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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended June 29, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to .
------- ------
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
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
requirements for the past 90 days. Yes [X] No [ ]
On July 31, 2002, the Registrant had outstanding 8,807,033 shares of Common
Stock, par value $0.10 per share, which is the Registrant's only class of Common
Stock.
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited) -- Three and six months
ended June 29, 2002 and June 30, 2001 3
Condensed Consolidated Balance Sheets - June 29, 2002
(unaudited) and December 31, 2001
4
Condensed Consolidated Statements of Cash Flows (unaudited) -- Six months ended June
29, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
-------------- ------------- ------------- -------------
Net sales $ 18,005 $20,096 $ 36,918 $43,463
Cost of sales 11,755 12,916 23,425 28,645
-------- ------- -------- -------
Gross profit 6,250 7,180 13,493 14,818
Selling, general and administrative
expenses 6,981 6,015 13,513 12,408
-------- ------- -------- -------
Operating income (loss) (731) 1,165 (20) 2,410
Interest income -- 33 9 118
Interest expense (934) (1,041) (1,571) (1,812)
Other income (expense) 66 (24) 84 (24)
-------- ------- -------- -------
Income (loss) before income taxes (1,599) 133 (1,498) 692
Income tax provision 20,644 56 20,686 291
-------- ------- -------- -------
Net income (loss) $(22,243) $ 77 $(22,184) $ 401
======== ======= ======== =======
Basic and diluted net income (loss) per share $ (2.53) $ .01 $ (2.52) $ .05
======== ======= ======== =======
See notes to the condensed consolidated financial statements.
3
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 29, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 228 $ 1,315
Accounts receivable, net of allowance of $1,883 and $2,196 10,907 13,839
Inventories 7,857 7,907
Deferred income taxes, net -- 5,269
Prepaid expenses and other 1,162 1,325
-------- --------
Total current assets 20,154 29,655
Property, plant and equipment, net 18,051 19,145
Goodwill, net 11,247 11,247
Deferred income taxes, net -- 15,895
Other assets 1,151 1,635
-------- --------
$ 50,603 $ 77,577
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 10,677 $ 12,868
Accounts payable 8,656 7,146
Accrued expenses 10,134 13,376
-------- --------
Total current liabilities 29,467 33,390
Long-term debt 16,995 17,622
Accrued warranty obligation 560 843
Other liabilities 2,709 2,678
-------- --------
Total liabilities 49,731 54,533
-------- --------
Contingencies (Note 7)
Stockholders' Equity:
Common stock, $.10 par value, 20,000 shares authorized, 9,022 shares
issued 902 902
Additional paid-in capital 45,008 44,990
Treasury stock, at cost (218 and 213 shares) (2,264) (2,258)
Accumulated deficit (42,693) (20,509)
Accumulated other comprehensive loss (81) (81)
-------- --------
Total stockholders' equity 872 23,044
-------- --------
$ 50,603 $ 77,577
======== ========
See notes to condensed consolidated financial statements.
4
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------
June 29, June 30,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $(22,184) $ 401
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 2,294 2,504
Provision for doubtful accounts 38 79
Deferred income taxes 21,164 291
Net change in other operating assets and liabilities 1,274 2,030
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,586 5,305
-------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment (835) (870)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (835) (870)
-------- -------
FINANCING ACTIVITIES:
Payments of long-term debt (1,737) (2,096)
Net payments under the revolving loan (1,081) (2,528)
Deferred refinancing costs (14) (224)
Purchase of treasury stock (6) (7)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (2,838) (4,855)
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,087) (420)
CASH AND CASH EQUIVALENTS, beginning of period 1,315 3,354
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 228 $ 2,934
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 1,442 $ 1,609
Acquisition of customer list in exchange for forgiveness of accounts
receivables -- 518
See notes to condensed consolidated financial statements.
5
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
Cybex International, Inc. (the "Company" or "Cybex"), a New York corporation, is
a leading manufacturer of exercise equipment and develops, manufactures and
markets premium performance, professional quality, strength and cardiovascular
fitness equipment products for the commercial and consumer markets.
The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and changes in cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three and
six months ended June 29, 2002 are not necessarily indicative of the results
that may be expected for the entire year.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's reports filed with the Securities and Exchange Commission,
including its Report on Form 10-K for the year ended December 31, 2001, this
Report on Form 10-Q, its current Reports on Form 8-K, and its proxy statement
dated April 9, 2002.
