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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Commission file number
0-4538
CYBEX INTERNATIONAL, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1731581
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Trotter Drive, Medway, Massachusetts 02053
- --------------------------------------- ------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (508) 533-4300
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
- ------------------------------------ ------------------------------
Common Stock, $.10 Par Value American Stock Exchange
- ------------------------------------ ------------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing required
for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 2, 2001
Common Stock, $.10 Par Value -- $7,419,023
- --------------------------------------------------------------------------------
The number of shares outstanding of each of the registrant's classes of common
stock, as of April 2, 2001
Common Stock, $.10 Par Value -- 8,787,042 shares
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (items 10, 11, 12 and 13) is incorporated
by reference from the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders, to be filed with the Commission pursuant to Regulation
14A, or if such proxy statement is not filed with the Commission on or before
120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than
the end of such 120-day period.
1
PART I
------
ITEM 1. BUSINESS
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General
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Cybex International, Inc. (the "Company" or "Cybex"), a New York Corporation, is
a leading manufacturer of exercise equipment which develops, manufactures and
markets premium performance, professional quality, strength and cardiovascular
fitness equipment products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix"). Today, all of the
Company's products are sold under the brand name "Cybex". The Company also has a
wholly-owned finance subsidiary, Cybex Financial Corp ("CFC"), which provides
equipment lease financing for the Company's products, primarily to its
commercial domestic customer base. The Company operates in one business segment.
On May 23, 1997, the merger between a wholly-owned subsidiary of Cybex
International, Inc. and Trotter Inc. was consummated (the "Merger") with Trotter
surviving the Merger as a subsidiary of Cybex. This transaction was accounted
for as a purchase with Trotter deemed to be the acquiring company for accounting
purposes and, therefore, the surviving company for financial reporting purposes.
Trotter was subsequently merged into Cybex effective December 31, 1999.
On May 21, 1998, Cybex entered into an agreement with Tectrix and its
stockholders whereby Cybex acquired all of the outstanding common stock of
Tectrix (the "Acquisition"). In connection with the Acquisition, the Company
discontinued Tectrix's Virtual Reality products and treadmill development
program, closed Tectrix's Cambridge, Massachusetts research and development
facility and discontinued operations at Tectrix's two international sales
offices.
In June 2000, Cybex announced the relocation of its Irvine, California
cardiovascular equipment assembly and production development facility to its
facility in Medway, Massachusetts. As part of this relocation, the Irvine
facility was closed and all employees at such facility were laid-off. This
relocation resulted in a second quarter 2000 nonrecurring pre-tax charge of
approximately $2,352,000. In addition, the Company incurred in the second
quarter 2000 a one-time pre-tax charge of $800,000 associated with the write-off
of internal use software.
In December 2000, Cybex announced a restructuring plan designed to streamline
operations, improve efficiency and reduce costs. This restructuring plan
included eliminating about 26% of Cybex's workforce; a realignment (in
combination with the resignation of senior executives in the fourth quarter
2000) in management responsibilities; changes in Cybex's dealer standards;
changes in Cybex's service, credit and warranty policies; and a reassessment of
the carrying value of certain of its assets. The Company recorded fourth
quarter 2000 nonrecurring pre-tax charges of approximately $22,288,000, related
to this restructuring plan and other matters.
Additional information concerning the Company's nonrecurring 2000 charges may be
found in Note 4 to the Company's consolidated financial statements.
PRODUCTS
The Company develops, manufactures, and markets premium performance,
professional quality, exercise equipment products for the commercial and
consumer markets. These products can generally be grouped into two major
categories; cardiovascular products and strength systems.
The Company's products are of professional quality and are typically among the
best in the category in which they compete, featuring high performance and
durability suitable for utilization in health clubs or by professional athletes.
Accordingly, the majority of the Company's products are premium priced.
The contribution to net sales of the Company's product lines over the past three
years is as follows (dollars in millions):
2
2000 1999 1998
---------------------------- --------------------------- ----------------------------
Net Net Net
Sales Percent Sales Percent Sales Percent
------------ ------------ ------------ ------------ ------------ ------------
Cardiovascular Products $ 55.5 44% $ 62.6 48% $ 68.9 52%
Strength Systems 63.4 51 61.2 48 58.7 44
Freight Sales (1) 6.4 5 5.4 4 4.8 4
------------ ------------ ------------ ------------ ------------- ------------
$125.3 100% $129.2 100% $132.4 100%
============ ============ ============ ============ ============ ============
(1) Reflects shipping and handling fees and costs included in customer invoices.
Cardiovascular Products
The Company's cardiovascular equipment is designed to provide aerobic
conditioning by elevating the heart rate, increasing lung capacity, endurance
and circulation, and burning body fat. The Company's cardiovascular products
include treadmills, bikes and steppers. All of the Company's cardiovascular
products incorporate computerized electronics which control the unit and provide
feedback to the user.
Treadmills. The Company has seven treadmill models, series 900, 710, 700,
600, 410, 400 and 300. Models 900, 710, 700 and 600 represent products for the
commercial market, models 410 and 400 represent products for the light
commercial and consumer market, and model 300 represents a product for the
consumer market. Each treadmill model is motorized and incorporates
computerized electronics controlling speed, incline, and both preset and
customized exercise programs. The electronics also provide displays to indicate
program profiles, calories burned, calories per hour, speed, incline, distance,
elapsed time and pace. All treadmills have onboard diagnostics. In addition,
diagnostic information can be accessed through the display which is useful in
the maintenance of the product. All treadmills have polar heart rate
monitoring options and models 600, 700, 710 and 900 are also contact heart rate
equipped. The Company's treadmills have list prices ranging from $2,995 to
$8,295.
Bikes. The Company has two bike models, series 700 and 500, representing
commercial and consumer models, respectively, which are available in both
upright and recumbent riding positions. The bikes incorporate an ergonomic
design, epoxy powder-coat finish and a welded steel frame. The commercial model
has a full-featured control console, with optional contact and polar heart rate
monitoring. The consumer model has a simplified console suitable for low-
support locations. These two products have list prices ranging from $2,025 to
$2,925.
Steppers. The Company has three stepper models, series 800, 500 and 400.
Models 800 and 500 represent products for the commercial market while the model
400 represents a product for the consumer market. All models feature a
biomechanically correct design and patented drive technology. The model 800
features an advanced ergonomic handrail design with contact and polar heart rate
monitoring, while a traditional design is used in the models 500 and 400. Each
of the models has a console tailored to the type of use. These three products
have list prices ranging from $2,425 to $3,195.
Strength Training Products
Strength training equipment provides a physical workout by exercising the
muscular system. The Company's strength training equipment uses weights for
resistance. This product line includes selectorized single station equipment,
modular multi-station units, MG500 multi-gym, PG400 personal gym, the FT360,
plate-loaded equipment and free-weight equipment.
Selectorized Equipment. Selectorized single station equipment incorporates
stacked weights, permitting the user to select different weight levels for a
given exercise by inserting a pin at the appropriate weight level. Each
selectorized product is designed for a specific muscle group with each product
line utilizing a different technology targeted to facility and user type.
The Company's selectorized equipment is sold under the trademarks "VR2",
"Galileo" and "VR". The VR2 and the Galileo represent premium lines. While the
VR2 is appropriate for the average user, it also addresses the needs of the
advanced user with patented technology which permits the user to target specific
training. The Galileo line
3
provides a unique low profile look while also providing amenities for ease of
use. The VR represents a valued-engineered line suitable for smaller general-
purpose facilities and as an entry line in larger facilities. The Company
currently sells approximately 76 selectorized equipment products with list
prices between $2,025 and $5,425.
Modular Multi-Station Units. This product line has the advanced design and
high performance features of the VR selectorized equipment line while being able
to be configured into multiple station design. The multi-station units begin at
$1,425, with pricing depending on configuration.
MG500 Multi-gym and PG400 Personal Gym. The Company's multi (MG 500) and
personal (PG 400) gyms feature over 30 biomechanically correct exercises. They
are made of components including cold-rolled weight stacks and guide rods, fully
welded 11 gauge frames, texture powder coating and upholstery. These gyms use
considerably less space than multiple selectorized single station equipment.
The multi-gym contains three weight stacks to meet the needs of the commercial
market, especially hotels, corporate fitness centers and other small-scale
locations. The personal gym contains one weight stack and is designed for home
use. These products have a list price of $6,495 and $4,195, respectively.
FT360. The FT360 is a functional trainer that delivers an unlimited range of
movements and exercises using arms that are capable of multiple positioning.
This unit targets the personal training and rehabilitation markets and has a
$3,995 list price.
Plate Loaded Equipment. The Company manufactures and distributes a wide
range of strength equipment which mimics many of the movements found on its
selectorized machines but are manually loaded with weights. These are simple
products which allow varying levels of weight to be manually loaded. There are
approximately 21 plate-loaded products, ranging in price from $725 to $2,425.
Free-Weight Equipment. The Company also sells free-weight benches and racks
and compliments them with OEM supplied dumbbells, barbells and plates. The
Company offers approximately 25 items of free-weight equipment with list prices
ranging from $210 to $1,225.
Customers and Distribution
The Company markets its products to commercial customers and to individuals
interested in purchasing premium quality equipment for use in the home. A
commercial customer is defined as any purchaser who does not intend the product
for home use. Typical commercial customers are health clubs, corporate fitness
centers, hotels, resorts, spas, educational institutions, sports teams, sports
medicine clinics, military installations and community centers.
The Company distributes its products through independent authorized dealers, its
own sales force, international distributors and its e-commerce web site
(www.eCybex.com).
Independent authorized dealers operate independent stores specializing in
fitness-related products and promote home and commercial sales of the Company's
products. The operations of the independent dealers are primarily local or
regional in nature. In North America, the Company publishes dealer performance
standards which are designed to assure that the Company brand is properly
positioned in the marketplace. These dealer performance standards were revised
as part of the Company's restructuring program announced in December 2000.
In order to qualify as an authorized dealer, the dealer must, among other
things, market and sell Cybex products in a defined territory, achieve sales
objectives, have qualified sales personnel, and be responsible for the delivery,
installation and servicing of products within its territory. Today, the
Company has approximately 100 active dealers in North America. The Company
believes that its current dealer network is adequate to service its targeted
markets. The Company's domestic dealer sales force services this dealer
network with seven dealer managers, one major accounts manager, one
regional director and a Vice President.
The Company's domestic direct sales force is comprised of nine direct sales
representatives, one director, three national account managers and one Vice
President. The domestic sales force focuses on commercial users such as health
clubs, universities, sports medicine clinics, hotels, spas and resorts. Cybex
involves independent installers and authorized service providers for
installation and ongoing service relating to its direct sales. Authorized Cybex
dealers may also provide service to Cybex direct sales customers.
4
International sales, excluding Canada, accounted for approximately 21% of the
Company's net sales for 2000. The international sales force consists of one
Vice President, one regional sales director, one sales manager and one
operations manager. There are approximately 55 independent distributors in
59 countries currently representing Cybex. The Company enters into international
distributor agreements with these distributors which define territories,
performance standards and volume requirements. During the first quarter of 2001,
the Company and its distributor in the United Kingdom and parts of Europe
mutually agreed to terminate its distributor agreement effective May 1, 2001.
The Company, through a newly-formed subsidiary, will thereafter directly market
and sell Cybex products in the United Kingdom and will also operate a
distribution center in the United Kingdom which will serve Cybex operations
throughout Europe. The Company has also appointed a new distributor in Germany.
The Company markets certain products by advertising in publications which appeal
to individuals within its targeted demographic profiles. In addition, the
Company advertises in trade publications and participates in industry trade
shows.
The Company offers lease financing for its products through CFC, its wholly-
owned finance subsidiary. The Company periodically enters into agreements to
sell lease receivables to financial institutions.
WARRANTIES
The Company revised its warranty program as of December 31, 2000. After that
date, the various components of the cardiovascular products are warranted for
varying periods, generally one year labor and two years parts. The various
components for strength products are warranted for varying periods of time, up
to a ten-year warranty with respect to the structural frame. Warranty expense
for the years ended December 31, 2000, 1999 and 1998 was $4,209,000, $3,782,000
and $5,315,000, respectively.
COMPETITION
The market in which the Company operates is highly competitive. Numerous
companies manufacture, sell or distribute exercise equipment. The Company
currently competes primarily in the premium-performance, professional quality
equipment segment of the market, which management estimates to be approximately
25% of the total exercise equipment market. Its competitors vary according to
product line and include companies with greater name recognition and more
extensive financial and other resources than the Company.
