
dilute basic earnings per share in the future that were not included
in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the period.
<PAGE>
(j) 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.
(k) Stock Based Compensation
The Company employs the footnote disclosure provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock Based Compensation. SFAS 123 encourages entities to adopt a
fair value based method of accounting for stock options or similar
equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock based compensation using the
intrinsic-value method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures
required by SFAS No. 123.
(l) Concentration of Risk
In the normal course of business, the Company provides unsecured
credit terms to its customers. Most of the Company's customers are
involved in the medical industry. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range of
management's expectations.
(m) Operating Segments
The Company operates in one line of business, the development,
marketing, and distribution of a broad line of physical therapy
products. As such, the Company has only one reportable operating
segment as defined by the Financial Accounting Standards Board
Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information.
(n) 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.
<PAGE>
(o) Fair Value Disclosure
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.
(2) Inventories
Inventories consist of the following:
Raw materials $3,053,843
Finished goods 1,553,430
Inventory reserve (114,999)
----------
$4,492,274
==========
(3) Property and Equipment
Property and equipment consist of the following:
Land $ 354,744
Buildings 2,787,553
Machinery and equipment 1,408,584
Office equipment 244,774
Vehicles 26,754
----------
4,822,409
Less accumulated depreciation
and amortization 1,292,724
----------
$3,529,685
==========
(4) Line of Credit
The Company has available with a commercial bank a revolving line of
credit agreement totaling $3.5 million at June 30, 1999. The agreement
requires letter of credit fees and is secured by trade receivables and
inventories. The line requires the monthly payment of interest on
outstanding balances at prime plus one-half percent (8.0 percent at June
30, 1999). The line expires on November 30, 1999.
<PAGE>
(5) Long-term Debt
Long-term debt consists of the following:
7.11% promissory note secured by a trust deed on real
property, payable in monthly installments of $8,708
through November 2003 $ 715,817
6.21% promissory note secured by a trust deed on real
property, maturing November 2013, payable in decreasing
installments beginning at $7,545 monthly ($7,060 during
1999) 802,964
9.0% promissory note secured by a vehicle, payable in
monthly installments of $534 through May 2000 5,144
8.65% promissory note secured by a trust deed on real
property, payable in monthly installments of $7,182 through
January 2012 659,794
8.96% - 9.07% term loans secured by fixed assets, payable in
monthly installments of $7,607 through April 2001 to July
2003 272,788
8.87% promissory note secured by fixed assets payable in
monthly installments of $4,382 through July 2002 138,065
10.97% promissory note secured by fixed assets payable in
monthly installments of $654 through September 2001 15,074
---------
Total long-term debt 2,609,646
Less current installments 245,053
---------
Long-term debt, excluding current installments $2,364,593
=========
The aggregate maturities of long-term debt for each of the years
subsequent to June 30, 1999 are as follow: 2000, $245,053; 2001,
$259,208; 2002, $258,498; 2003, $212,196; 2004, $163,681; and thereafter
$1,471,010.
(6) Leases
The Company leases building space, equipment, and vehicles under
noncancelable operating lease agreements. Rent expense for the years
ended June 30, 1999 and 1998, was $68,515 and $41,746, respectively.
Future minimum rental payments required under noncancelable operating
leases that have initial or remaining lease terms in excess of one year
as of June 30, 1999, is $14,959 payable in fiscal year 2000.
<PAGE>
(7) Related Party Transactions
The Company had a services agreement to provide certain administrative
and accounting services for ITEC which expired in May 1998. Estimated
costs for services were prorated based upon personnel time, facilities,
and services used. Management believes the method used to allocate the
costs of services provided was reasonable. Such charges resulted in
other income to the Company of $61,500 in 1998.