NOTE 2 -- NEW ACCOUNTING PRONOUNCEMENTS
Derivatives
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133," on January 1, 2001. SFAS No. 133 requires
the transition adjustment resulting from adopting these statements to be
reported in net income or other comprehensive income, as appropriate, as the
cumulative effect of a change in accounting principle.
The amount of the transition adjustment recorded in accumulated other
comprehensive income (loss) as a result of recognizing all derivatives that were
designated as cash flow hedging instruments at fair value amounted to an
unrealized gain of $212,000 at January 1, 2001.
The Company recognizes derivatives on the balance sheet at fair value. At June
29, 2002 and December 31, 2001, derivative 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 4). The interest rate
swap has been designated as a cash flow hedge. Changes in the fair value of the
derivative were initially recorded in accumulated other comprehensive income
(loss) and reclassified into earnings as the underlying hedged item affected
earnings.
Effective April 12, 2001, the Company discontinued hedge accounting,
prospectively, as a result of the change in the interest rate on its term debt
from a LIBOR-based rate to a Base Rate and the change in the forecasted
principal repayment dates (see Note 4). For the three months ended March 31,
2001, the Company recorded an unrealized loss of $293,000 in accumulated other
comprehensive income (loss) for the
6
change in the fair value of the interest rate swap. For the three months ended
June 30, 2001, the Company recorded a charge of $24,000 within other income for
the change in fair value of the interest rate swap during the quarter. For the
three and six months ended June 29, 2002, the Company recorded a gain of $66,000
and $84,000, respectively, within other income for the change in the fair value
of the interest rate swap during the period.
Business Combinations
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and other
Intangible Assets." SFAS No. 141 requires that all business combinations
consummated after June 30, 2001 be accounted for under the purchase method of
accounting. SFAS No. 142 provides for the discontinuance of amortization of
goodwill effective January 1, 2002 and establishes methodologies for determining
the impairment of the carrying value of goodwill.
All of the Company's previous business combinations were accounted for using
purchase accounting and all of the excess purchase price from these transactions
was allocated to goodwill. The following table illustrates adjusted net income
and basic and diluted earnings per share as if these pronouncements were adopted
as of January 1, 2001:
Three Months Ended Six Months Ended
------------------- -------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Adjusted net income:
Net income (loss) $(22,243) $ 77 $(22,184) $401
Add back: Goodwill amortization,
net of tax -- 119 -- 238
-------- ---- -------- ----
Adjusted net income (loss) $(22,243) $196 $(22,184) $639
======== ==== ======== ====
Basic and diluted earnings (loss)
per share:
Reported $ (2.53) $.01 $ (2.52) $.05
Goodwill amortization -- .01 -- .02
-------- ---- -------- ----
Adjusted basic and diluted
earnings (loss) per share $ (2.53) $.02 $ (2.52) $.07
======== ==== ======== ====
Management determined that goodwill was not impaired at January 1, 2002 and June
29, 2002 under SFAS No. 142, based on the estimated enterprise value of the
Company, using various valuation methods. If the assumptions and estimates used
to determine the fair value of the Company changes in the future, the Company
may be required to record an impairment charge related to goodwill.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which establishes a single accounting model,
based on the framework established in SFAS No. 121, for long-lived assets to be
disposed of and resolves significant implementation issues related to SFAS No.
121. SFAS No. 144 supersedes SFAS No. 121 and APB No. 30, "Reporting the Results
of Operations - Reporting the Effects of a Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS
No. 144 did not have a material impact on the Company's financial condition or
results of operation.
Accounting for Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS 146 is not expected to have an impact on the financial
position or results of operations of the Company.
7
NOTE 3 -- INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market and
consist of the following:
June 29, December 31,
2002 2001
---------- ------------
Raw materials $2,932,000 $3,121,000
Work in process 1,464,000 1,452,000
Finished goods 3,461,000 3,334,000
---------- ----------
$7,857,000 $7,907,000
========== ==========
NOTE 4 -- LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
June 29, December 31,
2002 2001
------------ ------------
Bank revolving loan $ 6,287,000 $ 7,368,000
Bank term loans 19,485,000 18,916,000
Industrial development revenue bond 1,900,000 2,200,000
Promissory note -- 2,006,000
------------ ------------
27,672,000 30,490,000
Less - current portion (10,677,000) (12,868,000)
------------ ------------
$ 16,995,000 $ 17,622,000
============ ============
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.