Important competitive factors include price, product quality and performance,
diversity of features, warranties and customer service. The Company follows a
policy of premium quality, responsive customer service and a comprehensive
warranty program, which results in products having suggested retail prices at or
above those of its competitors in most cases. The Company currently focuses on
the segment of the market which values quality and is willing to pay a premium
for products with performance advantages over the competition. The Company
believes that its reputation for producing products of high quality and
dependability, accompanied by competitive warranties, constitutes a competitive
advantage.
PRODUCT DEVELOPMENT
Research and development expense for the years ended December 31, 2000, 1999 and
1998 was $4,817,000, $4,816,000 and $3,479,000, respectively. At December 31,
2000, the Company had the equivalent of 21 employees engaged in ongoing research
and development programs. The Company's development efforts focus on improving
existing products and developing new products, with the goal of producing user-
friendly, ergonomically and biomechanically correct, durable exercise equipment.
As part of the Company's restructuring program announced in December 2000,
product development has been realigned as a cross functional effort of sales,
marketing, product management, engineering and manufacturing, led by the
Company's Vice President of Operations - Medway for cardiovascular equipment and
its Vice President of Operations - Owatonna for strength equipment.
MANUFACTURING AND SUPPLY
The Company maintains two facilities which are vertically integrated
manufacturing facilities equipped to perform fabrication, machining, welding,
grinding, assembly and finishing of its products. The Company believes that its
facilities provide the Company with proper control over product quality, cost
and faster delivery time.
5
The Company manufactures treadmill and bike cardiovascular products in its
facility located in Medway, Massachusetts and manufactures strength equipment in
its facility located in Owatonna, Minnesota. Raw materials and purchased
components are comprised primarily of steel, aluminum, wooden decks, electric
motors, molded or extruded plastics, milled products, circuit boards for
computerized controls and upholstery. These materials are assembled, fabricated,
machined, welded, powder coated and upholstered to create finished products.
The Company's stepper products have, since the fourth quarter 2000, been
manufactured for the Company in Taiwan. The Company believes that this
outsourcing will reduce manufacturing costs of this product while maintaining
quality.
The Company single sources its stepper products and certain raw materials and
component parts, including drive motors, belts, running decks, molded plastic
components and electronics, where it believes that sole sourcing is beneficial
for reasons such as quality control and reliability of the vendor or cost.
The Company attempts to reduce the risk of sole source suppliers by maintaining
varying levels of inventory. However, the loss of a significant supplier, or
delays or disruptions in the delivery of components or materials, or increases
in material costs, could have a material adverse effect on the Company's
operations.
The Company manufacturers most of its strength training equipment on a "build-
to-order" basis which responds to specific sales orders. The Company
manufactures its other products based upon projected sales.
BACKLOG
Backlog historically has not been a significant factor in the Company's
business.
PATENTS AND TRADEMARKS
The Company owns, licenses or has applied for various patents with respect to
its products and has also registered or applied for a number of trademarks.
While these patents and trademarks are of value, the Company does not believe
that it is dependent, to any material extent, upon patent or trademark
protection.
INSURANCE
The Company's product liability insurance is written on an occurrence form and
provides an aggregate of $5,000,000 of coverage, with a deductible of up to
$75,000 per occurrence with an annual aggregate deductible of $500,000.
In prior years, the Company maintained a claims made policy which was converted
to an occurrence form policy in 1998. The insurance company has provided a seven
year extended reporting period for the expired claims made product liability
policy.
GOVERNMENTAL REGULATION
The Company's products are not subject to material governmental regulation.
The Company's operations are subject to federal, state and local laws and
regulations relating to the environment. The Company regularly monitors and
reviews its operations and practices for compliance with these laws and
regulations, and the Company believes that it is in material compliance with
such environmental laws and regulations. Despite these compliance efforts, some
risk of liability is inherent in the operation of the business of the Company,
as it is with other companies engaged in similar businesses, and there can be no
assurance that the Company will not incur material costs in the future for
environmental compliance.
EMPLOYEES
On March 31, 2001, the Company employed 434 persons on a full-time basis. None
of the Company's employees are represented by a union. The Company considers
its relations with its employees to be good.
6
AVAILABLE INFORMATION
The Company files reports electronically with the Securities and Exchange
Commission. Forms 10-Q, 10-K, Proxy Statements and other information can be
viewed at http://www.sec.gov. The Company maintains its own web site which can
be viewed at http://www.eCybex.com.
ITEM 2. PROPERTIES
----------
The Company occupies approximately 120,000 square feet of space in Medway,
Massachusetts and approximately 210,000 square feet of space in Owatonna,
Minnesota for administrative offices, manufacturing, assembly and warehousing.
These facilities are owned by the Company. The Company also utilizes outside
warehousing.
In the first quarter 2001, the Company's newly-formed United Kingdom subsidiary
entered into a lease of approximately 10,000 square feet of space in
Northampton, England. This space will be utilized for the subsidiary's direct
sales effort in the United Kingdom and for a distribution center which will
serve Cybex's operations throughout Europe.
The Company's manufacturing facilities are equipped to perform fabrication,
machining, welding, grinding, assembly and powder coating of its products.
The Company believes that its facilities provide adequate capacity for its
operations for the foreseeable future, and the facilities are well maintained
and kept in good repair.
Additional information concerning the financing of the Company's owned
facilities is described in Note 5 the Company's consolidated financial
statements.
ITEM 3. LEGAL PROCEEDINGS
-----------------
As a manufacturer of fitness products, the Company is inherently subject to the
hazards of product liability litigation; however, the Company has maintained,
and expects to continue to maintain, insurance coverage which the Company
believes is adequate to protect against these risks.
KIRILA ET AL V. CYBEX INTERNATIONAL, INC., ET AL
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This action was commenced in the Court of Common Pleas of Mercer County,
Pennsylvania in May 1997 against the Company, the Company's wholly-owned
subsidiary, Trotter, and certain officers, directors and affiliates of the
Company. The plaintiffs include companies which sold to Trotter a strength
equipment company in 1993, a principal of the corporate plaintiffs who was
employed by Trotter following the acquisition, and a company which leased to
Trotter a plant located in Sharpsville, Pennsylvania. In accordance with
Pennsylvania practice, the complaint in this matter was not served upon the
defendants until the second quarter of 1998. The complaint, among other things,
alleges that the closure of the Sharpsville facility was wrongful, wrongful
termination of the individual plaintiff's employment and nonpayment of
compensation, breach of the lease agreement and the asset purchase agreement,
tortious interference with business relationships, fraud, negligent
misrepresentation, unjust enrichment, breach of the covenant of good faith and
fair dealing, conversion, unfair competition and violation of the Wage Payment
and Collection Law. The complaint seeks specific performance of the lease, the
employment agreement and the indemnification provisions of the asset purchase
agreement, and an unspecified amount of compensatory and punitive damages and
expenses. The Company has filed an answer to the complaint denying the material
allegations of the complaint and denying liability. It has further asserted
counterclaims against the plaintiffs, including for repayment of over-
allocations of expenses under the lease and certain excess incentive
compensation payments which were made to the individual plaintiff. The Company
intends to vigorously defend this matter.
HOT NEW PRODUCTS V. CYBEX INTERNATIONAL, INC., ET AL
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This action is in the United States District Court for the Northern District of
Alabama. The Plaintiff in this action is a terminated dealer of Trotter Inc.
Shortly after the termination, Plaintiff filed a State action against Trotter
and Cybex, alleging fraud, breach of contract, unjust enrichment and recoupment.
The Plaintiff also sued another Cybex dealer alleging intentional interference
with business relations. In July 1998, the Plaintiff filed this antitrust
Complaint in federal court, alleging price discrimination and price and
territory conspiracy violations; the State court case was dismissed with the
State court claims refiled as part of this federal action. The Plaintiff is
seeking approximately
7
$3,500,000 in compensatory damages, plus treble damages for the antitrust claims
and punitive damages. The Company has filed an answer to the complaint denying
the material allegations of the complaint and denying liability. The Company
intends to vigorously defend this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 2000.
SPECIAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT
--------------------------------
Officers are elected by the Board of Directors and serve at the pleasure of the
Board. The executive officers of the Company as of March 31, 2001 were as
follows:
NAME AGE POSITION
John Aglialoro...... 57........... Chairman and Acting Chief Executive Officer
Karen A. Slein...... 43........... Vice President - Human Resources
Paul G. Horgan...... 44........... Corporate Controller
Mr. Aglialoro has served as Cybex's Acting Chief Executive Officer since
November 2000. Mr. Aglialoro is the Chairman and Chief Executive Officer of
UM Holdings Ltd., which he co-founded in 1973. UM Holdings Ltd. is the Company's
principal shareholder. He served as a Director and Chairman of Trotter Inc. from
1983 until its merger with Cybex in 1997, from which time he has served as the
Chairman of the Company's Board of Directors.
Ms. Slein has served as the Company's Vice President of Human Resources since
the 1997 Merger date. She joined Trotter in 1995 as Manager of Human Resources
and was promoted to Director of Human Resources in 1996. From 1992 to 1995, she
was Director of Human Resources for EcoScience, a publicly traded biotechnology
company. Prior to that, she spent seven years as Manager of Administration for
New England Shrimp Company.
Mr. Horgan has served as the Company's Corporate Controller since June 2000.
From 1997 to 2000, he served as Senior Manager of Accounting Operations at Stone
& Webster, a publicly traded engineering and construction company. From 1984 to
1997 he held various management positions at Etonic, a privately held footwear
company, most recently as corporate controller.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
-------
The Company's common shares are traded on the American Stock Exchange (Amex).
The Company's Amex symbol is CYB.
The following table shows the high and low market prices as reported by the
Amex:
2000 1999
Calendar High Low High Low
- -------- ---- --- ---- ---
First Quarter $4.500 $3.000 $5.625 $4.000
Second Quarter 4.438 2.625 5.625 3.750
Third Quarter 3.500 2.750 5.000 3.438
Fourth Quarter 3.625 1.875 3.750 2.000
As of April 10, 2001 there were approximately 466 common shareholders of record.
This figure does not include stockholders with shares held under beneficial
ownership in nominee name.
On December 31, 2000, in accordance with the Board compensation policy, the
Company issued 5,000 shares of its common stock to John Aglialoro for serving as
Chairman of the Board of Directors. In issuing these shares, the Company relied
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended.
Under the Company's Credit Agreement, the Company currently does not have the
ability to pay dividends. The present policy of the Company is to retain any
future earnings to provide funds for the operation and expansion of its
business.
9
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following information has been extracted from the Company's consolidated
financial statements for the five years ended December 31, 2000. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes thereto included
elsewhere in this report.
Year Ended December 31
------------------------------------------------------------------------------------------
2000 1999 1998(a) 1997(b) 1996
------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Net sales $125,293 $129,168 $132,385 $94,326 $48,518
Cost of sales 82,936 82,033 85,567 (d) 60,490(f) 32,127
-------- -------- -------- ------- -------
Gross profit 42,357 47,135 46,818 33,836 16,391
Selling, general and administrative
expenses 46,370 37,752 37,228 32,772(g) 12,124
Nonrecurring charges 25,440 (c) -- 5,898 (e) 7,134 (h) --
-------- -------- -------- ------- -------
Operating income (loss) (29,453) 9,383 3,692 (6,070) 4,267
Interest income 318 434 723 427 49
Interest expense (3,141) (3,034) (2,405) (1,188) (1,004)
-------- -------- -------- ------- -------
Income (loss) before income taxes (32,276) 6,783 2,010 (6,831) 3,312
Income tax provision (benefit) (11,699) 2,781 992 (1,586) 1,344
-------- -------- -------- ------- -------
Net income (loss) $(20,577)(i) $ 4,002 $ 1,018 (j) (5,245)(k) $ 1,968
======== ======== ======== ======= =======
Basic earnings (loss) per share $(2 .36)(i) $ .46 $ .12 (j) $ (.76)(k) $ .46
======== ======== ======== ======= =======
Diluted earnings (loss) per share $(2 .36)(i) $ .46 $ .12 (j) $(.76)(k) $ .45
======== ======== ======== ======= =======
(a) 1998 includes the results of Tectrix from the May 21, 1998 acquisition date.
(b) 1997 includes the results of Trotter plus the results of Cybex from the
May 23, 1997 merger date.
