The primary objective of the past year has been to successfully integrate the six distributor businesses acquired at the beginning of the fiscal year. Although filled with some of the typical turmoil and adjustments associated with such complex transactions, we have successfully eliminated five points of distribution, reduced personnel by over 20%, cut annual expenses by over $2,000,000 and virtually doubled sales over the prior year. We believe the assimilation has been a success.
Most importantly, anticipated sales from these acquisitions achieved expectations. The sales team has migrated well to the new Dynatronics platform and we are busy launching integrated sales efforts as we start this new fiscal year. The strategy instigated at the beginning of the fiscal year called for the company to transition from being a manufacturer to also being a distributor. That transition has been costly and took a few months longer than expected, but it is positioning us to be competitive in the dynamic market we serve.
Before discussing the financial results for the year, let me point out three important facts: First, the reported pre-tax losses of almost $10,000,000 for fiscal year 2008 were mostly the result of acquisition-related factors and required accounting adjustments. Second, with those factors stripped away, the operating losses were less than $500,000. Third, now that these losses are behind us, we believe that we are positioned to capitalize on the strategic plans we implemented a year ago and are accelerating toward profitability.
Dealer Acquisitions
Our initiative to acquire six key dealers was implemented in response to consolidation pressures within our market. Channels of distribution were being consolidated as two large companies were actively acquiring distributors and/or manufacturers. Failure to act, in our judgment, would likely have resulted in Dynatronics ultimately becoming a captive manufacturer for one or two main distributors.
The process of assimilating the six acquired dealers over the course of the past year caused us to incur over $2 million in mostly acquisition-related expenses, including the expense of exhausting acquired dealer inventories of Dynatronics products with wholesale cost basis instead of Dynatronics’ manufactured cost basis, reducing personnel and the associated severance costs, stock option expense, and duplicate SG&A overhead costs. On July 2, 2007, Dynatronics inherited six different warehouses and associated staff, bringing to eight the total number of distribution points. Over the course of the year we closed all of the acquired distribution facilities, except the warehouse in Pleasanton, California, that continues to service the West Coast. In addition to Pleasanton, three field sales support offices were also maintained: one each in Houston, Texas, Youngstown, Ohio, and Detroit, Michigan.
Stock Prices and the Subsequent Goodwill Write-Off
As I prepare this letter (September 26, 2008), the common stock of the company was trading at $.50 per share – a level not seen since 1986. With the stock trading below $1, NASDAQ issued a deficiency letter to Dynatronics indicating that failure to cure the deficiency would result in delisting the company’s stock from the NASDAQ Small Cap Exchange on December 22, 2008. Given general market conditions, overcoming that deficiency will be a steep hill to climb. It is likely we will move our stock to the OTC Bulletin Board if we are unable to cure the deficiency unless NASDAQ implements extensions of the six-month rule.
We are certainly disappointed in the decline in value of the stock and believe it is markedly undervalued at current levels. We believe the decline in price was in part a result of reported losses over the past few quarters, but also because of general pressures on the financial markets in the United States. We will do all we can to cure this deficiency by helping investors understand the underlying causes of the current stock price and the promising forecast for the company’s future.
Nevertheless, an unfortunate accounting side effect of the decline in the value of the company’s common stock was a required write-off of $6.6 million in goodwill assets. Under accounting rules applicable to the company, goodwill remains on the books at book value unless there is an impairment of that goodwill. Goodwill is deemed impaired if the market value of the company drops below the net book value of its assets. When Dynatronics’ market capitalization dropped below its net book value at the end of the fiscal year, it triggered an impairment analysis. To the extent the excess book value of the company was attributable to goodwill in that analysis, we were required to write down the goodwill to match market value.
In our case that meant all the goodwill on the books, totaling over $6.6 million, had to be written off. This write-off is a non-cash expense. Most of that goodwill was associated with the acquisitions at the first of the fiscal year, as well as the 1996 acquisition of our Tennessee operations. The good news is that we no longer have to worry about goodwill impairment or the cost of such analysis each year unless we add more goodwill through future transactions.
Other Adjustments
In the course of the past year we determined that our reserves for bad debts and inventory obsolescence should be increased until we have more experience with the new post-acquisition operating paradigm. These changes resulted in over $750,000 in adjustments that contributed to the loss booked for fiscal year 2008.
While we do not want to minimize the significance of a reported pre-tax loss of almost $10,000,000, I felt it was important for you to understand that the losses are attributable primarily to the assimilation costs of the acquisitions, the goodwill write-off and the reserve account adjustments. These are acquisition-related expenses and to a large extent they belie the underlying operational efficiencies that are emerging and pointing to the future potential of the company.
Solid Reasons to Be Optimistic About the Future
We have identified several factors that will help accelerate our push to profitability in this new fiscal year. Increased sales and improved margins will be key. Factors we expect will help drive sales and improve margins in fiscal year 2009 include the following:
We expect the introduction of our first consolidated catalog in September 2008 to give sales a strong push going into the second quarter of the new fiscal year. In addition, a new price list, including the first price increase for our core products in over 20 years, should help improve margins. This new catalog not only showcases more than 12,000 products, but it also brings a sense of cohesiveness to our sales effort that was previously missing.
During the past year we introduced the Synergie Elite line of aesthetic products. This is the first major redesign of Dynatronics’ popular cellulite reduction and microdermabrasion devices. It promises to bring renewed interest to this high-margin product line.
Efforts are underway to expand both domestic and international sales. With 36 direct sales representatives in 29 states, our presence of direct sales professionals continues to grow. Over the coming year, however, we will focus on bringing experienced distributors and dealers on board in areas where representation was lost through acquisition.
International sales have always been somewhat elusive for Dynatronics. We plan to overcome this by teaming up with larger distributors in foreign countries.
Introduction of new, innovative products will also help to drive additional sales in the coming year. Looking Ahead With Confidence
The storm of assimilation is past. The accounting adjustments have been made. We are now positioned to capitalize on the strategic plans we set in place last year.
We do not minimize the concern caused by the losses of this past year. However, with that chapter in our history now closed, and our initiatives for growth, profitability and improved shareholder value firmly in place, we are moving forward with confidence.

Sincerely,

Kelvyn H. Cullimore, Jr.
Chairman, President and CEO