On April 12, 2001, the Agreement was amended to, among other things, revise the
financial covenants; waive financial covenant defaults that existed at the time;
fix May 1, 2002 as the maturity date of all loans under the Agreement; reduce
the availability under the revolving loan facility to the lesser of $20,125,000
or an amount determined by reference to a borrowing base formula and provide
certain additional collateral to the banks. On December 21, 2001, the Agreement
was amended and restated in its entirety (the "Restated Agreement") to provide
for an $11,000,000 revolving loan, subject to a borrowing base formula based on
accounts receivable and inventory (the "Revolver"), term loans totaling
$19,167,000 (the "Term Loans"), and a letter of credit facility of $4,459,000.
Under the Restated Credit Agreement, the facility expires on December 31, 2003.
The total principal due to the banks did not change as a result of the Restated
Agreement; however there was a $3,250,000 reclassification between the Revolver
and Term Loans. In February 2002, a letter of credit under the letter of credit
facility was utilized to retire an outstanding promissory note in the amount of
$2,006,000. Pursuant to the terms of the Restated Agreement, the letter of
credit facility was reduced by $2,006,000 and replaced by an additional Term
Loan in the same amount. After the end of the second quarter 2002, the Company
and the banks entered into the First Amendment to Amended and Restated Credit
Agreement (the "First Amendment"), which amends the Restated Agreement in
certain respects, including revising the financial covenants, waiving any then
outstanding defaults and deferring principal payments otherwise due July 1,
2002.
In connection with the First Amendment, UM Holdings Ltd., a principal
stockholder of the Company (i) lent to the Company, on a subordinated basis,
$500,000, (ii) agreed to lend, on a subordinated basis, an additional $500,000
if certain events do not occur on or before October 15, 2002, and (iii) provided
a limited guaranty of $500,000
8
of the credit facility, which guaranty will be released upon the occurrence of
certain events, including the making of the additional subordinated loan.
Under the Restated Agreement, the Revolver expires on December 31, 2003;
however, it is classified as a current liability as a result of the Company's
lockbox arrangement with the bank whereby remittances from the Company's
customers are used to reduce the outstanding Revolver balance. At June 29, 2002,
unused availability under the Revolver was $658,000. The Term Loans are due in
equal monthly principal installments of $294,000, with four additional monthly
payments of $133,000 due beginning on September 30, 2002, and a final payment of
all principal due on December 31, 2003. Interest is payable monthly.
Under the Restated Agreement, borrowings under the Revolver bear interest at the
Base Rate plus 2 percent and borrowings under the Term Loans bear interest at a
Base Rate plus 3 percent. The Base Rate is equal to the greater of the prime
rate, as defined, or the federal funds effective rate plus 50 basis points. The
Base Rate was 4.75% at June 29, 2002. From March 31, 2001 through December 21,
2001, borrowings under the Revolver bore interest at the Base Rate plus rates
ranging from 1% to 2% and borrowings under the Term Loans bore interest at the
Base Rate plus rates ranging from 1.5% to 3%. The Company is required to pay
commitment fees equal to .5% of the unused Revolver. Prior to March 31, 2001,
the Revolver and Term Loan borrowings bore interest at the Company's option of
either the Base Rate or LIBOR plus an applicable margin that varied depending 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
whereby the Company receives a variable LIBOR rate and pays a fixed rate of
5.04% through December 2003. The purpose of the Interest Rate Swap was to fix
the interest rate on the Term Loans and the notional amount of the Interest Rate
Swap amortizes based on the original terms of the Term Loan. At June 29, 2002,
the notional amount of the Interest Rate Swap was $10,000,000. At June 29, 2002,
the Company received interest at a rate of 2.04% and paid interest at a rate of
5.04% under the Interest Rate Swap.
In connection with the Restated Agreement, the Company issued warrants to the
banks to purchase 263,501 shares of common stock at an exercise price of $1.269
per share. The warrants have a term of 10 years and are exercisable immediately.