(c) Includes $2,352 of relocation costs, $2,545 of severance charges pertaining
to the restructuring plan, $16,912 of goodwill impairment relating to the
Tectrix acquisition, $2,831 of license settlement charges and $800 of system
impairments. (see Note 4)
(d) Includes $300 of costs related to the Cybex bike and $372 of costs related
to the elimination of the Reactor product line, both of which are considered
unusual or nonrecurring.
(e) Includes $3,000 of costs related to the Fuqua litigation, $1,435 of costs
related to the Cybex bike, $952 of costs related to the elimination of the
Reactor product line and $511 of other nonrecurring costs considered unusual
or a direct result of the Tectrix acquisition.
(f) Includes $2,375 of costs considered unusual or nonrecurring, or a direct
result of the Cybex/Trotter merger.
(g) Includes $4,599 of costs considered unusual or nonrecurring, or a direct
result of the Cybex/Trotter merger.
(h) Includes $2,734 of costs related to the Sharpsville plant closure, a $2,500
charge for acquired research and development and a $1,900 charge related to
the arbitrator's decision in connection with the dispute with Fuqua.
(i) Includes $25,440 of pre-tax charges on an after-tax basis for nonrecurring
costs comprised of the items listed in (c) above.
(j) Includes $6,570 of pre-tax charges on an after-tax basis for nonrecurring
or acquisition-related costs comprised of the items listed in (d) and (e)
above.
(k) Includes $14,108 of pre-tax charges on an after-tax basis for nonrecurring
or merger-related costs comprised of the items listed in (f), (g) and (h)
above.
Year Ended December 31
------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
- -------------------
Working capital $ 5,061 $ 20,470 $ 18,772 $19,013 $ 4,205
Total assets 88,720 104,778 107,897 78,725 20,367
Long-term debt 37,242 36,364 38,926 13,639 11,369
Stockholders' equity 23,554 44,004 39,928 38,908 1,396
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements.
There are a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated by the statements made below. These
include, but are not limited to, competitive factors, technological and product
developments, market demand, and uncertainties relating to the implementation of
the Company's restructuring plan. Further information on these and other
factors which could affect the Company's financial results can be found in the
Company's Reports filed with the Securities and Exchange Commission including
this Form 10-K.
OVERVIEW
Cybex International, Inc. (the "Company" or "Cybex"), a New York Corporation, is
a leading manufacturer of exercise equipment which develops, manufactures and
markets premium performance, professional quality, strength and cardiovascular
fitness equipment products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix").
Revenue is recorded when products are shipped and the Company has no significant
remaining obligations. In accordance with Emerging Issues Task Force (EITF)
Issue No. 00-10, "Shipping and Handling Costs," the Company classifies amounts
billed to customers for shipping and handling as sales. Direct shipping and
handling costs are classified as cost of sales. Internal salaries and overhead
related to shipping and handling are classified as selling, general and
administrative expense. Sales, cost of sales and selling, general and
administrative expenses for the years ended December 31, 1999 and 1998 have been
reclassified to be consistent with EITF 00-10.
On May 23, 1997, the merger between a wholly owned subsidiary of Cybex and
Trotter was consummated (the "Merger") with Trotter surviving the Merger as a
subsidiary of Cybex. This transaction was accounted for as a purchase with
Trotter deemed to be the acquiring company for accounting purposes and,
therefore, the surviving company for financial reporting purposes. Trotter was
merged into Cybex effective December 31,1999.
On May 21, 1998, Cybex entered into an agreement with Tectrix and its
stockholders whereby Cybex acquired all of the outstanding common stock of
Tectrix (the "Acquisition"). In connection with the Acquisition, the Company
discontinued Tectrix's Virtual Reality products and treadmill development
program, closed its Cambridge, Massachusetts research and development facility
and discontinued operations at Tectrix's two international sales offices.
In June 2000, Cybex announced the relocation of its Irvine, California
cardiovascular equipment assembly and production development facility to its
Medway, Massachusetts facility, which was completed in December 2000. As part of
this relocation, the Irvine facility was closed and all employees at such
facility were laid-off. This relocation resulted in a second quarter 2000
nonrecurring pre-tax charge of approximately $2,352,000. In addition, the
Company incurred a one-time pre-tax charge of $800,000 associated with the
write-off of internal use software.
In December 2000, Cybex announced a restructuring plan designed to streamline
operations, improve efficiency and reduce costs. This restructuring plan
included eliminating about 26% of Cybex's workforce. The Company recorded
fourth quarter 2000 nonrecurring pre-tax charges of $22,288,000, including a
$2,545,000 charge relating to its workforce reduction, a $16,912,000 charge
relating to goodwill impairment from the Company's Tectrix acquisition, and a
$2,831,000 charge relating to the settlement of a license agreement.
11
RESULTS OF OPERATIONS
The Company adopted its restructuring plan in response to the fourth quarter
2000 decrease in net sales discussed below. The Company anticipates that sales
will continue at a reduced level throughout 2001, primarily due to tightened
credit standards adopted as part of its restructuring plan and to economic
conditions, both generally and in the Company's business segment. The Company
has achieved significant cost reductions in the first quarter of 2001, which it
anticipates will continue throughout the year. The Company anticipates that
while first quarter 2001 net sales are likely to be approximately 35% below net
sales for the corresponding period of 2000, profitability will be achieved for
the first quarter of 2001 as a result of the Company's lower cost structure.
The following table sets forth selected items from the Consolidated Statements
of Operations as a percentage of net sales, exclusive of unusual or nonrecurring
charges.
Year Ended December 31
-------------------------
2000 1999 1998
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 66 64 64
----- ---- ----
Gross profit 34 36 36
Selling, general and administrative
expenses 37 29 28
----- ---- ----
Operating income (loss) (3) 7 8
Interest expense (net) (3) (2) (2)
----- ---- ----
Income (loss) before income taxes (6)% 5% 6%
===== ==== ====
NET REVENUES
Cybex's net revenues decreased $3,875,000, or 3%, to $125,293,000 in 2000,
compared with a $3,217,000, or 2% decrease, in 1999. The decrease in 2000 was
primarily attributable to a decrease in demand of the Company's cardiovascular
products of $7,000,000, or 11%, to $55,600,000. This was offset primarily by a
$2,200,000, or 4% increase in strength training products to $63,400,000 where
the company believes it is the leader in terms of market share and an increase
of $900,000, or 17%, to $6,400,000 for freight revenue. The decline in the sale
of cardiovascular products was primarily related to a fourth quarter decline in
orders resulting from an industry slowdown and the Company's stricter credit
policy adopted in the fourth quarter of 2000.
The decrease in net revenues in 1999 was primarily attributable to a decrease in
demand of the Company's cardiovascular products of $6,300,000, or 9%, to
$62,600,000. This was offset primarily by a $2,500,000, or 4% increase, to
$61,200,000 in strength training products and $600,000, or 13%, to $5,415,000
for freight revenue. The decline in the sale of cardiovascular products was
primarily attributable to the lack of new products. In addition, some
instability in the sales organization during the first half of 1999 led to a
reduced pipeline of orders for the third quarter of 1999. Subsequently, a new
distribution model and sales organization structure was implemented which led to
the improved order rate in the fourth quarter. Sales in all product lines
suffered the effects of the implementation in 1999 of a new Enterprise Resource
Planning System ("ERP"), which management believes cost the Company lost sales
to the competition and is reflected in the Company's poor third quarter 1999
performance. Significant improvements have since been made with the ERP system.
Revenues outside the U.S. and Canada represented total net revenues of 21%, 20%
and 18% in 2000, 1999 and 1998, respectively.
GROSS MARGIN
Gross margin was 34% in 2000, compared with 36% in 1999 and 1998. Gross
margin in 2000 was affected by fourth quarter adjustments for returned product
and price adjustments relating to the termination of the Company's relationship
with a domestic dealer, transition costs related to the relocation of the
Irvine, California facility to Medway, Massachusetts, higher warranty costs
relating to the cardiovascular products, a new accounting guideline for freight
costs and lower volume of sales in the fourth quarter. The Company was able to
maintain margins in 1999 despite lower sales in 1999 versus 1998 primarily due
to lower warranty and overhead costs.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $8,618,000, or 23%, in
2000 to $46,370,000 compared with an increase of $524,000, or 1%, in 1999. As a
percentage of net revenues, these expenses were 37%, 29% and 28% in 2000, 1999
and 1998, respectively. The provision for doubtful accounts increased in 2000
by $3,900,000 due to weakness in the fitness industry in the fourth quarter, a
tighter credit policy, and additional reserves for a domestic dealer and an
international distributor. Health insurance costs were higher in 2000 by
$900,000 due to increased costs and claims. Information system costs increased
by $1,900,000 due to the new ERP system. In 2000, product improvements made in
the strength line resulted in higher costs of $700,000. Between 1999 and 1998,
product development expenses increased by $1,337,000, or 38%, to $4,816,000 to
fuel the creation of new products planned for 2000. Investments were also made
in 1999 in international sales and marketing and information systems. These
increases were offset by decreases in shipping, selling and customer service
expenses.
NONRECURRING CHARGES
Nonrecurring pre-tax charges totaling $25,440,000 ($16,231,000, or $1.86 per
share on an after-tax basis) for 2000 are comprised of:
Asset impairment charge related to Tectrix goodwill $16,912,000
Asset impairment charge related to internal-use software 800,000
Severance and exit costs related to June 2000 relocation 2,352,000
Severance costs related to December 2000 restructuring 2,545,000
Settlement of dispute related to license 2,831,000
----------------
Total $25,440,000
================
The asset impairment charge of $16,912,000 related to the goodwill recorded in
connection with the Tectrix acquisition. The remaining goodwill of $260,000 is
being amortized over the estimate remaining useful life of the related products
of five years. Subsequent to the Tectrix acquisition, sales and operating profit
from the Tectrix products did not meet the projections that were originally used
to determine the purchase price for the business. In June 2000, the Company
announced the relocation of the former Tectrix cardiovascular equipment assembly
and production development facility. As a result of these factors, management
reviewed the goodwill from the Tectrix acquisition for impairment. The Company
measured impairment based on the fair value of the Tectrix business, which was
based on an independent appraisal that considered the discounted cash flows from
the Tectrix product line and the value of the Tectrix business based on
acquisitions of similar companies.
In the second quarter 2000, the Company incurred a one-time charge of $800,000
associated with the write-off of internal use software that will not be
utilized.
In June 2000, the Company announced the relocation of its Irvine, California
cardiovascular equipment assembly and production development facility to its
Medway, Massachusetts facility in an effort to improve efficiencies and reduce
manufacturing overhead. As part of this relocation, the Irvine facility was
closed and all employees at such facility were laid off. This relocation
resulted in a charge of $2,352,000 of which $1,550,000 is for the cost of
employee severance related to the termination of 69 employees, most of which
were involved in manufacturing, lease termination fees ($355,000) and fixed
asset impairment charges ($447,000).
In December 2000, the Company announced a restructuring plan designed to
streamline operations, improve efficiency and reduce costs. This restructuring
plan included eliminating 152 employees, involved in manufacturing, sales and
marketing, product development and administration. The restructuring charge
associated with employee severance was $2,545,000.
In December 2000, the Company settled a dispute related to a license agreement
whereby the Company is required to make minimum quarterly royalty payments of
$90,000 through November 2012. No future benefit is expected from the licensed
technology. Accordingly, the Company recorded a charge of $2,831,000 for the
net present value of the future minimum royalty payments under the settlement
agreement.
INTEREST EXPENSE
Net interest expense increased by $223,000, or 9%, in 2000 to $2,823,000
compared to an increase of $918,000, or 55%, in 1999. The increase in 2000 was
primarily due to higher interest rates, while the increase in 1999 was
attributable to additional borrowings incurred in connection with the Tectrix
acquisition.
INCOME TAXES
The effective tax rates were 36%, 41% and 49% for 2000, 1999 and 1998,
respectively. The tax rates differ from statutory rates due to the impact of
permanent differences of primarily non-deductible goodwill amortization.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had working capital of $5,061,000 compared
to $20,470,000 of working capital at December 31, 1999. The decrease in working
capital is primarily due to a decrease in accounts receivable of $10,521,000 as
a result of the decrease in net sales and a higher provision for doubtful
accounts, which was driven by reserves related to a domestic dealer and an
international distributor, as well as overall economic conditions, and an
increase in accrued expenses of $5,541,000 primarily related to the Company's
restructuring activities. The decrease in working capital is also due to the
presentation of a portion of the revolver ($6,922,000) as a current liability at
December 31, 2000 as a result of the addition of a lockbox arrangement whereby
remittances from the Company's customers are used to reduce the outstanding
revolver balance. These decreases in working capital were partially offset by a
decrease in accounts payable of $4,255,000 as a result of the timing of
inventory purchases. The Company's debt-to-equity ratio increased to 1.58-to-1
at December 31, 2000 from 0.83-to-1 at December 31, 1999, primarily due to the
decrease in stockholders' equity as a result of the net loss incurred for the
year ended December 31, 2000.
