<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended December 31, 1998.
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act for the
transition period from _________ to _________
Commission File Number: 0-12697
Dynatronics Corporation
-----------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0398434
------------------------------ ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7030 Park Centre Drive, Salt Lake City, UT 84121
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 568-7000
---------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
X Yes No
----- -----
The number of shares outstanding of the issuer's common stock, no par value,
as of February 9, 1999 is 8,675,314 shares.
Transitional Small Business Disclosure Format.
(Check One) : Yes No X
<PAGE>
DYNATRONICS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
-----------
Condensed Balance Sheet
December 31, 1998 1
Condensed Statements of Income
Three and Six Months Ended December 31, 1998,
and December 31, 1997 2
Condensed Statements of Cash Flows
Six Months Ended December 31, 1998,
and December 31, 1997 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis
Or Plan of Operation 7
Part II. OTHER INFORMATION 13
<PAGE>
DYNATRONICS CORPORATION
Condensed Balance Sheet
(Unaudited)
December 31
ASSETS 1998
------------
Current assets:
Cash and cash equivalents $ 136,846
Trade accounts receivable, less allowance for
doubtful accounts of $108,238 3,153,518
Other receivables 39,054
Inventories 4,546,869
Prepaid expenses 211,032
Deferred tax asset-current 119,614
------------
Total current assets 8,206,933
Net property and equipment 3,637,678
Excess of cost over book value, net of accumulated
amortization of $357,830 1,106,344
Deferred tax asset-noncurrent 180,410
Other assets 593,374
------------
$ 13,724,739
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 657,638
Line of credit 2,278,306
Accounts payable 778,389
Accrued expenses 668,251
------------
Total current liabilities 4,382,584
Long-term debt, excluding current installments 2,348,140
Deferred compensation 573,156
------------
Total long-term liabilities, excluding
current installments 2,921,296
------------
Total liabilities 7,303,880
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000
shares; issued 8,710,898 shares; outstanding
8,675,314 shares 2,246,651
Treasury stock, 35,584 shares (120,096)
Retained earnings 4,294,304
------------
Total stockholders' equity 6,420,859
------------
$ 13,724,739
============
See accompanying notes to condensed financial statements.
1
<PAGE>
DYNATRONICS CORPORATION
Condensed Statements Of Income
(Unaudited)
[CAPTION]
<TABLE>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $4,019,706 3,000,648 8,930,931 6,028,427
Cost of sales 2,253,773 1,741,754 4,911,870 3,477,745
---------- ---------- ---------- ----------
Gross profit 1,765,933 1,258,894 4,019,061 2,550,682
Selling, general, and
administrative expenses 1,200,765 902,845 2,520,069 1,745,861
Research and development expenses 174,162 121,514 339,545 244,916
---------- ---------- ---------- ----------
Operating income 391,006 234,535 1,159,447 559,905
Other income (expense):
Interest income 62 13 5,187 81
Interest expense (102,033) (47,881) (185,468) (92,349)
Other income, net 5,172 21,146 9,849 43,244
---------- ---------- ---------- ----------
Total other income (expense) (96,799) (26,722) (170,432) (49,024)
Income before income taxes 294,207 207,813 989,015 510,881
Income tax expense 110,878 73,535 388,034 184,378
---------- ---------- ---------- ----------
Net income $ 183,329 134,278 600,981 326,503
========== ========== ========== ==========
Basic and diluted net income $ 0.02 0.02 0.07 0.04
per common share ========== ========== ========== ==========
Weighted average basic and diluted
common shares outstanding (note 2)
Basic 8,671,325 8,427,847 8,660,111 8,427,847
Diluted 9,077,135 8,517,334 9,099,947 8,524,600
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
DYNATRONICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 600,981 326,503
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property and equipment 125,553 84,926
Other amortization 46,108 34,894
Provision for doubtful accounts 18,000 8,400
Provision for inventory obsolescence 78,000 57,000
Provision for warranty reserve 79,057 79,528
Deferred compensation 42,042 42,042
Decrease (increase) in operating assets:
Receivables (966,394) (62,223)
Inventories (1,901,719) (519,204)
Prepaid expenses and other assets 85,798 (52,483)
Deferred tax assets 0 (58,456)
Increase (decrease) in operating liabilities:
Trade accounts payable and accrued expenses 137,525 (302,199)
Income taxes payable 58,859 (80,866)
---------- ----------
Net cash used in operating activities (1,596,190) (442,138)
---------- ----------
Cash flows from investing activities:
Capital expenditures (179,390) (134,973)
---------- ----------
Net cash used in investing activities (179,390) (134,973)
---------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligations 0 (3,695)
Principal payments on long-term debt (107,305) (77,933)
Net change in line of credit 1,162,665 407,087
Proceeds from sale of common stock 108,967 0
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Net cash provided by financing activities 1,164,327 325,459
---------- ----------
Net decrease in cash and cash equivalents (611,253) (251,652)
Cash and cash equivalents at beginning of period 748,099 544,615
---------- ----------
Cash and cash equivalents at end of period $ 136,846 292,963
========== ==========
Supplemental cash flow information
Cash paid for interest (net of amounts capitalized) 185,468 92,349
Cash paid for income taxes 331,975 321,700
Supplemental Disclosure of Non-cash Investing and Financing Activities
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 condensed financial statements.