The fair value of the warrants of $209,000 was accounted for as an additional
deferred financing cost. The fair value of the warrants was determined using the
Black-Scholes pricing model using expected volatility of 60%, the contractual
term of the warrants and a risk-free interest rate of 5.25%. Additional
warrants, representing 264,211 shares of the Company's Common Stock became
exercisable as of July 30, 2002, at an exercise price of $1.269 per share. The
fair value of these warrants of $276,000 will be accounted for as additional
deferred financing cost in the third quarter 2002. Pursuant to the Restated
Agreement, as amended, the Company is required to pay fees of $281,000 on
December 31, 2002, if the facility is not retired in full prior to September 30,
2002, fees of $400,000 on March 31, 2003, if the facility is not retired in full
prior to March 31, 2003 and fees of $281,000 on December 31, 2003, if the
facility is not retired in full prior to December 31, 2003. Management is
seeking to refinance the existing facility; 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.
Pursuant to the Restated 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 maximum leverage ratio. Additionally, the
Company currently does not have the ability under the Restated Agreement to pay
cash dividends. Borrowings under the Restated Agreement are secured by
substantially all of the Company's assets with certain exceptions.
9
In 1992, an industrial development revenue bond provided the funds to purchase,
expand and equip the manufacturing and administrative facility in Medway,
Massachusetts. The bonds bear interest at a rate that resets weekly (1.30% at
June 29, 2002) with interest payable monthly and principal payable annually
through May 2007. A letter of credit in the amount of $1,947,000 is outstanding
under the Restated Agreement for the benefit of the bondholders to guarantee
principal and interest payments.
NOTE 5 -- RESTRUCTURING CHARGES
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. This
relocation resulted in a second quarter 2000 nonrecurring pre-tax charge of
approximately $2,352,000, of which $1,550,000 was for the cost of employee
severance, $355,000 related to lease termination costs and $447,000 related to
fixed asset impairment charges. Management's plans with respect to this
relocation are complete. In December 2000, Cybex announced a restructuring plan
designed to streamline operations, improve efficiency and reduce costs. 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.
During the March 30, 2002 quarter, the Company adjusted the reserve for
severance payments provided as part of the December 2000 restructuring plan
resulting in a reduction to selling, general and administrative expenses of
$358,000. This adjustment to the reserve occurred as a result of a change in
required future payments which occurred during the quarter. Management's plans
with respect to the December 2000 restructuring plan are substantially complete.
The following table summarizes accrued restructuring costs at June 29, 2002:
Balance Utilized/ Balance
December 31, 2001 Reversed June 29, 2002
----------------- --------- -------------
Severance and other $ 525,000 $(496,000) $ 29,000
License settlement 2,426,000 (61,000) 2,365,000
---------- --------- ----------
$2,951,000 $(557,000) $2,394,000
========== ========= ==========
NOTE 6 -- EARNINGS PER SHARE
The table below sets forth a reconciliation of the shares used in the basic and
diluted net income per share computations:
Three Months Ended Six Months Ended
--------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Shares used in computing basic
earnings (loss) per share 8,807,000 8,787,000 8,807,000 8,787,000
Dilutive effect of options and
warrants -- 1,000 -- 3,000
--------- --------- --------- ---------
Shares used in computing diluted
earnings (loss) per share 8,807,000 8,788,000 8,807,000 8,790,000
========= ========= ========= =========
10
For the three and six months ended June 29, 2002, options to purchase 473,653
shares of the Company's Common Stock at exercise prices ranging from $1.30 to
$11.75 per share were outstanding but were not included in the calculation of
diluted earnings (loss) per share since the result would be anti-dilutive. For
the three and six months ended June 30, 2001, options to purchase 448,286 and
413,286 shares, respectively, of the Company's common stock at exercise prices
ranging from $3.00 to $11.75 per share were outstanding but were not included in
the calculation of diluted earnings (loss) per share since the result would be
anti-dilutive.
NOTE 7 -- CONTINGENCIES
The Company is involved in certain legal actions and claims arising in the
ordinary course of business, including product liability claims and disputes, a
patent dispute, a dispute with the seller of an acquired business and disputes
pertaining to distributor agreements. The Company recorded a charge of
$2,200,000 at December 31, 2001, primarily to cover potential costs relating to
the dispute with the seller of an acquired business.
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, 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,
alleged 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 also sought 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 filed an answer to the complaint denying the
material allegations of the complaint and denying liability and it 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.
A jury verdict was rendered in this litigation on February 2, 2002. While the
jury found in favor of the Company with respect to the majority of the
plaintiffs' claims, it also found that the Company owes certain incentive
compensation payments totaling approximately $873,000 and rent of approximately
$38,000. A motion is pending before the trial judge to award to the plaintiffs
their attorneys fees and a further sum under the Wage Payment and Collection Law
equal to 25% of the awarded compensation payments. The Company intends to
vigorously defend this motion and to also vigorously pursue the appeal of the
portion of the jury award related to incentive compensation.