For the year ended December 31, 2000, cash provided by operating activities was
$5,817,000 compared to cash provided by operating activities of $7,965,000 for
the year ended December 31, 1999. The decrease in cash provided by operating
activities was primarily due to the Company's net loss before non-cash asset
impairment charges in 2000 versus net income in 1999, partially offset by cash
provided by changes in working capital in 2000 versus cash used by changes in
working capital in 1999. For the year ended December 31, 1999, cash provided by
operating activities was $7,965,000 compared to cash provided by operating
activities of $1,397,000 for the year ended December 31, 1998. The increase was
primarily attributable to higher net income and less cash used by increases in
working capital during 1999.
Cash used in investing activities consists primarily of purchases of property,
plant and equipment. Capital expenditures for the years ended December 31, 1999
and 1998 were higher than normal levels primarily as a result of costs incurred
related to the Company's Enterprise Resource Planning system (totaling
$7,598,000 during those periods) and costs related to the Company's showroom in
its Medway, Massachusetts facility. Projected capital expenditures for 2001
relate mostly to manufacturing equipment and computer hardware and software and
are expected to be approximately $2,500,000. For the year ended December 31,
1998, cash used in investing activities also included $21,331,000 of net cash
paid for the acquisition of Tectrix. An additional earnout payment of $538,000
was made in 1999 related to the Tectrix acquisition. No additional amounts will
be paid under the earnout arrangement.
On May 21, 1998, the Company entered into a Credit Agreement with several banks
that consisted of a $26,700,000 revolving loan availability which increased to
$30,000,000 in May 1999, and a $25,000,000 term loan replacing its existing Loan
and Security Agreement. Cash flows from financing activities consist primarily
of net borrowings under this credit facility. For the year ended December 31,
2000, cash provided by financing activities of $866,000 consists of borrowings
under the revolver of $5,500,000, offset by scheduled principal payments of
$4,622,000 under term debt arrangements. For the year ended December 31, 1999,
cash used in financing activities of $2,701,000 consisted of scheduled principal
payments under term debt arrangements of $3,753,000, offset by $1,100,000 of
borrowings under the revolver. For the year ended December 31, 1998, cash
provided by financing activities of $22,803,000 was primarily due to borrowings
under the Company's Credit Agreement, the proceeds of which were used to repay
outstanding debt under another facility and to finance the acquisition of
Tectrix.
At December 31, 2000, there was outstanding under the Credit Agreement
$18,000,000 in term loans, $14,500,000 in revolving loans and $5,226,000 in
letters of credit. The Company failed to meet certain financial covenants set
forth in the Credit Agreement at December 31, 2000. On April 12, 2001, the
Credit Agreement was amended to, among other things, revise the financial
covenants; waive any existing financial covenant default through the maturity
date of the loans; fix May 1, 2002 as the maturity date of all loans under the
Credit Agreement; reduce the availability under the revolving loan facility
(including the letter of credit sub-facility) to the lesser of $20,125,000 or an
amount determined by reference to a borrowing base formula; increase the
interest rate under the facility and provide certain additional collateral to
the banks. Management plans to refinance the existing facility prior to May 1,
2002, however, there can be no assurance that management will be successful in
refinancing the facility or that any such refinancing will be on terms favorable
to the Company.
The Company believes that the cash flow from its operations and available
borrowings under the amended credit agreement will be sufficient to meet its
general working capital and capital expenditure requirements in the near term.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Interest Rate Risk
The Company's debt portfolio, including interest rate swap agreements, as of
December 31, 2000, is comprised of debt denominated in US dollars. The Company
has both fixed and variable rate debt. Changes in interest rates have different
impacts on the fixed and variable portion of the Company's debt portfolio.
A change in interest rates on the fixed portion of the debt portfolio impacts
the net financial position of the Company, but has no impact on interest
incurred or cash flows. A change in interest rates on the variable portion of
the debt portfolio impacts the interest incurred and cash flows but does not
impact the net financial position.
At December 31, 2000 and 1999, the Company had fixed rate debt with a book value
of $2,243,000 and $2,564,000, respectively. The Company believes that book
value approximates fair value for this debt. The sensitivity analysis related
to the fixed portion of the Company's debt portfolio assumes an instantaneous
100 basis point move in interest rates from their levels at December 31, 2000,
with all other variables held constant. The Company does not believe that a
100 basis point increase or decrease in market rates would result in a material
decrease in the net financial position of the Company because the difference
between market rates and the fixed rate is not significant over the short
remaining term of the fixed rate debt.
At December 31, 2000 and 1999, the Company had variable rate debt with a book
value of $35,000,000 and $33,800,000, respectively, including term debt with a
principal balance outstanding of $22,000,000 and $18,000,000 at December 31,
2000 and 1999, respectively. The Company uses an interest rate swap as a cash
flow hedge against future changes in interest rates on its term debt.
A 100 basis point increase in interest rates would result in an additional
$144,000 and $117,000 in interest incurred on variable rate debt for the years
ended December 31, 2000 and 1999, respectively. A 100 basis point decrease in
rates would lower interest incurred on variable rate debt by $144,000 and
$117,000 for the years ended December 2000 and 1999, respectively. A change in
interest rates would not impact the net interest incurred or cash flows on the
Company's term debt because the interest rate on the term debt is effectively
fixed as a result of the interest rate swap.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Public Accountants................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Consolidated Financial Statement Schedule:
II. Valuation and Qualifying Accounts............................... S-1
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission that are not required
under the related instructions or are inapplicable, have been omitted.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cybex International, Inc.:
We have audited the accompanying consolidated balance sheets of Cybex
International, Inc. (a New York Corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide 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 Cybex International, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania
April 12, 2001
F-2
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
DECEMBER 31,
---------------------------
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 3,354 $ 565
Accounts receivable, net of allowance of $5,418 and $4,475 18,483 29,004
Lease receivables 137 509
Inventories 11,138 8,080
Deferred income taxes 8,986 7,449
Prepaid expenses and other 958 1,774
---------- --------
Total current assets 43,056 47,381
Property, plant and equipment, net 20,895 21,907
Lease receivables 84 659
Goodwill, net 11,742 29,713
Deferred income taxes 12,127 1,965
Other assets 816 3,153
---------- --------
$ 88,720 $104,778
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 14,464 $ 4,622
Accounts payable 5,908 10,163
Accrued expenses 16,757 11,216
Income taxes payable 866 910
---------- --------
Total current liabilities 37,995 26,911
Long-term debt 22,778 31,742
Accrued warranty obligation 1,967 2,121
Other liabilities 2,426 --
---------- --------
Total liabilities 65,166 60,774
---------- --------
Commitments and contingencies (Notes 10 and 13)
Stockholders' Equity:
Common stock, $.10 par value, 20,000 shares authorized,
9,002 and 8,917 shares issued 900 892
Additional paid-in capital 44,748 44,627
Treasury stock, at cost (215 and 217 shares) (2,261) (2,259)
Retained earnings (accumulated deficit) (19,833) 744
---------- --------
Total stockholders' equity 23,554 44,004
---------- --------
$ 88,720 $104,778
========== ========
The accompanying notes are an integral part of these statements.
F-3
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998(1)
--------- --------- ---------
Net sales $125,293 $129,168 $132,385
Cost of sales 82,936 82,033 85,567
--------- --------- ---------
Gross profit 42,357 47,135 46,818
Selling, general and administrative expenses 46,370 37,752 37,228
Asset impairment and restructuring charges 25,440 -- 5,898
--------- --------- ---------
Operating income (loss) (29,453) 9,383 3,692
Interest income 318 434 723
Interest expense (3,141) (3,034) (2,405)
--------- --------- ---------
Income (loss) before income taxes (32,276) 6,783 2,010
Income tax provision (benefit) (11,699) 2,781 992
--------- --------- ---------
Net income (loss) $(20,577) $ 4,002 $ 1,018
--------- --------- ---------
Basic and diluted earnings (loss) per share $(2.36) $.46 $.12
========= ========= =========
(1) 1998 includes the results of Tectrix from the May 21, 1998 acquisition date.
(see Note 3)
The accompanying notes are an integral part of these statements.
F-4
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(in thousands)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------- PAID-IN TREASURY (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT) EQUITY
--------------------------------------------------------------------------------
Balance, December 31, 1997 8,854 $885 $44,189 $(1,890) $ (4,276) $ 38,908
Exercise of stock options 33 3 325 (70) -- 258
Common stock issued to Directors 8 1 35 21 -- 57
Repurchase of Common Stock -- -- -- (313) -- (313)
Net income -- -- -- -- 1,018 1,018
--------------------------------------------------------------------------------
Balance, December 31, 1998 8,895 889 44,549 (2,252) (3,258) 39,928
Common stock issued to Directors 22 3 55 14 72
Repurchase of Common Stock -- -- (15) (21) -- (36)
Other -- -- 38 -- -- 38
Net income -- -- -- -- 4,002 4,002
--------------------------------------------------------------------------------
Balance, December 31, 1999 8,917 892 44,627 (2,259) 744 44,004
Common stock issued to Directors 35 3 70 10 -- 83
Restricted stock issued to officer 50 5 158 -- -- 163
Repurchase of Common Stock -- -- -- (12) -- (12)
Other -- -- (107) -- -- (107)
Net loss -- -- -- -- (20,577) (20,577)
--------------------------------------------------------------------------------
Balance, December 31, 2000 9,002 $900 $44,748 $(2,261) $(19,833) $ 23,554
================================================================================
The accompanying notes are an integral part of these statements.
F-5
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
-----------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(20,577) $ 4,002 $ 1,018
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 5,023 4,064 3,241
Deferred income taxes (11,699) 2,781 992
Stock based compensation 246 -- --
Provisions for losses on accounts and lease receivables 4,412 519 1,683
Write-off of intangibles and fixed assets 18,159 -- 1,659
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable 6,109 (896) (4,601)
Lease receivables 947 26 1,006
Inventories (3,058) 2,635 421
Prepaid expenses and other 2,845 (515) 397
Accounts payable, accrued liabilities and other liabilities 3,410 (4,651) (4,419)
-----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,817 7,965 1,397
-----------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,894) (6,060) (7,659)
Cash paid for Tectrix stock, net -- (538) (21,331)
-----------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,894) (6,598) (28,990)
-----------------------------------
FINANCING ACTIVITIES:
Proceeds from long-term debt -- -- 25,000
Principal payments of long-term debt (4,622) (3,753) (9,528)
Net borrowings under revolving loan 5,500 1,100 7,900
Deferred financing costs -- (41) (571)
Purchase of treasury stock (12) (7) (313)
Exercise of stock options -- -- 315
-----------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 866 (2,701) 22,803
-----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,789 (1,334) (4,790)
CASH AND CASH EQUIVALENTS, beginning of year 565 1,899 6,689
-----------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 3,354 $ 565 $ 1,899
===================================
The accompanying notes are an integral part of these statements.
F-6
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 2000
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION
Cybex International, Inc. (the "Company" or "Cybex"), a New York Corporation, is
a leading manufacturer of exercise equipment which develops, manufactures and
markets premium performance, professional quality strength and cardiovascular
fitness equipment products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix"). Today, all of the
Company's products are sold under the brand name "Cybex". The Company also has
a wholly-owned finance subsidiary, Cybex Financial Corp ("CFC"), which provides
equipment lease financing for the Company's products, primarily to its
commercial domestic customer base. The Company operates in one business segment.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, after elimination of all significant intercompany accounts and
transactions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (first in, first out) or market.
Costs include materials, labor and manufacturing overhead. Inventories are
summarized as follows:
December 31,
--------------------------
2000 1999
---- ----
Raw materials $ 4,591,000 $5,305,000
Work in process 1,963,000 1,297,000
Finished goods 4,584,000 1,478,000
----------- ---------
$11,138,000 $8,080,000
=========== ==========
Property and Equipment
Property and equipment are recorded at cost. Betterments and improvements are
capitalized and repairs and maintenance costs are expensed as incurred.