3
<PAGE>
DYNATRONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
NOTE 1. PRESENTATION
The financial statements as of December 31, 1998 and for the three and six
months then ended were prepared by the Company without audit pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, all necessary
adjustments to the financial statements have been made to present fairly
the financial position and results of operations and cash flows. All
adjustments were of a normal recurring nature. The results of operations
for the respective periods presented are not necessarily indicative of the
results for the respective complete years. The Company has previously
filed with the SEC an annual report on Form 10-KSB which included audited
financial statements for the two years ended June 30, 1998. It is
suggested that the financial statements contained in this filing be read
in conjunction with the statements and notes thereto contained in the
Company's 10-KSB filing.
NOTE 2. NET INCOME PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
("SFAS 128"), "Earnings Per Share," effective January 1, 1998. SFAS 128
establishes a different method of computing the net income per common
share than was previously required under the provisions of Accounting
Principles Board Opinion No. 15. Net income per common share is computed
based on the weighted-average number of common shares and, as appropriate,
dilutive common stock equivalents outstanding during the period. Stock
options are considered to be common stock equivalents.
Basic net income per common share is the amount of net income for the
period available to each share of common stock outstanding during the
reporting period. Diluted net income per common share is the amount of
net income 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.
In calculating net income per common share, the net income was the same
for both the basic and diluted calculation. A reconciliation between the
basic and diluted weighted-average number of common shares for the three
months and six months ended December 31, 1998 and 1997 is summarized as
follows:
<PAGE>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Basic weighted average number
of common shares outstanding
during the period 8,671,325 8,427,847 8,660,111 8,427,847
Weighted-average number of dilutive
common stock options outstanding
during the period 405,810 89,487 439,836 96,753
Diluted weighted average number ________ ________ ________ ________
of common and common equivalent
shares outstanding during the
period 9,077,135 8,517,334 9,099,947 8,524,600
========= ========= ========= =========
NOTE 3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130
("SFAS 130"), "Reporting Comprehensive Income," effective July 1, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. For the periods ending
December 31, 1998 and 1997, comprehensive income was equal to the net
income as presented in the accompanying condensed statements of income.
NOTE 4. INVENTORIES
Inventories consisted of the following:
December 31,
1998
------------
Raw Material $ 3,342,721
Finished Goods 1,358,308
Inventory Reserve (154,160)
------------
$ 4,546,869
============
<PAGE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
December 31,
1998
------------
Land $ 354,744
Buildings 2,805,569
Machinery and equipment 1,634,375
------------
4,794,688
Less accumulated depreciation
and amortization 1,157,010
------------
$ 3,637,678
============
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Condensed
Financial Statements and Notes thereto appearing elsewhere in this Form
10-QSB.