(8) Income Taxes
Income tax expense for the years ended June 30, consists of:
Stock
option
Current Deferred benefit Total
------- -------- ------- --------
1999:
U.S. federal $278,853 (21,625) 112,000 369,228
State and local 57,742 (7,995) 21,000 70,747
-------- -------- -------- --------
$336,595 (29,620) 133,000 439,975
======== ======== ======== ========
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
======== ======== ======== ========
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:
1999 1998
-------- --------
Expected tax expense (benefit) $393,739 313,172
State taxes, net of federal tax benefit 46,692 27,374
Meals and entertainment 2,315 3,060
Amortization of goodwill not deductible 2,985 2,985
Research and development credits (11,820) (22,942)
Reduction in valuation allowance - (37,300)
Other, net 6,064 (30,042)
-------- --------
$439,975 256,307
======== ========
<PAGE>
Deferred income tax assets related to the tax effects of temporary
differences are as follows:
Net deferred tax asset - current:
Inventory capitalization for income tax purposes $55,267
Obsolete inventory reserve 42,895
Vacation reserve 3,730
Warranty reserve 23,872
Accrued product liability 11,114
Bad debt reserve 37,161
--------
Total deferred tax asset - current $174,039
========
Net deferred tax asset - noncurrent:
Salary continuation agreements $231,054
Net operating loss carryforwards 77,504
Property and equipment, principally due to
differences in depreciation (159,963)
Noncompete and goodwill amortization 7,011
--------
Total deferred tax asset - noncurrent $155,606
========
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 $900,000 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 that 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 $133,605
2004 63,383
2005 1,899
2006 60
2007 29,007
--------
$227,954
========
<PAGE>
(9) Major Customers
During the fiscal years ended June 30, 1999 and 1998, sales to any single
customer did not exceed ten percent of total revenues.
(10) 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:
1999 1998
Weighted Weighted
average average
Number exercise Number exercise
of shares price of shares price
--------- --------- ---------- --------
Options outstanding at
beginning of year 886,832 $.95 532,321 $.91
Options granted 195,791 2.03 404,037 1.00
Options exercised 291,235 .89 19,496 .73
Options canceled or
expired 135,598 1.41 30,030 1.02
------- -------
Options outstanding
at end of year 655,790 1.18 886,832 .95
======= =======
Options exercisable
at end of year 422,503 .93 391,855 .86
======= =======
Range of exercise prices
at end of year .72-2.03 .72-1.28
On November 17, 1998, the Company's shareholders approved an increase in
the authorized number of shares available in the Company's stock option
plan from 1 million to 2.5 million.
At June 30, 1999, 1,459,879 shares of common stock were authorized and
reserved for issuance, but were not granted under the terms of the stock
option plan.
<PAGE>
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 elected to use the intrinsic-value method. Accordingly, no
compensation expense has been recognized for the stock option plans.
Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1999
and 1998, consistent with the provisions of SFAS 123, the Company's
results of operations would have been reduced to the pro forma amounts
indicated below:
June 30,
-----------------------------
1999 1998
------------ -----------
Net income - as reported $718,080 664,788
Net income - pro forma 514,516 624,957
Earnings per share - as reported .08 .08
Earning per share - pro forma .06 .08
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:
June 30,
-----------------------------
1999 1998
------------ -----------
Expected dividend yield 0% 0%
Expected stock price volatility 85.23% 90.4%
Risk-free interest rate 4.70% 5.25%
Expected life of options 5.0 & 7.0 years 3.5 & 5.0 years
The weighted average fair value of options granted during 1999 and 1998
was $1.57 and $.725, respectively.
(11) 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 1999 and 1998, 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 1999 and 1998
were $20,537 and $14,259, respectively. Company matching contributions
for future years are at the discretion of the Board of Directors.
<PAGE>
(12) 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, 1999, the Company has accrued $619,448 of deferred
compensation under the terms of the Agreements.
(13) Columbia Operation Closure
During the last month of fiscal 1999, the Company's management decided to
close its Columbia, South Carolina manufacturing facility in the first
quarter of fiscal 2000. The operations will be moved to its Chattanooga
facility or contracted to a third party. As a result of the plan, the
Company has expensed $68,000 in prepaid lease costs related to a
manufacturing facility abandoned, and recorded an impairment loss for
leasehold improvements and manufacturing equipment of $39,000. Certain
severance costs totaling approximately $15,000 associated with the
closure will be recorded in fiscal 2000, the period during which such
arrangements were communicated to affected employees. The closure
related costs are included in selling, general and administrative
expenses.