Depreciation is calculated using the straight-line method based on estimated
useful lives for financial statement purposes and various prescribed methods for
tax purposes. The estimated useful lives for financial statement purposes are 25
years for buildings and improvements and 3 to 10 years for equipment and
furniture.
F-7
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Internal Software Costs
Under the provisions of Statement of Position ("SOP") 98-1, the Company
capitalizes certain costs associated with software for internal use.
Capitalization begins when the preliminary project stage is complete and ceases
when the project is substantially complete and ready for its intended purpose.
Capitalized costs include external direct costs of hardware, software and
services and payroll and payroll-related expenses for employees who are directly
associated with developing and implementing internal use software. Through
December 31, 2000, the Company has capitalized $7,598,000 of costs associated
with an Enterprise Resource Planning System. Such costs are included within
property and equipment and are being amortized over seven years.
Impairment of Long-Lived Assets
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 121 also
requires that long-lived assets held for sale be reported at the lower of the
carrying amount or fair value less cost to sell. The Company continually
evaluates whether events and circumstances have occurred that indicate that the
remaining estimated useful lives of long-lived assets may warrant revision or
that the remaining balance may not be recoverable. When factors indicate that
such assets should be evaluated for possible impairment, the Company uses an
estimate of the related undiscounted cash flow in measuring whether the asset is
recoverable.
For the year ended December 31, 2000, asset impairment charges include (i)
$800,000 associated with the write-off of internal-use software that will not be
utilized and (ii) $447,000 associated with the write-off of fixed assets at the
Company's Irvine facility that were disposed of in connection with the closure
of the plant (see Note 4). For the year ended December 31, 1998, the Company
recorded asset impairment charges which include (i) $919,000 for tooling related
to the Cybex branded bike, which was discontinued, and (ii) $585,000 for the
write-off of intangible assets related to an exclusive technology license
related to the Reactor product line (see Note 4). At December 31, 2000,
management believes that no revision to the remaining useful lives or additional
write-downs of long-lived assets is required.
Goodwill
Goodwill has been amortized over periods ranging from 30 to 40 years. In
connection with the write-off of Tectrix goodwill (see Note 3), the Company
reduced the useful life of the remaining Tectrix goodwill to five years. As of
December 31, 2000 and 1999, accumulated amortization was $2,042,000 and
$2,558,000, respectively. Amortization expense for the years ended December 31,
2000, 1999 and 1998 was $1,059,000, $1,058,000 and $774,000, respectively.
In accordance with Accounting Principles Board (APB) No. 17, "Intangible
Assets," the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
lives of goodwill may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that such assets should be evaluated for
possible impairment, the Company uses an estimate of the related future
undiscounted cash flow in measuring whether the asset should be written down to
fair value. For the year ended December 31, 2000, the Company recorded an asset
impairment charge of $16,912,000 related to goodwill recorded in connection with
the acquisition of Tectrix (see Note 3).
F-8
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets
Other assets consist of the following:
December 31,
-----------------------
2000 1999
-------- ----------
Recoverable income taxes $ -- $1,753,000
Deferred financing costs 349,000 459,000
Other intangibles 348,000 859,000
Other assets 119,000 82,000
-------- ----------
$816,000 $3,153,000
======== ==========
Amortization expense of other intangibles was $347,000, $320,000 and $320,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
Deferred Financing
In connection with the financing described in Note 5, the Company has
capitalized debt issuance costs consisting of brokerage and legal fees, totaling
$623,000, which are included within other assets at December 31, 2000. The
Company is amortizing these costs on a straight-line basis, which approximates
the effective interest rate method over the term of the related debt.
Accumulated amortization was $274,000 and $164,000 for the years ended December
31, 2000 and 1999, respectively. Amortization expense was $110,000 and $105,000
for the years ended December 31, 2000, and 1999, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, and debt
instruments. The book values of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses are considered to be representative of
their respective fair values. Based on the terms of the Company's debt
instruments that are outstanding as of December 31, 2000, the carrying values
are considered to approximate their respective fair values. See Note 5 for the
terms and carrying value of the Company's various debt instruments.
Concentration of Credit Risk
The majority of the Company's customers are specialty fitness-related dealers,
health clubs, and consumers located in the United States. Financial instruments
that potentially subject the Company to concentrations of credit risk consist
primarily of trade accounts and lease receivables. The Company utilizes third-
party insurers for certain trade accounts receivable. No single customer
accounted for more than 10% of the Company's net sales for the years ended
December 31, 2000, 1999 and 1998.
There is no single geographic area of significant concentration. Export sales
accounted for approximately 21%, 20% and 18% of total net sales for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-9
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes sales of the Company's product lines over the
past three years (in millions):
2000 1999 1998
---- ---- ----
Cardiovascular products $ 55.5 $ 62.6 $ 68.9
Strength systems 63.4 61.2 58.7
Freight revenue 6.4 5.4 4.8
------ ------ ------
$125.3 $129.2 $132.4
====== ====== ======
Accrued Warranty Obligations
Prior to December 31, 2000, the Company generally provided a three-year warranty
on cardiovascular products and a warranty on strength products that varied by
component. Warranty expense was $4,209,000, $3,782,000 and $5,315,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. The accrued
warranty obligation is provided at the time of product sale based on management
estimates which are developed from historical information and certain
assumptions about future events which are subject to change.
Revenue Recognition
Revenue is recorded when products are shipped and the Company has no significant
remaining obligations. In accordance with Emerging Issues Task Force (EITF)
Issue No. 00-10, "Shipping and Handling Costs," the Company classifies amounts
billed to customers for shipping and handling as sales. Direct shipping and
handling costs are classified as cost of sales. Internal salaries and overhead
related to shipping and handling are classified as selling, general and
administrative expense. Sales, cost of sales and selling, general and
administrative expenses for the years ended December 31, 1999 and 1998 have been
reclassified to be consistent with EITF 00-10.
Advertising Costs
The Company expenses advertising costs as incurred. For the years ended
December 31, 2000, 1999 and 1998, advertising expense was $5,659,000,
$5,971,000 and $3,696,000, respectively. Included in advertising expense is the
cost to reimburse certain customers for a portion of their advertising costs
under a cooperative advertising program. These obligations are accrued when the
related revenues are recognized.
Research and Development Costs
Research and development costs are charged to expense as incurred. Such costs
were $4,817,000, $4,816,000 and $3,479,000 for the years ended December 31,
2000, 1999 and 1998, respectively, and are included in selling, general and
administrative expenses.
F-10
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental Cash Flow Disclosures
Cash paid for interest was $3,311,000, $3,047,000 and $2,173,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Cash paid for income
taxes was $77,000, $267,000 and $187,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
The following table displays the net non-cash assets and liabilities that were
acquired in 1998 as a result of the Tectrix Acquisition.
YEAR ENDED DECEMBER 31
----------------------
Non-cash assets (liabilities): 1998
------------
Accounts receivable $ 3,803,000
Inventories 4,156,000
Prepaid expenses and other 119,000
Property, plant and equipment 1,058,000
Intangibles and other assets 819,000
Goodwill 18,225,000
Deferred income taxes 277,000
Accounts payable and accrued expenses (5,211,000)
-----------
23,246,000
Less note payable to seller (1,915,000)
-----------
Net cash paid (acquired) $21,331,000
===========
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
Income taxes are calculated using the liability method. Accordingly, deferred
tax assets and liabilities are recognized currently for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
basis. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the
current year's presentation.
F-11
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) per Common Share
The table below sets forth the reconciliation of the basic and diluted earnings
(loss) per share computations:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
---- ---- ----
Net income (loss) $(20,577,000) $4,002,000 $1,018,000
============ ========== ==========
Shares used in computing basic earnings (loss) per share 8,725,000 8,689,000 8,671,000
Dilutive effect of options -- -- 47,000
Shares used in computing diluted earnings (loss) per share
------------ ---------- ----------
8,725,000 8,689,000 8,718,000
============ ========== ==========
For the year ended December 31, 2000, 1999 and 1998, options to purchase
435,661, 768,641 and 755,189 shares of common stock at exercise prices ranging
from $2.69 to $11.75, $4.06 to $11.75 and $4.31 to $12.13 per share were
outstanding, respectively, but were not included in the computation of diluted
earnings per share as the result would be anti-dilutive.
New Accounting Pronouncements
Derivatives
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. In accordance with the transition
provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect
type adjustment of $212,000 in the first quarter 2001 in accumulated other
comprehensive income to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments. At December 31, 2000, cash flow
hedging instruments consist solely of an interest rate swap, which is used to
reduce the Company's exposure to interest rate fluctuations on its variable rate
term debt (see Note 5).
Accounting for Transfers and Servicing of Financial Assets
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective January 1, 2001.
The adoption of SFAS No. 140 did not have any impact on the Company's accounting
for sales of lease receivables. See Note 10 for disclosures required by SFAS
No. 140.
F-12
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 3--ACQUISITIONS
On May 21, 1998, Cybex entered into an agreement (the "Agreement") with Tectrix
and its stockholders whereby Cybex acquired all of the outstanding common stock
of Tectrix (the "Acquisition"). The purchase price consisted of net cash of
$21,331,000, of which $2,670,000 was used to repay Tectrix debt, and a
promissory note in the amount of $2,006,000. In addition, the selling
stockholders had the right to receive aggregate additional payments of up to
$6,600,000 based on Tectrix's post-closing margin performance during the three-
year period following the Acquisition. As of December 31, 2000, $538,000 has
been earned under this arrangement and recorded as additional purchase price.
No additional amounts will be earned under this arrangement. The Acquisition
has been accounted for using the purchase method of accounting and the parties
have made a Section 338(h)10 election for the Acquisition to be accounted for as
an asset purchase for income tax purposes.
In connection with the Acquisition in 1998, the Company discontinued Tectrix's
Virtual Reality products and treadmill development program, closed its
Cambridge, Massachusetts research and development facility and has discontinued
operations at Tectrix's two international sales offices. The costs associated
with the discontinuance of the Virtual Reality and treadmill product lines, as
well as the exit costs of the international sales offices, have been included in
the application of purchase accounting by the Company. The Company also
discontinued the manufacture of Cybex branded bikes in connection with the
Acquisition, thereby eliminating a duplicate product line. The costs to
discontinue the Cybex bike were charged to the statement of operations in the
second quarter of 1998 (see Note 4).
The following table summarizes the unaudited pro forma combined results of
operations for the year ended December 31, 1998 as if the Acquisition had
occurred on January 1, 1998. The pro forma information does not purport to be
indicative of the results that would have been attained if the operations had
actually been combined during the periods presented:
YEAR ENDED DECEMBER 31,
-----------------------
1998
------------
(unaudited)
Net sales $138,466,000
Operating income 7,930,000
Net income 3,111,000
Basic and diluted earnings per share .36
Shares used in computing earnings per share 8,671,000
The pro forma data for the year ended December 31, 1998 excludes net sales, cost
of sales and other direct costs associated with the Tectrix Virtual Reality
product and other adjustments as a direct result of the Acquisition. The pro
forma data does not include $1,435,000, ($832,000, or $0.10 per share on an
after-tax basis) of nonrecurring charges expensed by the Company in the second
quarter of 1998 related to the Cybex bike and $3,000,000, ($1,740,000, or $0.20
per share on an after-tax basis) of nonrecurring charges expensed by the Company
in the fourth quarter of 1998 related to the Fuqua litigation settlement (see
Note 4) but includes $2,135,000, ($1,238,000, or $0.16 per share on an after-tax
basis), of unusual costs primarily related to the elimination of the Reactor
product line.
F-13
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 3--ACQUISITIONS (CONTINUED)
Goodwill Impairment
Subsequent to the Tectrix acquisition, sales and operating profit from the
Tectrix products have not met the projections that were originally used to
determine the purchase price for the business. In June 2000, the Company
announced the relocation of the former Tectrix cardiovascular equipment assembly
and production development facility in Irvine, California to its Medway,
Massachusetts facility. As part of this relocation, the Irvine facility was
closed and all employees at such facility were terminated (see Note 4).