Results of Operations
Sales for the quarter ended December 31, 1998 increased 34 percent to
$4,019,706 compared to $3,000,648 in the same period of the prior year. Net
income for the reporting period increased 37 percent to $183,329 compared to
$134,278 in the prior year period. Sales for the six months ended December
31, 1998 increased 48 percent to $8,930,931 compared to $6,028,427 in the
prior year period while net income increased 84 percent to $600,981 compared
to $326,503 in the same period of the prior year. The increases in both
sales and net income are attributed primarily to a 29 percent year-to-date
increase in sales of medical supplies and soft goods and sales of the
Company's new Synergie Lifestyle System product line which began shipping
in July 1998.
The Synergie AMS device, which is part of the Synergie Lifestyle System,
provides non-invasive massage treatments to skin and subcutaneous tissues
in common problem areas where heredity, inactive lifestyle, or poor diet
tend to create undesirable effects for women. As part of the Synergie
Lifestyle System, the Company, with the assistance of knowledgeable
consultants, developed and introduced a line of 19 nutritional supplements
which are marketed through clinics offering Synergie AMS treatments, and
by other professionals interested in quality nutritional supplements.
Other components of the Synergie product line include treatment body
suits, treatment tables, a photo station and other related accessories.
As forecasted, second quarter growth was less dramatic than first quarter
growth, which benefited from initially filling distribution channels with
the new Synergie products. While broad interest exists in the new
product line, the Company underestimated the effort required to convert
that interest to actual sales. A recently completed research study
commissioned by the Company confirmed the effectiveness of the Synergie
Lifestyle System in temporarily reducing the appearance of cellulite and
reducing girth measurements around the hips, thighs, and waist. The
Company believes these study results along with more refined marketing
strategies should result in steadily improving sales of Synergie products
in the future.
Total gross profit for the quarter ended December 31, 1998 increased 40
percent to $1,765,933 as compared to $1,258,894, in the prior year period.
Gross profit for the six- month period ended December 31, 1998 increased
58 percent to $4,019,061 compared to $2,550,682 in the same period of the
previous year. These increases are directly attributable to the increased
sales of medical supplies and soft goods and sales of the new Synergie
product line. Gross margins as a percentage of sales increased to 43.9
percent for the reporting quarter compared to 42.0 percent in the same
quarter in the prior year. Gross margins for the six months ended
December 31, 1998 increased to 45.0 percent compared to 42.3 percent in
the same period of the prior year. The increase in gross margins in 1998
as a percentage of sales reflects the higher margins associated with the
new Synergie product line.
<PAGE>
Selling, general and administrative (SG&A) expenses for the three- and
six- month periods ended December 31, 1998, increased to $1,200,765 and
$2,520,069 respectively, as compared to $902,845 and $1,745,861
respectively in the prior year periods. Expenses associated with
introducing and supporting the new Synergie product line account for the
majority of increased expenses during the quarter and six-month period.
Areas of increased cost include sales, advertising and marketing expenses,
R&D expenses and employee compensation expenses including bonuses paid to
management during the period related to increased profitability. Another
factor contributing to the higher expenses was increased interest expense
during the quarter and six-month period associated with higher balances on
the line of credit due to increased inventories as well as new borrowings
to finance capital improvement projects in fiscal 1998. A trademark
dispute that was settled during the quarter required the Company to record
expenses in excess of $60,000 during the six months ended December 31,
1998, $36,000 of which was incurred in the quarter then ended. In
addition, efforts at the Company's Columbia operations to convert to new
manufacturing methods resulted in increased operating expenses of
approximately $170,000 for the six months ended December 31, 1998, of
which approximately $100,000 was recognized in the quarter then ended.
This conversion is expected to be completed during the quarter ending
March 31, 1999 and is anticipated to increase capacity and improve
operating efficiencies.
Research and development (R&D) expenses in the three months ended December
31, 1998 totaled $174,162, compared to $121,514 in the same period of the
prior year. R&D expenses for the six months ended December 31, 1998 were
$339,545 compared to $244,916 in 1997. As a percentage of sales, R&D
expenses in the three and six months ended December 31, 1998 were 4.3
percent and 3.8 percent, respectively compared to 4.0 percent and 4.1
percent for the same periods one year ago. These increases in R&D
expenses for the reporting periods were associated with development
efforts on the new Synergie product line. The Company expects R&D
expenses as a percentage of sales to continue at approximately the same
level as the six months ended December 31, 1998 through the remainder of
the year ending June 30, 1999.