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 $3,500,000 in compensatory
11
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 and has filed a counterclaim for fraud,
promissory estoppel and intentional interference with business relations. The
Company intends to vigorously defend this litigation.
Creighton et al v. Cybex International, Inc., et al
This action is in the Superior Court of the State of California for the County
of Orange. The plaintiffs are a corporation which is a terminated dealer of
Trotter and its stockholder. The complaint states a number of causes of actions
generally arising from the termination, including claims for fraud and negligent
misrepresentation, breach of contract, breach of fiduciary duty, breach of the
implied covenant of good faith and fair dealing, interference with contract and
prospective business advantage and the intentional infliction of emotional
distress. Plaintiffs in a Statement of Damages provided prior to the dismissal
of claims discussed below alleged $15,000,000 of compensatory damages and sought
$20,000,000 in punitive damages. On December 8, 1998, the trial court granted
Cybex's motion for summary judgment of all claims asserted by the individual
plaintiff and on March 4, 1999 the trial court granted Cybex's motion for
summary judgment of all claims asserted by the corporate plaintiff. The
plaintiffs appealed these summary adjudications. On February 25, 2002, the Court
of Appeal determined that the trial court had properly granted summary
adjudication on the individual claims and on the corporate plaintiff's
intentional interference and breach of fiduciary duty claims, and reversed the
summary adjudication on the corporate plaintiff's contract-based causes of
action and intentional and negligent misrepresentation claims. Accordingly, the
latter claims will proceed at the trial level. The Company intends to vigorously
defend this litigation.
NOTE 8 -- INCOME TAXES
During the three months ended June 29, 2002, the Company recorded an income tax
provision of $21,316,000 to record a valuation allowance against its net
deferred tax assets. In accordance with SFAS No. 109, "Accounting For Income
Taxes" projected future taxable income generally cannot be used as a basis for
recovering deferred tax assets if there are cumulative losses during recent
periods. Accordingly, as a result of the recent losses in 2002, this valuation
allowance was recorded. Net deferred tax assets of approximately $21,316,000 are
still available to the Company to offset future taxable income. Management will
continually re-evaluate the need for the valuation allowance in future quarters.
12
ITEM 2. 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, economic conditions, the ability of the Company to
comply with the terms of its credit facility and to refinance such credit
facility, 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 its Report on Form
10-K, including Part I thereof, its Current Reports on Form 8-K, this Form 10-Q
and its proxy statement dated April 9, 2002.
OVERVIEW
Cybex International, Inc. (the "Company" or "Cybex"), a New York corporation, is
a leading manufacturer of exercise equipment and 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").
In June 2000, Cybex announced the relocation of its Irvine, California
cardiovascular equipment assembly and production development facility to its
Medway, Massachusetts facility. As part of this relocation, the Irvine facility
was closed and all employees at such facility were laid off. 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 responded to the decline in its sales, which commenced in the fourth
quarter 2000, by pursuing a number of initiatives in 2001 and 2002 designed to
increase sales and improve profitability, including developing new
cardiovascular and strength models, changing its channels of distribution in the
United Kingdom and parts of Europe, instituting changes in its independent
authorized dealer standards, and restructuring its leasing and service
operations. Many of the causes of the 2001 and 2002 sales decline will likely
continue for the remainder of 2002. In addition, first quarter 2002 results were
negatively impacted by shipping delays caused by the transition to new treadmill
products. While the full impact of the Company's new product offerings was not
felt during the first two quarters of 2002, the Company's three new treadmill
offerings, eleven components of its new Eagle strength line and its new ARC
Trainer, will all be in full production in the third quarter of 2002. Management
believes that the impact of its initiatives, including these new product
offerings, will result in net sales for the second half of 2002 surpassing net
sales for the corresponding period of 2001 and that the Company will be
profitable for the second half of 2002, although uncertainties in the U.S. and
world economies and the overall fitness industry may preclude the Company from
achieving such results.