Subsequent to the relocation, management continued to attempt to improve the
sales and profitability of the Tectrix products. In December 2000, Cybex
announced a restructuring plan designed to streamline operations, improve
efficiency and reduce costs. This restructuring plan was in response to a
decrease in net sales in 2000 as a result economic conditions, both generally
and in the Company's business segment, and tightened credit policies adopted by
the Company. As a result of these factors, management reviewed the goodwill from
the Tectrix acquisition for impairment. The Company measured impairment based on
the fair value of the Tectrix business, which was based on an independent
appraisal that considered the discounted cash flows from the Tectrix product
line and the value of the Tectrix business based on acquisitions of similar
companies. For purposes of determining future discounted cash flows from the
Tectrix product lines, the Company used historical results, current projections
and internal earnings targets. These projected cash flows were then discounted
at a rate corresponding to the Company's estimated cost of capital, as adjusted
for the risk premium related to the specific Tectrix products. For the year
ended December 31, 2000, the Company recorded an impairment charge of
$16,912,000 related to the goodwill recorded in connection with the Tectrix
acquisition. The remaining goodwill of $268,000 is being amortized over the
estimated remaining useful life of the related products of five years.
F-14
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 4--RESTRUCTURING CHARGES
2000 Restructuring Charges
The statement of operations for the year ended December 31, 2000 includes pre-
tax charges totaling $25,440,000 ($16,231,000, or $1.86 per share on an after-
tax basis) for asset impairments and restructuring charges. This charge is
comprised of:
Asset impairment charge related to Tectrix goodwill $16,912,000
Asset impairment charge related to internal-use software 800,000
Severance and exit costs related to June 2000 relocation 2,352,000
Severance costs related to December 2000 restructuring 2,545,000
Settlement of dispute related to license 2,831,000
----------------
Total $25,440,000
================
In June 2000, the Company announced the relocation of its Irvine, California
cardiovascular equipment assembly and production development facility to its
Medway, Massachusetts facility in an effort to improve efficiencies and reduce
manufacturing overhead. As part of this relocation, the Irvine facility was
closed and all employees at such facility were laid off. This relocation
resulted in a charge of $2,352,000 of which $1,550,000 is for the cost of
employee severance related to the termination of 69 employees, most of which
were involved in manufacturing, lease termination fees ($355,000) and fixed
asset impairment charges ($447,000). Management's efforts with respect to this
relocation are substantially complete.
In December 2000, the Company announced a restructuring plan designed to
streamline operations, improve efficiency and reduce costs. This restructuring
plan included eliminating 152 employees, involved in manufacturing, sales and
marketing, product development and administration. The restructuring charge
associated with employee severance was $2,545,000. Management's efforts with
respect to the December 2000 restructuring are substantially complete.
In December 2000, the Company settled a dispute related to a license agreement
whereby the Company is required to make minimum quarterly royalty payments of
$90,000 through November 2012. No future benefit is expected from the licensed
technology. Accordingly, the Company recorded a charge of $2,831,000 for the
net present value of the future minimum royalty payments under the settlement
agreement (see Note 13).
The following table summarizes accrued restructuring costs at December 31, 2000:
BALANCE
CHARGE UTILIZED DECEMBER 31, 2000
---------- --------- -----------------
Severance $4,095,000 $(439,000) $3,656,000
Lease termination 355,000 (355,000) --
License settlement 2,831,000 -- 2,831,000
---------- --------- --------------
$7,281,000 $(794,000) $6,487,000
========== ========= ==============
F-15
1998 Restructuring Charges
The statement of operations for the year ended December 31, 1998 includes pre-
tax charges totaling $6,570,000 ($3,958,000, or $.45 per share on an after-tax
basis) for unusual and nonrecurring items, of which $672,000 is included in cost
of goods sold and $5,898,000 is included as an asset impairment and
restructuring charges. This charge is comprised of:
Final settlement with Fuqua Enterprises $3,000,000
Discontinuance of Cybex branded bike 1,735,000
Discontinuance of Reactor product line 1,324,000
Other 511,000
----------------
Total $6,570,000
================
The $3,000,000 charge related to the final settlement of a dispute with Fuqua
Enterprises, Inc. (Fuqua), which was a contingency that existed prior to the
Merger between Trotter and Cybex (see Note 3). Prior to the Merger, Lumex/Basic
American Holdings, Inc. formerly known as Fuqua, asserted a claim against the
Company in connection with the sale of substantially all of the assets of the
Company's Lumex Division to Fuqua in 1996. At the Merger date, the Company
provided a reserve for the Fuqua claim based on the information available at
that time in accordance with SFAS No. 38, "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises". A final decision with respect to the
arbitration was received on February 13, 1998, awarding a payment of
approximately $2,400,000, including interest, to Fuqua. The Company recorded a
$1,900,000 charge in 1997 related to the arbitration and accrued professional
fees. During 1997 Fuqua notified Cybex of a separate claim for breaches of
certain of Cybex's representations and warranties in the asset sale agreement
involving substantially the same matters submitted to the arbitrator and in
February 1998, Fuqua commenced an action with respect to these and other matters
in the State Courts of Georgia against the Company and certain former
executives. In February 1999, the Company entered into a final settlement
resolving all claims made by Fuqua against the Company and these former
executives, resulting in the $3,000,000 charge.
The costs associated with the discontinuance of the Cybex branded bike of
$1,735,000 include charges for the write-off of specific tooling ($919,000), the
write-off of obsolete inventory ($516,000) and a provision for unusual warranty
costs ($300,000), which is included as part of cost of sales.
The costs associated with the discontinuance of the Reactor product line of
$1,324,000 include charges for the write-off of intangible assets related to an
exclusive technology license ($585,000), a provision for future minimum royalty
payments ($210,000), employee severance and lease termination costs ($157,000)
and the write-off of obsolete inventory and a provision for unusual warranty
costs ($372,000), which is included as part of cost of sales.
The Company's activities with respect to the discontinuance of the Cybex branded
bike and Reactor product line are substantially complete. For the year ended
December 31, 1998, sales from the Cybex branded bike and Reactor were
$3,389,000.
As of December 31, 2000 and 1999, the severance and the merger related reserve
balance was $25,000 and $25,000, respectively.
F-16
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 5--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
December 31
------------------------------
2000 1999
----------- -----------
Bank revolving loan $14,500,000 $ 9,000,000
Bank term loans 18,000,000 22,000,000
Industrial development revenue bond 2,500,000 2,800,000
Promissory note 2,006,000 2,006,000
Other 236,000 558,000
----------- -----------
37,242,000 36,364,000
Less - current portion (14,464) (4,622,000)
----------- -----------
$22,778,000 $31,742,000
=========== ===========
On May 21, 1998, the Company entered into a Credit Agreement (the "Agreement")
with several banks that consisted of a $26,700,000 revolving loan (the
"Revolver"), increased to $30,000,000 in May 1999, and a $25,000,000 term loan
(the "Term loan"). At December 31, 2000, the Company was out of compliance with
certain financial covenants in the Credit Agreement. On April 12, 2001, the
Credit Agreement was amended to, among other things, revise the financial
covenants, waive the existing financial covenant default through the maturity
date of the loans, fix May 1, 2002 as the maturity date of all loans under the
Credit Agreement; reduce the availability under the revolving loan facility
(including the letter of credit sub-facility) to the lesser of $20,125,000 or an
amount determined by reference to a borrowing base formula and provide certain
collateral to the banks. Additionally, the Company is required to maintain a
lockbox arrangement with the bank whereby remittances from the Company's
customers are used to reduce the outstanding revolver balance. Accordingly, a
portion of the revolver balance ($6,922,000) has been classified as current at
December 31, 2000, although such balance is not due until May 1, 2002.
Management plans to refinance the existing facility prior to May 1, 2002,
however, there can be no assurance that management will be successful in
refinancing the facility on terms that are acceptable to the Company. Up until
March 30, 2001, borrowings under the Revolver bore interest at the Company's
option of either a Base Rate (as defined) or LIBOR plus 0.25% to 2.25%, which
was adjusted based on the Company's level of compliance with certain financial
covenants, as defined. As of March 30, 2001, a portion of the interest under the
revolver will accrue at Base Rate plus 1% and a portion will accrue at Base Rate
plus 2%. As of March 30, 2001, the Base Rate was 8.0%. After September 30, 2001,
the entire revolver will bear interest at the Base Rate plus 3%. The average
outstanding Revolver balance during 2000 and 1999 was approximately $12,288,000
and $8,732,000, respectively, and the weighted average interest rate in 2000 and
1999 was 8.79% and 7.39%, respectively. Interest expense on the revolver was
$1,146,000, $761,000 and $397,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
Up until March 30, 2001, borrowings under the Term loan bore interest at the
Company's option at either the Base Rate (as defined) or LIBOR plus 0.25% to
2.25%, which was adjusted based on the Company's level of compliance with
certain financial covenants, as defined. In November 1998, the Company entered
into an Interest Rate Swap Agreement which fixed the LIBOR rate at 5.04% on the
term loan through December 2003. The interest rate at December 31, 2000
and 1999 was 7.84% and 7.94%, respectively. As of March 30, 2001, interest on
the Term Loan will accrue at the Base Rate plus 1.5% increasing to a base rate
plus 3% after September 30, 2001. Interest expense on the Term loan was
$1,480,000, $1,723,000 and $1,367,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
F-17
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 5--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (CONTINUED)
Pursuant to the amended Agreement, the Company is required to maintain certain
financial and non-financial covenants, as defined, including certain cumulative
minimum earnings before interest, taxes, depreciation and amortization levels,
maximum capital expenditures and a minimum leverage ratio. Additionally, the
Company is limited in its ability to pay cash dividends. Borrowings under the
Agreement are secured by substantially all of the Company's assets with certain
exceptions.
In 1992, an industrial development revenue bond provided the funds to construct
and equip the manufacturing and administrative facility in Medway,
Massachusetts. The bonds bear interest at a rate that resets weekly (4.31% at
December 31, 2000) with interest payable monthly and principal payable annually
through May 2007. Interest expense on the bonds was $107,000, $96,000 and
$167,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
A letter of credit in the amount of $2,560,000 is outstanding for the benefit of
the bondholders to guarantee principal and interest payments.
In connection with the Merger, the Company assumed an 8.9% note payable to a
finance company in the original amount of $1,051,000. The note is payable in
equal monthly payments of principal and interest of $22,000 through November
2001. The note is collateralized by certain manufacturing equipment. As of
December 31, 2000 and 1999, $229,000 and $458,000, respectively, was outstanding
under this note. Interest expense on the note was $30,000, $55,000 and $69,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
In connection with the Merger, the Company assumed a bank term loan in the
original amount of $2,465,000 pursuant to a five year, 9.48% fixed rate term
loan agreement. The term loan is payable in equal monthly principal
installments plus interest through March 2001. The term loan is secured by
specific lease receivables. As of December 31, 2000 and 1999, $7,000 and
$100,000, respectively, was outstanding under this term loan. Interest expense
on the term loan was $8,000, $18,000 and $71,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
In connection with the Acquisition, the Company issued a 5.63% note payable to
the former Tectrix stockholders in the original amount of $2,340,000. This note
was adjusted to $2,006,000 based on the closing Tectrix balance sheet and
certain adjustments for income taxes, as defined. This note is payable in June
2001. Interest expense on the note was $115,000, $139,000 and $68,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, long-term debt maturities are as follows:
2001 $ 7,542,000
2002 27,800,000
2003 300,000
2004 400,000
2005 400,000
Thereafter 800,000
-----------
$37,242,000
===========
F-18
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6-- STOCKHOLDERS' EQUITY
Stock Options
- -------------
1995 Omnibus Incentive Plan
Cybex's Omnibus Incentive Plan ("Omnibus Plan"), as amended, is designed to
provide incentives that will attract and retain individuals key to the success
of the Company through direct or indirect ownership of the Company's common
stock. The Omnibus Plan provides for the granting of stock options, stock
appreciation rights, stock awards, performance awards and bonus stock purchase
awards. The Company has reserved 750,000 shares of common stock for issuance
pursuant to the Plan. The terms and conditions of each award are determined by
a committee of the Board of Directors of the Company. Under the Omnibus Plan,
the committee may grant either qualified or nonqualified stock options with a
term not to exceed ten years from the grant date and at an exercise price per
share that the committee may determine (which in the case of incentive stock
options may not be less than the fair market value of a share of the Company's
common stock on the date of grant).
1987 Stock Option Plan
The terms and conditions of grants of stock options under the 1987 Stock Option
Plan were determined by a committee of the Board of Directors. Options
outstanding under this plan were granted at exercise prices which were not less
than fair market value on the date of grant and were generally exercisable over
a period not to exceed ten years from the original date of grant. No future
grants may be made under this plan.
