The
dynamics of the physical medicine market are changing … and
so is Dynatronics. The traditional model, in which manufacturers
sell their products through networks of independent dealers, is giving
way to consolidation. That consolidation is occurring between manufacturers
and dealers/distributors, and even between manufacturers.
Near the end of calendar year 2006, we realized that these market changes
were progressing rapidly. Manufacturers were merging or being acquired.
Distribution channels were narrowing. Recognizing that these trends presented
a unique opportunity for vertical integration, we began merger discussions
with our largest distributors.
To our delight, they agreed with our assessment and we began the process
of negotiating the purchase of six of our top dealers’ businesses.
On June 30, 2007, we formally merged with Rajala Therapy Sales Associates
of Pleasanton, California. Rajala had been our largest dealer for years.
John and Mary Jo Rajala, along with their children, Pete and Kelley,
had built a highly respected dealership. Their decision to embrace the
vertical integration model was a stamp of approval for the strategy,
giving other dealers confidence in its merit.
On July 2, 2007, Dynatronics merged with five additional dealers:
• Therapy & Health Care Products, Inc., Girard,
Ohio
• Responsive Providers, Inc., Houston, Texas
• Cyman Therapy Products, Inc., Detroit, Michigan
• Theratech, Inc., Minneapolis, Minnesota
• Al Rice and Associates, Inc., Jeffersonville, Indiana
The total cost of these acquisitions was $8.4 million, of which $3.3
million was paid in cash and the balance in Dynatronics common stock
valued at $1.13 per share. The cash consideration was virtually equivalent
to the working capital value of the six dealerships, while the stock
essentially represented consideration for intangibles. Overall, the number
of outstanding shares increased from 9 million to almost 14 million,
and the stock price per share has increased approximately 30 percent
to 40 percent over pre-merger levels. Total market capitalization has
risen from less than $10 million to almost $20 million.
Cumulatively, annual sales of these acquired six dealers totaled approximately
$19 million. Added to Dynatronics’ 2007 annual sales, adjusted
to eliminate the sales to the acquired dealerships, annual sales for
the 2008 fiscal year are expected to be approximately $32 million.
The acquisition of these dealers triggered a change in Dynatronics’ distribution
methods. From these acquisitions alone, we now have 26 direct sales
reps in 20 states. Since the mergers were announced, we have added
another four direct sales reps and expanded our coverage to 22 states.
We are in discussions with other dealers who are interested in our vertical
integration strategy, and with other direct sales reps who would like
to be part of the team we are building. Despite this shift in distribution
strategy, we will continue to work faithfully with the dealers now representing
our products. Most of these dealers are financially sound and have strong
distribution networks in their respective territories. Where they are
working well, we have no desire to disrupt these dealer relationships.
We will continue to look at each opportunity to expand and strengthen
our distribution channels whether with local dealers or direct sales
representatives.
The acquisition of these dealers, supplemented by the hiring of additional
key direct sales reps, has not only transformed our distribution channels,
but has also had a significant impact on the products we sell. While
the products we manufacture in Salt Lake City, Utah, and in Chattanooga,
Tennessee, continue to be the heart of our offering and the most profitable
of all the products we sell, we now distribute products manufactured
by hundreds of other companies, including some that were our competitors.
In fact, prior to the mergers, we offered approximately 2,000 distinct,
unique products. Now, after the mergers, that product number has more
than doubled. Clearly, the nature of our business is changing from just
being a manufacturer to serving as a broad-based distributor of products
for the physical medicine market.
Ultimately, we will operate three major distribution warehouses: Salt
Lake City, Utah; Pleasanton, California; and Chattanooga, Tennessee.
We will also have customer service operations and minor distribution
points around the country to support our local sales representatives
and customers. We believe the economies of scale generated by the consolidation
of these operations will yield greater profitability for the company
without sacrificing the local service for which these dealers, direct
sales reps and Dynatronics are well known.
While many things are changing at Dynatronics, some things remain the
same. We are committed to continued product innovation for our market.
During the past fiscal year, we introduced several new products. In
the first fiscal quarter, the long-awaited X-series products – the
Dynatron X3 multi-modality light therapy device and the DX2 combination
decompression and light therapy device – were unveiled. The X3
has not performed up to expectations, primarily because its price point
is higher than anticipated. The DX2 has performed much closer to expected
levels.
In the third fiscal quarter, we introduced the T4 Motorized Traction
Table. This is a feature-laden therapy table offered at a very economical
price. Is it designed to be a companion product for the DX2 decompression
and light therapy device, to be packaged with the DX2 and other accessories
manufactured at our Chattanooga facility as an affordable decompression
therapy package.
In an effort to be more competitive in the iontophoresis market, we introduced
the Dynatron Ion Electrodes in the first quarter of fiscal 2007. These
electrodes are complementary to the Dynatron iBox introduced last year.
Finally, the Dynatron X5 was introduced in June, 2007. This unique product
provides pain management through oscillation therapy that is delivered
via electrostatic charges.
We will continue to focus on additional new products during the coming
fiscal year, including updating the Synergie AMS technology and the Solaris
family of devices.
We are also thrilled that during this past fiscal year Kelvyn Cullimore
Sr. returned from his two-year hiatus performing humanitarian work
in Asia to resume his leadership of the Synergie department, as well
as the oversight of Dynatronics’ operations in Tennessee. His
return has sparked new enthusiasm and rising sales of the high-margin
Synergie line of aesthetic products.
|
In
this changing and consolidating market, we are confident that the opportunities
we have tapped into will yield positive results. Dynatronics is uniquely
positioned to compete favorably in this environment. We continue to
have one of the most desirable capital equipment product lines in the
market. As the manufacturer of many of the products we offer, we have
the ability to be more competitive than a company that is only a distributor.
Plus, as already mentioned, we have now added to our team some of the
most respected and productive sales and marketing minds in our industry.
We are proud that the Rajala family, Tony Trolio, Guy Whittington,
Steve Cyman, Andy Moore, the Rice family and their related sales associates
are now part of the Dynatronics team. This is truly an all-star lineup!
We are changing with our market – adapting to the new environment by capitalizing
on our longstanding relationships with the best sales people in our industry.
By combining our legacy of success in developing and manufacturing capital products
and soft goods with our recent acquisitions of the finest dealers and their broad
lines of distributed products, we fully expect to be greater than the sum of
our parts.
We appreciate your support and confidence and look forward to the future.
Sincerely,
Kelvyn H. Cullimore, Jr.
Chairman, President and CEO |
|