RESULTS OF OPERATIONS
NET SALES
Cybex's net sales decreased $2,091,000, or 10%, to $18,005,000 for the second
quarter 2002 from $20,096,000 for the second quarter 2001. For the six months
ended June 29, 2002, net sales decreased $6,545,000, or 15% to $36,918,000 from
$43,463,000 for the same period in 2001. The
13
decrease is reflected in sales of both cardiovascular and strength equipment.
For the second quarter of 2002, sales of cardiovascular products decreased
$800,000, or 12%, to $6,008,000 and sales of strength products decreased
$1,275,000, or 12%, to $9,642,000. For the six months ended June 29, 2002, sales
of cardiovascular products decreased $3,943,000, or 25%, to $12,117,000 and
sales of strength products decreased $2,644,000, or 12% to $19,773,000. The
decline in the sales of these products was predominantly related to the
Company's stricter credit policies, tighter warranty standards, and pricing
policies adopted as part of its restructuring plan, to economic conditions, and,
in the case of the six month period, to a five week treadmill shipping delay
experienced during the first quarter as a result of the transition to the new
treadmill products. Freight and other revenue decreased $120,000, or 10%, to
$1,019,000 in the second quarter of 2002 and $43,000, or 2% to $2,085,000 for
the six months ended June 29, 2002. Sales of parts increased by 5% in the second
quarter to $1,559,000 and for the six months ended June 29, 2002 were comparable
to 2001 at $3,208,000.
GROSS MARGIN
Gross margin decreased to 34.7% in the second quarter of 2002 from 35.7% in the
corresponding prior year period due to lower volumes. Gross margin for the six
months ended June 29, 2002 increased to 36.5% from 34.1% for the same period in
2001. The increase in gross margin was predominantly due to higher pricing and a
higher percentage of strength equipment sales, which have higher margins. In
addition, for the first six months of 2001, the Company's freight expense
exceeded freight billings by $677,000 while freight expense exceeded freight
billings by $197,000 for the same period in 2002. Freight billings approximated
freight expense for the second quarters of both 2002 and 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $966,000, or 16.1%, to
$6,981,000 in the second quarter 2002 compared to $6,015,000 in the second
quarter 2001, predominantly due to increased product development and sales and
marketing expenses. For the six months ended June 29, 2002, selling, general and
administrative expenses increased by $1,105,000, or 9%, predominantly due to
increased product development and sales and marketing expenses. This increase
was partially offset by a second quarter 2002 reduction of $470,000 to a product
liability reserve as a result of favorable claims experience and by a reduction
in the first quarter of 2002 of $358,000 to the reserve for severance payments
provided as part of the December 2000 restructuring plan reflecting lower than
anticipated severance payments. Goodwill amortization of $124,000 and $248,000
was included in the second quarter 2001 and six months ended June 30, 2001
expenses, respectively. Amortization of goodwill was discontinued effective
January 1, 2002 upon the adoption of SFAS 142.
INTEREST EXPENSE
Net interest expense decreased by $98,000 in the second quarter and $156,000 for
the first six months of 2002 compared to the corresponding periods of 2001 due
to lower borrowing levels.
INCOME TAXES
The Company's 2002 tax provision includes a charge of $21,316,000 to establish a
valuation reserve for deferred taxes in accordance with SFAS 109 due to the
Company's recent loss. Net deferred tax assets of $21,316,000 are still
available to the Company to offset future taxable income. Management will
re-evaluate the need for the valuation reserve in future quarters.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 2002, the Company had negative working capital of $9,313,000
compared to $3,735,000 of negative working capital at December 31, 2001. Working
capital is negatively impacted by the requirement to classify the revolver loan
balance of $6,287,000 at June 29, 2002 and
14
$7,368,000 at December 31, 2001 as a current liability as a result of the
Company's lockbox arrangement with the bank whereby remittances from customers
are used to reduce the outstanding revolver balance, although the revolver loan
does not mature until December 31, 2003. Working capital was also negatively
impacted by the reserve established in the second quarter 2002 for current
deferred taxes of $5,269,000. Working capital also changed as a result of a
$2,191,000 decrease in the current maturities of debt and a $2,441,000 decrease
in accrued expenses offset by a $2,932,000 decrease in accounts receivables, a
$1,087,000 decrease in cash and a $1,510,000 increase in accounts payable. The
net change in working capital was predominantly the result of the Company's
lower sales levels and the establishment of the deferred tax valuation
allowance. The Company's debt-to-equity ratio at June 29, 2002 is not comparable
to December 31, 2001 due to the $21,316,000 reserve established for deferred
taxes.