Information with respect to options under the Company's plans is as follows:
Weighted
Number Range of Average
of Exercise Exercise
Shares Price Price
------ ------------ --------
Outstanding at December 31, 1997 794,789 $ 5.85-12.75 $ 8.81
Granted 37,000 4.31 4.31
Exercised (32,600) 9.38-12.75 9.84
Forfeited (44,000) 10.70-12.75 11.73
-------- ------------ ------
Outstanding at December 31, 1998 755,189 4.31-12.13 8.35
Granted 129,000 4.06-4.56 4.17
Exercised -- -- --
Forfeited (115,548) 4.31-12.13 9.42
-------- ------------ ------
Outstanding at December 31, 1999 768,641 4.06-11.75 7.48
Granted 81,500 2.69-4.06 3.30
Exercised -- -- --
Forfeited (414,480) 2.69-11.75 8.56
-------- ------------ ------
Outstanding at December 31, 2000 435,661 $ 2.69-11.75 $ 5.67
======== ============ ======
At December 31, 2000, 341,411 options with a weighted average exercise price of
$6.05 were exercisable and 169,473 options were available for future grants.
The options generally vest over a three to five year period (with some subject
to cliff vesting). The weighted average remaining contractual life of
outstanding options at December 31, 2000 was 3.43 years.
F-19
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6-- STOCKHOLDERS' EQUITY (CONTINUED)
On July 7, 2000, the Company granted 50,000 shares of common stock to its former
CEO in exchange for the cancellation of 238,000 options with an exercise price
of $10.875 per share. During the year ended December 31, 2000, the Company
recorded stock based compensation expense of $163,000 for the fair value of the
common stock on the grant date. In addition, the Company extended the life of a
separate option held by the CEO to purchase 213,653 shares of common stock for
an exercise price of $5.85 per share. This modification resulted in a new
measurement date for the option, however, the exercise price of the option was
greater than the fair value of the Company's common stock on the measurement
date, thus resulting in no compensation expense.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and the related interpretations in accounting for its
stock option plans. Had compensation cost for the plans been determined based
upon the fair value of the options as prescribed by SFAS No. 123, "Accounting
for Stock Based Compensation", the Company's net income (loss) and earnings
(loss) per share would have been as follows:
Year Ended December 31
-------------------------------------------
2000 1999 1998
---- ---- ----
Net income (loss):
As reported $(20,577,000) $4,002,000 $1,018,000
============ ========== ==========
Pro forma $(20,904,000) $3,513,000 $ 585,000
============ ========== ==========
Basic earnings (loss) per share:
As reported $ (2.36) $ .46 $ .12
============ ========== ==========
Pro forma $ (2.40) $ .40 $ .07
============ ========== ==========
Diluted earnings (loss) per share:
As reported $ (2.36) $ .46 $ .12
============ ========== ==========
Pro forma $ (2.40) $ .40 $ .07
============ ========== ==========
The weighted average fair value of each stock option granted during the years
ended December 31, 2000, 1999 and 1998 was $2.04, $5.71 and $5.67, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Year Ended December 31
---------------------------------------------------
2000 1999 1998
-------- -------- --------
Risk free interest rate 6.2% 6.1% 5.6%
Expected dividend yield -- -- --
Expected life 7 years 7 years 7 years
Expected volatility 60% 60% 60%
The above pro forma amounts may not be indicative of future amounts because
option grants prior to January 1, 1995, have not been included and because
future option grants are expected.
F-20
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 6-- STOCKHOLDERS' EQUITY (CONTINUED)
Stock Retainer Plan for Nonemployee Directors
- ---------------------------------------------
The Company's Amended and Restated Stock Retainer Plan for Nonemployee Directors
("Retainer Plan"), provides that each nonemployee director will receive 70% of
their annual retainer in shares of common stock of the Company. The number of
shares to be issued is computed by dividing the applicable amount of the annual
retainer to be paid in stock by the fair market value of a common share on
January 1 of each calendar year. Up to 70,000 shares of common stock may be
issued pursuant to the Retainer Plan. The issuance of shares in payment of
annual retainers results in expense based on the fair market value of such
shares. As of December 31, 2000, 20,494 shares of common stock are available for
issuance under the Retainer Plan.
Leveraged Employee Stock Ownership Plan
- ---------------------------------------
The Company's leveraged Employee Stock Ownership Plan (ESOP) is a
noncontributory plan covering substantially all employees meeting a one year
length of service requirement. The plan is designed to give employees a
proprietary interest in the Company through common stock ownership. At December
31, 2000, no unallocated shares were held by the ESOP.
NOTE 7--INCOME TAXES
The income tax provision (benefit) consists of the following:
Year Ended December 31
-----------------------------------------
2000 1999 1998
------------ ---------- --------
Current provision:
Federal $ -- $ -- $ --
State -- -- --
------------ ---------- --------
-- -- --
------------ ---------- --------
Deferred provision
(benefit):
Federal (10,124,000) 2,409,000 829,000
State (1,575,000) 372,000 163,000
------------ ---------- --------
(11,699,000) 2,781,000 992,000
------------ ---------- --------
$(11,699,000) $2,781,000 $992,000
============ ========== ========
The reconciliation between income taxes at the federal statutory rate and the
amount recorded in the accompanying consolidated financial statements is as
follows (in thousands):
Year Ended December 31
---------------------------------------
2000 1999 1998
------- ----------- -----------
Tax at statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of federal tax benefit (3.2) 3.6 5.4
Acquired in-process research and development -- -- --
Other permanent differences, primarily
non-deductible goodwill amortization 1.0 3.4 10.0
------- ---------- -----------
(36.2)% 41.0% 49.4%
======= =========== ===========
F-21
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 7--INCOME TAXES
The significant components of the Company's net deferred tax assets are as
follows:
December 31
------------------------------
2000 1999
----------- -----------
Deferred tax assets:
Net operating and capital loss $10,478,000 $ 7,524,000
carryforwards
Warranty reserves 2,071,000 2,091,000
Other accruals and reserves 3,856,000 1,200,000
Bad debt and lease reserves 1,528,000 1,536,000
Depreciation (2,854,000) (2,857,000)
Intangible amortization 5,908,000 (204,000)
Other - net 126,000 124,000
----------- -----------
$21,113,000 $ 9,414,000
=========== ===========
At December 31, 2000, the Company had federal net operating and capital loss
carryforwards which are scheduled to expire as follows:
2011 $ 6,691,000
2012 8,945,000
2018 707,000
2019 3,637,000
2020 6,323,000
-----------
$26,303,000
===========
In addition, the Company has federal alternative minimum tax credit
carryforwards of $276,000, which do not expire, a federal tax credit
carryforward of $129,000, which expires in 2008, and capital loss carryforwards
of $387,000 which expire in 2003.
Pursuant to the Tax Reform Act of 1986, annual use of $16,343,000 of the
Company's federal net operating loss and credit carryforwards are limited as a
result of a cumulative change in ownership of more than 50% during the three-
year period ended in November 1998. The annual limitation is approximately
$2,600,000 per year, which is equal to (i) the aggregate fair market value of
the Company's common stock immediately before the ownership change multiplied by
(ii) the long-term tax exempt rate (within the meaning of Section 382(f) of the
Internal Revenue Code) in effect at that time. The Section 382 rate in effect
as of the date of ownership change was 5.02%. The annual limitation is
cumulative and, therefore, if not fully utilized in a year, can be utilized in
future years in addition to the Section 382 limitation for those years.
Management believes that it is more likely than not that future taxable income
will be sufficient to realize the net deferred tax asset. Approximately
$50,300,000 of future taxable income is needed to fully realize the net deferred
tax asset recorded at December 31, 2000.
As a result of the Merger, Trotter's federal tax for the period from January 1,
1997 to May 23, 1997, was included in the consolidated tax return of UM Holdings
Ltd. ("UM"), and for the period from May 24, 1997 to December 31, 1997,
Trotter's taxable income was included in the Company's consolidated return. The
portion of the Company's 1997 net operating loss attributable to Trotter
represents a net operating loss carryforward available to UM. UM has agreed to
remit $585,000 to Cybex upon their utilization of the $1,723,000 net operating
loss carryforward. Such amount is included in long-term deferred taxes in the
accompanying financial statements.
Prior to the Merger, pursuant to a tax-sharing agreement, Trotter paid UM
amounts equal to the taxes calculated on a separate return basis.
F-22
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 8--BENEFIT PLANS
The Company has a 401(k) defined contribution retirement plan. The Company
currently matches 100% of the first 2% of the employee's eligible compensation
contributions and 50% of the next 4% of the employee's eligible compensation
contributions. Contributions by the Company to the Plan were $729,000, $744,000
and $746,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Additionally, the Company may make discretionary contributions to the Plan. No
discretionary contributions were made for the years ended December 31, 2000,
1999 and 1998.
NOTE 9--RELATED PARTY TRANSACTIONS
For the years ended December 31, 2000 and 1999, the Company paid $224,000 and
$128,000, respectively, to a law firm of which one of the directors of the
Company is a member.
NOTE 10--COMMERCIAL LEASING
Subsequent to the Merger, the Company continued Cybex's lease financing program
for selected products to its commercial customers through its wholly-owned
leasing subsidiary. Such leases are accounted for as sales-type leases and are
generally for terms of three to five years at which time title transfers to the
lessee. Leases are secured by the equipment financed, often with additional
security in the form of other equipment liens, letters of credit, cash down
payments and personal guarantees.
At December 31, 2000, lease receivables were comprised of the following:
Minimum lease payments receivable $ 737,000
Less - unearned interest income (110,000)
Less - reserve for lease receivables (406,000)
---------------
$ 221,000
===============
Minimum lease payments as of December 31, 2000 are due to be received as
follows:
2001 $319,000
2002 151,000
2003 114,000
2004 90,000
2005 63,000
---------------
$737,000
===============
The Company provided lease financing for $5,977,000, $5,016,000 and $8,601,000
of its sales for the years ended December 31, 2000, 1999 and 1998, respectively.
Income before income taxes from leasing activities was $21,000, $57,000 and
$97,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
F-23
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 10--COMMERCIAL LEASING (CONTINUED)
The Company periodically enters into agreements, generally subject to limited
recourse, to sell lease receivables to financial institutions through qualified
special purpose entities. For the years ended December 31, 2000, 1999 and 1998,
the Company generated net proceeds of $6,312,000, $2,836,000 and $3,252,000,
respectively, from the sale of lease receivables. Under the terms of these
agreements, the Company continues to bill and collect the monthly lease payments
which are then remitted to the respective financial institutions each month.
The Company uses a third party to service the lease receivables that have been
sold to third parties. Upon the sale of lease receivables, the Company records
a servicing liability for the amounts payable to the third party, which is
generally equal to approximately 100 basis points of the related receivables
sold. At December 31, 2000 and 1999, servicing liabilities were $119,000 and
$153,000, respectively. The Company is subject to recourse provisions which may
require it to repurchase or replace leases in default. In return, the Company
receives the collateral position in the defaulted leases. The recourse
provisions, which range from 15% to 100% of the outstanding net lease
receivables, may be reduced annually based upon the remaining outstanding lease
payment streams. At December 31, 2000, the maximum contingent liability under
these recourse provisions was approximately $938,000. A reserve for estimated
losses under recourse provisions has been recorded based upon historical and
industry experience, and is included in accrued liabilities at December 31,
2000.
NOTE 11--ACCRUED LIABILITIES
December 31
---------------------------
2000 1999
----------- -----------
Customer deposits $ 658,000 $ 1,328,000
Warranty reserves 3,658,000 3,665,000
Self insurance reserves 2,581,000 1,936,000
Payroll related and other 9,860,000 4,287,000
----------- -----------
$16,757,000 $11,216,000
=========== ===========
NOTE 12--PROPERTY PLANT AND EQUIPMENT
December 31
---------------------------
2000 1999
----------- -----------
Land, building and improvements $10,332,000 $10,337,000
Equipment, computers, software
and furniture 20,355,000 20,427,000
----------- -----------
30,687,000 30,764,000
Less - accumulated depreciation (9,792,000) (8,857,000)
----------- -----------
$20,895,000 $21,907,000
=========== ===========
Depreciation expense was $3,509,000, $2,581,000 and $2,087,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-24
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 13--COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has lease commitments expiring at various dates through 2005, for
equipment under noncancelable operating leases. Future minimum payments under
these leases at December 31, 2000 are as follows:
2001 $209,000
2002 147,000
2003 59,000
2004 29,000
2005 2,000
--------
$446,000
========
Rent expense under all operating leases for the years ended December 31, 2000,
1999 and 1998 was $203,000, $592,000 and $516,000, respectively.