Income before tax for the quarter ended December 31, 1998 increased 42
percent to $294,207 compared to $207,813 during the same period of the
prior year. Income before tax for the six months ended December 31, 1998
increased 94 percent to $989,015 compared to $510,881 in the prior year.
Income tax expense for the three and six months ended December 31, 1998
was $110,878 and $388,034, respectively, as compared to $73,535 and
$184,378, respectively in the prior year periods. The effective tax rate
for the 1998 quarter was 37.7 percent compared to 35.4 percent for the
same quarter last year. The effective tax rate for the six months ended
December 31, 1998 was 39.2 percent compared to 36.1 percent in 1997. The
increase in effective tax rates for the 1998 periods reflect an adjustment
of the valuation allowance for deferred tax assets which was reduced to -0-
as of June 30, 1998 as detailed in the Company's 10KSB as of that date.
Net income for the quarter ended December 31, 1998 increased 37 percent to
$183,329 compared to $134,278 in the prior year period. Net income for
the six months ended December 31, 1998 increased 84 percent to $600,981
compared to $326,503 in the same period of the previous year. The
increase in sales volumes of medical supplies and soft goods and new
Synergie products, together with the higher gross margins associated with
the Synergie product line combined to cause the increase in net income.
<PAGE>
Liquidity and Capital Resources
The Company expects revenues from operations, together with amounts
available under the Company's bank line of credit will be adequate to meet
its working capital needs related to its business and its planned capital
expenditures for the upcoming operating year.
The Company's current ratio at December 31, 1998 was 1.87 to 1. Current
assets represent 60 percent of total assets.
Trade accounts receivable are from the Company's dealer network and are
generally considered to be within term. All accounts payable are within
term with the Company continuing its policy of taking advantage of any and
all payment discounts available.
During the quarter ended December 31, 1998, the Company amended its loan
agreement for a revolving line of credit with a commercial bank and
increased the loan amount up to a maximum of $3,500,000 based on loan
ratios of 70 percent of accounts receivable and 30 percent of inventory.
The outstanding balance on the line of credit at December 31, 1998 was
$2,278,306. A total of approximately $900,000 was available for
additional borrowings under the line based on the current level of
accounts receivable and inventory. The line is secured by the Company's
inventory and accounts receivable and bears interest at the bank's "Prime
Rate," currently 7.75 percent per annum. The Company may also elect to
lock in fixed rates on this agreement for 30 to 90 day periods at a rate
equal to the London Interbank Offered Rate (LIBOR) plus 2.70% per annum.
This line is subject to annual renewal and matures on November 30, 1999.
Accrued interest is payable monthly.
Inventory levels, net of reserves, at December 31, 1998 totaled $4,546,869
while net accounts receivable were $3,153,518. During the current fiscal
year, inventories and receivables increased significantly to support the
Company's introduction of the Synergie Lifestyle System. In addition,
management has made a stronger effort to reduce backorders by increasing
inventory quantities. Financing for these increases has been provided
through cash flow from operations together with the Company's line of
credit facility.
Long-term debt excluding current installments at December 31, 1998 totaled
$2,348,140 comprised primarily of the mortgage loans on the Company's
office and manufacturing facilities. The principal balance on the
mortgage loans is approximately $2.2 million with monthly principal and
interest payments of $26,900.
Business Plan
With the introduction of the new Synergie Lifestyle System product line,
the Company is expanding its distribution network and opening new markets
for products directed at the fields of plastic surgery, dermatology, and
related non-medical aesthetic markets. The first direct mail piece
<PAGE>
advertising the new product line generated over 4,000 requests for
information. This level of interest, coupled with strong indications of
interest from the dealer network, led management to anticipate
significantly more sales than have initially been realized. As a result,
inventory levels are currently higher than they would normally be. As
sales of the new products increase, the Company expects inventories to
decrease to more traditional levels. The Company believes the main reason
sales of the Synergie products have not reached expected levels is the
newness of the technology and the public's lack of experience with or
exposure to the Synergie AMS or similar products. Interest in the
product line remains strong, however, as indicated by over 3,000 responses
received from a second direct mail campaign. As the market becomes more
familiar with this new product line, the Company believes that sales will
improve. Consequently, the Company anticipates that fiscal year 1999 has
the potential to be the most profitable year in the Company's history, due
in large part to the anticipated success of the new Synergie product line.