<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 22,
1999 are:
Director
or Officer Position
Name Age Since with Company
Kelvyn H. Cullimore 64 1983 Chairman of the Board
Kelvyn H. Cullimore, Jr. 43 1983 President, CEO and Director
Larry K. Beardall 43 1986 Executive Vice President
of Sales and Marketing
and Director
E. Keith Hansen, M.D. 54 1983 Director
Joseph H. Barton 71 1996 Director
Howard L. Edwards 68 1997 Director
Val J. Christensen 46 1999 Director
John S. Ramey 48 1992 Sr. Vice President of
Operations
Kelvyn H. Cullimore is the father of Kelvyn H. Cullimore, Jr. No other
family relationships exist among officers and directors of the Company.
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.
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
<PAGE>
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. From 1986 until 1999, Mr. Cullimore
served as President of ITEC Attractions and from 1986 to 1997, he served as
ITEC's Chairman, President and CEO. He currently serves on the board of
directors 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.
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 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. 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.
<PAGE>
Val J. Christensen was appointed to the Board in January 1999. Since
1990, Mr. Christensen has served as Executive Vice President and General
Counsel of Franklin Covey Company. He also served on Franklin's Board of
Directors from 1989 to 1996. Prior to joining Franklin Covey, Mr. Christensen
was a partner in the international law firm of LeBoeuf, Lamb, Leiby & MacRae,
headquartered in New York City. Following graduation from law school in 1980,
Mr. Christensen served as a law clerk to the Honorable James K. Logan of the
United States Tenth Circuit Court of Appeals. He is an honors graduate of the
Brigham Young University School of Law and served as articles editor of the
BYU Law Review.
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.
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 10% of a
registered class of the Company's equity securities ("Reporting Persons") to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Reporting Persons 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, 1999, the Company
believes that during its 1999 fiscal year all Section 16(a) filings applicable
to these Reporting Persons 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
1999, 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 Thereof," contained in the Company's
definitive proxy statement for 1999, 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
During fiscal year 1998, the Company charged ITEC Attractions $61,500 for
services provided by the Company. 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 year 1997, ITEC Attractions' Plan of Reorganization
was approved by the U.S. Bankruptcy Court for the Western District of Missouri
and ITEC was subsequently discharged from bankruptcy. The Company's Chairman,
Kelvyn H. Cullimore served as ITEC's Chairman from 1986 until 1997 and served
<PAGE>
as ITEC's President from 1986 to 1999. Mr. Cullimore and the Company's
President, Kelvyn H. Cullimore, Jr., currently serve as directors 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, 1999 F-2
Statements of Income for years ended
June 30, 1999 and 1998 F-3
Statements of Stockholders'
Equity for years ended June 30, 1999
and 1998 F-4
Statements of Cash Flows for
years ended June 30, 1999 and 1998 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.
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, 1999
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 , 1999
- -------------------------- -----------
Kelvyn H. Cullimore
/s/ Kelvyn H. Cullimore, Jr. Director, President, CEO 9/23 , 1999
- --------------------------- (Principal Executive -----------
Kelvyn H. Cullimore, Jr. Officer and Principal
Financial and Accounting
Officer)
/s/ Larry K. Beardall Director, Executive 9/23 , 1999
- --------------------------- Vice President -----------
Larry K. Beardall
/s/ E. Keith Hansen, M.D. Director 9/23 , 1999
- --------------------------- ----------
E. Keith Hansen, M.D.
/s/ Joseph H. Barton Director 9/23 , 1999
- --------------------------- -----------
Joseph H. Barton
Director , 1999
- --------------------------- -----------
Howard L. Edwards
/s/ Val J. Christensen Director 9/23 , 1999
- --------------------------- -----------
Val J. Christensen
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF INCOME 6-30-99 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 628,349
<SECURITIES> 0
<RECEIVABLES> 2,893,724
<ALLOWANCES> 114,238
<INVENTORY> 4,492,274
<CURRENT-ASSETS> 8,438,726
<PP&E> 4,822,409
<DEPRECIATION> 1,292,724
<TOTAL-ASSETS> 13,854,197
<CURRENT-LIABILITIES> 4,187,023
<BONDS> 2,364,593
0
0
<COMMON> 2,271,730
<OTHER-SE> 4,411,403
<TOTAL-LIABILITY-AND-EQUITY> 13,854,197
<SALES> 15,956,798
<TOTAL-REVENUES> 15,956,798
<CGS> 9,087,933
<TOTAL-COSTS> 9,087,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 384,577
<INCOME-PRETAX> 1,158,055
<INCOME-TAX> 439,975
<INCOME-CONTINUING> 718,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 718,080
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