Royalty Agreement
In connection with the settlement of a license dispute (see Note 4), the Company
is required to make minimum royalty payments through November 2012. Future
minimum payments under this arrangement are as follows at December 31, 2000:
2001 $ 710,000
2002 360,000
2003 360,000
2004 360,000
2005 360,000
Thereafter 2,490,000
-----------
4,640,000
Amount representing interest (1,809,000)
-----------
$ 2,831,000
===========
Risk Retention
The Company's risk retention amounts per occurrence are as follows:
Product liability $75,000
Employee medical and hospitalization $70,000
The Company has excess primary coverage on a per-claim and aggregate basis
beyond the deductible levels and also maintains umbrella policies to supplement
the primary liability coverage. Reserves for self-insured retention, including
claims incurred but not yet reported, are included in accrued liabilities in the
accompanying balance sheets, based on management's review of outstanding claims
and claims history and consultation with its third-party claims administrators.
Actual results may vary from management estimates.
Product Liability
Due to the nature of its products, the Company is involved in certain pending
product liability claims and lawsuits. The Company maintains product liability
insurance coverage subject to deductibles. Management believes that the outcome
of known product liability claims will not have a material effect on its
financial position or results of operations.
F-25
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Kirila et al v. Cybex International, Inc., et al
This action was commenced in the Court of Common Pleas of Mercer County,
Pennsylvania in May 1997 against the Company, the Company's wholly-owned
subsidiary, Trotter Inc., and certain officers, directors and affiliates of the
Company. The plaintiffs include companies which sold to Trotter Inc. a strength
company in 1993, a principal of the corporate plaintiffs', who was employed by
Trotter Inc. following the acquisition, and a company which leased to Trotter
Inc. a plant located in Sharpsville, Pennsylvania. In accordance with
Pennsylvania practice, the complaint in this matter was not served upon the
defendants until the second quarter of 1998. The complaint, among other things,
alleges that the closure of the Sharpsville facility was wrongful, wrongful
termination of the individual plaintiff's employment and nonpayment of
compensation, breach of the lease agreement and the asset purchase agreement,
tortious interference with business relationships, fraud, negligent
misrepresentation, unjust enrichment, breach of the covenant of good faith and
fair dealing, conversion, unfair competition and violation of the Wage Payment
and Collection Law. The complaint seeks specific performance of the lease, the
employment agreement and the indemnification provisions of the asset purchase
agreement, and an unspecified amount of compensatory and punitive damages and
expenses. The Company has filed an answer to the complaint denying the
material allegations of the complaint and denying liability. It has further
asserted counterclaims against the plaintiffs, including for repayment of over-
allocations of expenses under the lease and certain excess incentive
compensation payments which were made to the individual plaintiff. The Company
intends to vigorously defend this matter.
Hot New Products v. Cybex International, Inc., et al
This action is in the United States District Court for the Northern District of
Alabama. The Plaintiff in this action is a terminated dealer of Trotter Inc.
Shortly after the termination, Plaintiff filed a State action against Trotter
and Cybex, alleging fraud, breach of contract, unjust enrichment and recoupment.
The Plaintiff also sued another Cybex dealer alleging intentional interference
with business relations. In July 1998, the Plaintiff filed this antitrust
Complaint in federal court, alleging price discrimination and price and
territory conspiracy violations; the State court case was dismissed with the
State court claims refiled as part of this federal action. The Plaintiff is
seeking approximately $3.5 million in compensatory damages, plus treble damages
for the antitrust claims and punitive damages. The Company has filed an answer
to the complaint denying the material allegations of the complaint and denying
liability. The Company intends to vigorously defend this litigation.
Other Litigation and Contingencies
The Company is involved in certain other legal actions, contingencies and claims
arising in the ordinary course of business.
Legal fees related to these matters are expensed as incurred.
F-26
NOTE 14--QUARTERLY DATA (unaudited)
The following table presents unaudited quarterly financial information for the
years ended December 31, 2000 and 1999:
2000 QUARTER ENDED
-----------------------------------------------------------------------------
March 31 JUNE 30 SEPTEMBER 29 DECEMBER 31
-------- ------- ------------ -----------
Sales $35,768 $30,261 $31,783 $ 27,481
Gross profit 13,441 10,763 11,250 6,903
Net income (loss) 658 (2,289) 148 (19,094)
Basic and diluted net income
(loss)per share .08 (.26) .01 (2.19)
1999 QUARTER ENDED
-----------------------------------------------------------------------------
March 27 JUNE 26 SEPTEMBER 25 DECEMBER 31
-------- ------- ------------ -----------
Sales $34,805 $28,794 $25,745 $ 39,824
Gross profit 12,878 10,098 8,248 15,911
Net income (loss) 1,920 323 (1,175) 2,934
Basic and diluted net income
(loss)per share .22 .04 (.14) .34
F-27
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Balance at
Beginning of Balance at End
Description Period Additions Deductions of Period
- ------------------------------------- ------------ --------------- ---------------- --------------
For the year ended December 31, 2000
Allowance for doubtful accounts $4,475,000 $6,011,000 $5,068,000 $5,418,000
============ =============== ================ ==============
Restructuring reserves 25,000 7,281,000(1) 794,000 6,512,000
============ =============== ================ ==============
For the year ended December 31, 1999
Allowance for doubtful accounts $3,336,000 $1,464,000 $ 325,000 $4,475,000
============ =============== ================ ==============
Restructuring reserves 605,000 -- 580,000 25,000
============ =============== ================ ==============
For the year ended December 31, 1998
Allowance for doubtful accounts $2,615,000 1,947,000(2) $1,226,000 $3,336,000
============ =============== ================ ==============
Restructuring reserves 2,177,000 1,375,000(3) (2,947,000) 605,000
============ =============== ================ ==============
(1) Includes severance charges of $2,545,000 pertaining to the restructuring
plan, and relocation costs of $1,905,000 due to the closure of the Irvine,
California facility and charges of $2,831,000 related to the settlement of
a license dispute.
(2) Includes allowance for doubtful accounts of $264,000 assumed in the Tectrix
acquisition.
(3) Includes a restructuring reserve of $628,000 recorded in the application of
purchase accounting for the Tectrix acquisition for the discontinuance of
the Tectrix treadmill, the shutdown of Tectrix's international subsidiaries
and severance payments to Tectrix employees. Additionally, 1998 additions
include $747,000 for final adjustments to pre-acquisition contingencies
related to the Cybex/Trotter merger, primarily related to final information
received with respect to the cost of closing Cybex's international
subsidiary.
S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information regarding the Directors of the Company and compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
from the sections captioned "Election of Directors" and "Security Ownership of
Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for its 2001
Annual Meeting of Shareholders (the "Proxy Statement"). For information
concerning the executive officers of the Company, see "Executive Officers of the
Registrant" in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information set forth under the caption "Executive Compensation" and
"Election of Directors - Compensation of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information set forth under the caption "Election of Directors" in the Proxy
Statement is incorporated herein by reference.
II-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed or incorporated by reference as a
part of this report:
(3) Exhibits
--------
3(a)(1) Restated Certificate of Incorporation of the Company, dated
May 20, 1988, incorporated by reference to Exhibit 3(a)(1)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30,1996 (the "June 1996-10-Q").
3(a)(2) Certificate of Amendment of the Certificate of
Incorporation of the Company, dated May 30, 1988,
incorporated by reference to Exhibit 3(a)(2) to the June
1996 10-Q.
3(a)(3) Certificate of Amendment of the Certificate of
Incorporation of the Company, dated August 7, 1996,
incorporated by reference to Exhibit 3(a)(3) to the June
1996 10-Q.
3(a)(4) Certificate of Amendment of the Certificate of
Incorporation of the Company, dated May 27, 1997,
incorporated by reference to Exhibit 3.1 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997
(the "June 1997 10-Q").
3(b) By-Laws of the Company, as amended, incorporated by
reference to Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1987.
10(i)(a) Assignment Agreement from Norwest Bank Minnesota South,
N.A., successor in interest to Norwest Bank, Owatonna N.A.,
to Summit Bank filed by reference to Exhibit 10(i)(g) to
the 1997 10-K.
10(i)(b) Credit Agreement dated May 21, 1998 among First Union
National Bank, the Company and the Company's subsidiaries,
incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June
27, 1998.
10(ii) Lumex, Inc. Amended and Restated 1987 Stock Option Plan,
incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-8 (No. 33-48124), filed
May 26, 1992.*
10(iii) Distributor Agreement dated June 5, 1997 among the Company,
Trotter Inc., Forza Fitness Equipment, Ltd. and Forza
Group, Ltd., incorporated by reference to Exhibit 10.1 to
the June, 1997 10-Q.
10(iv) Ultimate Net Loss Vendor Agreement with Portfolio Purchase,
dated December 30, 1994, among the Company, Cybex Financial
Corp. and C.I.T., incorporated by reference to Exhibit
10(x) to the 1994 10-K.
10(v) Portfolio Purchase Agreement, dated December 30, 1994,
among the Company, Cybex Financial Corp. and European
American Bank, incorporated by reference to Exhibit 10(xi)
to the 1994 10-K.
10(vi) Amended and Restated 1995 Stock Retainer Plan for Non-
Employee Directors of the Company incorporated by reference
to Exhibit 10(xi) to the 1997 10-K. *
10(vii) 1995 Omnibus Incentive Plan, as amended, incorporated by
reference by Exhibit 10(xx) to the Company's Registration
Statement on Form S-8 (No. 333-29045), filed June 12,
1997.*
II-2
10(viii) Management Employment Agreement between the Company and
Peter C. Haines, incorporated by reference to Exhibit 10.2
to the June, 1997 10-Q.*
10(ix) Tectrix Stock Purchase Agreement dated May 21, 1998 among
the Company and Tectrix Fitness Equipment, Inc.,
incorporated by reference to Form 8-K filed June 4, 1998.
10(x) Amended and Restated 1995 Stock Retainer Plan for
Nonemployee Directors dated May 18, 1999, incorporated by
reference to the registration statement on Form S-8 (No.
333-79899) filed June 3, 1999.*
10(xi) Non-negotiable secured promissory note dated May 21, 1998
to former Tectrix stockholders from the Company,
incorporated by reference to Exhibit 10(ii) to the
September 1999 10-Q.
10(xii) Amendment to Distributor Agreement dated March 1, 2000
between Cybex International, Inc. and Forza Fitness
Equipment Ltd., incorporated by reference to Exhibit 10(i)
to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.
10(xiii) Peter C. Haines Stock Award Agreement, incorporated by
reference to Exhibit 10(i) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 2000.*
10(xiv) Separation Agreement -Peter Haines* (Filed herewith)
10(xv) Agreement of Termination of Distributor Agreement -Forza
Fitness Equipment Limited (Filed herewith).
21.0 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Public Accountants-- Arthur Andersen
LLP (filed herewith)
* Executive Compensation Plans and Arrangements
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the
quarter ended December 31, 2000:
Current Report dated November 22, 2000 reporting on the
resignation of the Registrant's Chief Executive Officer.
Current Report dated December 1, 2000 reporting on the
resignation of two executive officers and the promotion or
appointment of various other officers.
Current Report dated December 29, 2000, reporting upon the
Registrant's restructuring plan.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CYBEX International, Inc.
------------------------------------
(Registrant)
By: /s/ John Aglialoro
--------------------------------
April 16, 2001 Chairman
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.
By: /s/ John Aglialoro
--------------------------------
April 16, 2001 John Aglialoro, Chairman and
Acting Chief Executive Officer
(principal executive officer)
By: /s/ Paul G. Horgan
--------------------------------
April 16, 2001 Paul G. Horgan, Corporate
Controller (principal financial
and accounting officer)
By: /s/ James H. Carll
--------------------------------
April 16, 2001 James H. Carll, Director
By: /s/ Joan Carter
--------------------------------
April 16, 2001 Joan Carter, Director
By: /s/ David D. Fleming
--------------------------------
April 16, 2001 David D. Fleming, Director
By: /s/ Arthur W. Hicks, Jr.
--------------------------------
April 16, 2001 Arthur W. Hicks, Jr., Director
By: /s/ Jerry Lee
--------------------------------
April 16, 2001 Jerry Lee, Director
By: /s/ William E. Mahoney
--------------------------------
April 16, 2001 William E. Mahoney, Director
By: /s/ Alan H. Weingarten
--------------------------------
April 16, 2001 Alan H. Weingarten, Director
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