In addition, the Company is currently formulating a long-term, strategic
growth plan to capitalize on new opportunities in the aesthetic and
nutritional supplement markets.
In recent years the popularity of nutritional supplements has grown
significantly. In conjunction with knowledgeable consultants in the field
of nutritional supplements, the Company has developed a line of 19
nutritional supplements. These supplements, which were initially
developed as an integral part of the Synergie Lifestyle System, include
such products as a multivitamin/mineral compound, a St John's Wort
formulation, an antioxidant complex, an herbal calmative, and a calcium
formula. The Company is now exploring ways to market these products
directly to consumers including establishing an Internet presence to
facilitate direct ordering. With public interest in nutritional
supplements at an all-time high, the Company believes that the high
quality of the Synergie nutritional supplements will attract consumers as
well as many professional practitioners who in the past have not made
nutritional supplements a part of their practice.
Since the acquisition of Superior Orthopaedic Supplies in May 1996, the
Company has doubled sales of soft goods and medical supplies of that unit
compared to pre-acquisition levels. The start-up of the treatment table
and rehabilitation products manufacturing operation in South Carolina has
further broadened the Company's product line. The Company believes that
offering a broad product line is of strategic importance as clinics
continue to consolidate and develop centralized purchasing policies that
favor single source suppliers for their medical device and supplies needs.
To capitalize on its broader product line, the Company published its first
full-line catalog in January 1997. In February 1998, the Company
introduced a new version of its catalog with twice the number of products
as the first catalog. The Company anticipates introducing a new, expanded
catalog during the current fiscal year offering over 800 products to
practitioners. This new catalog is expected to continue to stimulate
sales growth of the Company's products.
The Company continues to evaluate acquisition opportunities that would
further expand manufacturing operations and add new products to a growing
line of existing products. The established criteria for such acquisitions
is relatively narrow to protect against an acquisition that may be
detrimental to shareholder value. Furthermore, the Company's ability to
successfully negotiate an acquisition may depend in part on the market
price of the Company's common stock. A higher stock price may facilitate
acquisitions. There can be no assurance that any acquisition or
disposition of a business, products or technologies by the Company will
not result in substantial charges or other expenses that may cause
fluctuations in the Company's operating results. The use of the Company's
common stock or securities convertible to common stock for an acquisition
or the offer and sale of such securities to raise capital to fund an
acquisition would result in immediate and perhaps substantial dilution to
<PAGE>
existing shareholders. In addition, the stock market is subject to
volatility and rapid increases and decreases in share price, which may not
necessarily be reflective of or bear a direct relationship to the actual
book value of the Company's common stock or of the Company.
Although approval to market products in Japan was received by the Company
during fiscal year 1997, sales in Japan have been slow to develop.
However, with sustained marketing effort, the Company anticipates sales in
Japan will continue to grow. Initial marketing efforts in Europe are
expected to be undertaken this year, continuing the Company's
international expansion. In conjunction with this effort, the Company
believes its "50 Series Plus" line of products will qualify for the CE
Mark during calendar year 1999. This mark makes it possible to market the
product line in all European Union member states. In addition, the
Company is making progress in its efforts to meet the requirements for ISO
9001 certification which is a validation of the Company's quality
manufacturing practices. This certification is also expected to be
completed in calendar year 1999. International markets are more difficult
to develop and subject to risks such as currency fluctuations, political
and economic instability and regulatory barriers to entry by foreign
governments.
The Company recognizes the need to continually upgrade and re-engineer
existing products as well as introduce new products if it is to remain
competitive. The Company believes its continuing commitment to research
and development enables it to be a technological leader in the market.
New products and engineering improvements are constantly being evaluated
and developed.
To better meet growing demand for its products, during fiscal year 1998
the Company completed a $1.2 million capital improvement campaign to
increase space and efficiencies primarily at its operations in
Chattanooga, Tennessee, and Columbia, South Carolina. This capital
improvement campaign has doubled the space at the Chattanooga facility and
increased space at the Columbia facility by 40 percent. New manufacturing
equipment has also been purchased and installed at both locations, which
has improved manufacturing capabilities and efficiencies.
Y2K Disclosure
The Company is aware of the risks associated with the operation of
information technology and non-information technology systems as the new
century approaches. The "Year 2000" problem is pervasive and complex,
with the possibility that it will affect many technology systems,
including computer programs and imbedded microprocessor technology. The
Year 2000 problem is the result of the rollover of the two digit year
value from "99" to "00". Such systems that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to complete manufacturing, process transactions, send invoices,
collect payments, or engage in similar normal business activities.
<PAGE>
The Company is in the process of assessing its state of readiness,
including the readiness of third parties with which the Company interacts,
with respect to the Year 2000 problem. The assessment will also include
an evaluation of the costs to the Company to correct Year 2000 problems
related to its own systems, which, if uncorrected, could have a material
adverse effect on the business, financial condition or results of
operations of the Company. As a part of this assessment, the Company
will also determine the known risks related to the consequences of failure
to correct any Year 2000 problems identified by the Company and
contingency plans, if any, that should be adopted by the Company should
any identified Year 2000 problems not be corrected. The Company intends
to use both internal and external resources to reprogram, or replace and
test its software for Year 2000 modifications as needed. However, if such
modifications or conversions are not made, or are not completed timely,
the Year 2000 problem could have a material impact on the operations of
the Company. The Company has initiated formal communications with all of
its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own 2000
problems.
The Company is presently not aware of any Year 2000 issues that have been
encountered by the Company or any third party which could materially
affect the Company's operations. Based on the most recent assessment,
the Company believes that with modifications to existing software and
conversions to new software, any Year 2000 problems that it may have with
its own systems can be mitigated without significant expense.
Notwithstanding the foregoing, there can be no assurance that the Company
will not experience operational difficulties as a result of Year 2000
issues, either arising out of internal operations, or caused by third-
party service providers, which individually or collectively could have an
adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems.
Forward-Looking Statements and Risks Affecting the Company
The statements contained in this Report on Form 10-QSB that are not purely
historical are "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act. These statements regard the Company's
expectations, hopes, beliefs, anticipations, commitments, intentions and
strategies regarding the future. They may be identified by the use of
words or phrases such as "believes," "expects," "anticipates," "should,"
"plans," "estimates," "intends," and "potential," among others. Forward-
looking statements include, but are not limited to, statements contained
in Management's Discussion and Plan of Operation regarding the Company's
financial performance, revenue and expense levels in the future and the
sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the
anticipated results or other expectations expressed in such forward-
looking statements for the reasons detailed in the Company's Annual Report
on Form 10-KSB under the headings "Description of Business" and "Risk
Factors." The fact that some of the risk factors may be the same or
similar to the Company's past reports filed with the Securities and
Exchange Commission means only that the risks are present in multiple
periods. The Company believes that many of the risks detailed here and in
the Company's other SEC filings are part of doing business in the industry
in which the Company operates and competes and will likely be present in
all periods reported. The fact that certain risks are endemic to the
industry does not lessen their significance.
<PAGE>
The forward-looking statements contained in this Report are made as of the
date of this Report and the Company assumes no obligation to update them
or to update the reasons why actual results could differ from those
projected in such forward-looking statements. Among others, risks and
uncertainties that may affect the business, financial condition,
performance, development, and results of operations of the Company
include:
- - market acceptance of the Company's technologies, particularly the new
Synergie Lifestyle System product line and other new or re-designed
products;
- - the ability to hire and retain the services of trained personnel at
cost-effective rates;
- - rigorous government scrutiny or the possibility of additional
government regulation of the industry in which the Company markets its
products;
- - potential effects of adverse publicity regarding nutritional
supplements;
- - reliance on key management personnel;
- - foreign government regulation of the Company's products and
manufacturing practices that may bar or significantly increase the
expense of expanding to foreign markets;
- - economic and political risks related to the Company's expansion into
international markets;
- - failure of the Company to sustain or manage growth including the
failure to continue to develop new products or to meet demand for
existing products;
- - the Company's reliance on information technology;
- - the timing and extent of research and development expenses;
- - the Company's ability to keep pace with technological advances, which
can occur rapidly;
- - the loss of product market share to competitors;
- - potential adverse effect of taxation;
- - the ability of the Company to obtain required financing to meet changes
or other risks described above; or
- - the Company's inability or failure to identify and to manage its Year
2000 risks
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings pending to which the
Company or any of its subsidiaries is a party or of which any of
their property is the subject which require disclosure in this
statement.
Item 4. Submission of Matters to a Vote of Security Holders
On November 19, 1998, the Company conducted its 1998 Annual
Meeting of Shareholders. At the Annual Meeting, the following
former members of the Company's Board of Directors were elected
for another term: Kelvyn H. Cullimore, Kelvyn H. Cullimore, Jr.,
E. Keith Hansen, M.D., Larry K. Beardall, V. LeRoy Hansen, Joseph
H. Barton, and Howard L. Edwards. At the Annual Meeting, the
Company's shareholders also ratified the Board's selection of KPMG
Peat Marwick, as the Company's independent public accountants. In
addition, shareholders approved a 1.5 million share increase in
the number of shares available for issuance under the Company's
stock option plan.
<PAGE>
A plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the
election of directors and ratification of the appointment of the
independent public accountants was required for the election and
approval, as the case may be. Abstentions were not counted as
votes cast and had no effect on the result of the vote, although
they did count toward the presence of a quorum for purposes of
convening and conducting the meeting.
The affirmative vote of the holders of a majority of the shares
present or represented and entitled to vote at the meeting was
required for approval of the amendment to the Company's stock
option and incentive plan. For purposes of the vote on the
proposed plan amendment, abstentions had the same effect as votes
against the proposed plan amendment and broker non-votes were not
counted as shares entitled to vote on the matter and therefore had
no effect on the result of the vote. Broker non-votes were
counted like abstentions, toward the presence of a quorum.
The following table summarizes the voting at the annual meeting.
Issue For Against
----- --- -------
Ratify selection of
Accountants 6,349,367 11,700
Addition of 1.5 million
Shares to Stock Option Plan 2,435,623 276,519*
Board Nominee For Against
------------- --- -------
Kelvyn H. Cullimore 6,372,393 0
Kelvyn H. Cullimore, Jr. 6,371,393 1,000
Keith Hansen, M.D. 6,372,373 0
Larry K. Beardall 6,372,393 0
V. Leroy Hansen 6,372,393 0
Joseph H. Barton 6,365,393 7,000
Howard L. Edwards 6,366,393 6,000
- ---------------------
*Includes 64,700 abstentions.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
No. Description
--------- ------------
27 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DYNATRONICS CORPORATION
-----------------------
Registrant
Date 2/11/99 /s/ Kelvyn H. Cullimore, Jr.
--------------------- -----------------------------
Kelvyn H. Cullimore, Jr.
President
Chief Executive Officer
Date 2/11/99 /s/ John L. Hales
--------------------- -----------------------------
John L. Hales
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 136,846
<SECURITIES> 0
<RECEIVABLES> 3,153,518
<ALLOWANCES> 108,238
<INVENTORY> 4,546,869
<CURRENT-ASSETS> 8,206,933
<PP&E> 4,794,688
<DEPRECIATION> 1,157,010
<TOTAL-ASSETS> 13,724,739
<CURRENT-LIABILITIES> 4,382,584
<BONDS> 2,921,296
0
0
<COMMON> 2,246,651
<OTHER-SE> 4,294,304
<TOTAL-LIABILITY-AND-EQUITY> 13,724,739
<SALES> 8,930,931
<TOTAL-REVENUES> 8,930,931
<CGS> 4,911,870
<TOTAL-COSTS> 4,911,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 185,468
<INCOME-PRETAX> 989,015
<INCOME-TAX> 388,034
<INCOME-CONTINUING> 600,981
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600,981
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