In 2002, the Company generated $2,586,000 of cash from operating activities
compared to $5,305,000 for 2001. Cash from operating activities for 2001 was
negatively impacted by approximately $2,662,000 of severance payments which had
been reserved as part of the Company's 2000 restructuring plan. Cash used in
investing activities was for purchases of equipment and totaled $835,000 in 2002
compared to $870,000 in 2001. The 2002 purchases relate primarily to equipment
and tooling for the manufacturing of new products and improvements to the
Company's computer network.
On December 21, 2001, the Company and its banks agreed to a restructuring of the
Company's Credit Agreement, with the Credit Agreement being amended and restated
in full (the "Restated Credit Agreement"). The Restated Credit Agreement, among
other things, extended the maturity date of the facility to December 31, 2003,
restructured the indebtedness, reduced the monthly principal payments, amended
the financial covenants under the facility, and waived all then outstanding
defaults under the Credit Agreement. The Restated Credit Agreement provided for
term loans with an initial balance of $19,167,000, a revolving loan availability
equal to the lesser of $11,000,000 or an amount determined by reference to a
borrowing base, and a letter of credit facility of up to $4,459,000. In February
2002, a letter of credit under the letter of credit facility was utilized to
retire an outstanding promissory note in the amount of $2,006,000. Pursuant to
the terms of the Restated Credit Agreement, the letter of credit facility was
reduced by $2,006,000 and replaced by an additional term loan in the same
amount. After the end of the second quarter of 2002, the Company and the banks
entered into the First Amendment to Amended and Restated Credit Agreement (the
"First Amendment"), which amends the Restated Credit Agreement in certain
respects, including revising the financial covenants, waiving any then
outstanding defaults and deferring principal payments otherwise due July 1,
2002.
In connection with the First Amendment, UM Holdings, Ltd., a principal
stockholder of the Company, lent to the Company, on a subordinated basis,
$500,000 in July 2002, and agreed to lend on a subordinated basis an additional
$500,000 if certain events do not occur on or before October 15, 2002.
At June 29, 2002, there was outstanding under the Credit Agreement $19,485,000
in term loans, $6,287,000 in revolving loans and $1,947,000 in letters of
credit, with $658,000 in unused availability under the revolver loan.
Pursuant to the Restated Credit Agreement, the Company issued warrants to the
banks to purchase 263,501 shares of the Company's Common Stock at an exercise
price of $1.269 per share; and additional warrants to purchase 264,211 shares of
the Company's Common Stock became exercisable on July 30, 2002, at an exercise
price of $1.269 per share. Pursuant to the Restated Credit Agreement, as
amended, the Company is required to pay fees of $281,000 on December 31, 2002,
if the facility is not retired in full prior to September 30, 2002, fees of
$400,000 if the facility is not retired in full prior to March 31, 2003 and fees
of $281,000 if the facility is not retired in full prior to December 31, 2003.
Management is seeking to refinance the existing facility; however, there can be
no
15
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 relies upon cash flows from its operations and borrowings under its
Credit Agreement to fund its working capital and capital expenditure
requirements, and a decline in sales or margins or a failure to remain in
compliance with the terms of the Credit Agreement could result in the Company
having insufficient funds for such purposes. Management believes that the cash
flows and availability under the Company's Credit Agreement will be sufficient
to fund its general working capital and capital expenditure needs into 2003.
As of June 29, 2002, the Company had approximately $31,800,000 in net operating
loss carry forwards of which approximately $18,000,000 is available to offset
2002 taxable income.
CONTRACTUAL OBLIGATIONS
The following is an aggregated summary of the Company's obligations and
commitments to make future payments under debt, royalty and lease agreements as
of June 29, 2002:
Less Than One to Four to Five After Five
TOTAL One Year Three Years Years Years
----------- ---------- ----------- ------------ ----------
Contractual obligations:
Long-term debt $27,672,000 $4,390,000 $22,882,000 $400,000 $ --
Royalty agreement 3,830,000 410,000 1,080,000 360,000 1,980,000
Operating lease commitments 483,000 205,000 266,000 12,000 --
OFF-BALANCE SHEET ARRANGEMENTS
The Company has a lease financing program, through its wholly-owned subsidiary,
for certain commercial customers for selected products. Leases written by Cybex
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. The Company has entered
into agreements, generally subject to limited recourse, to sell lease
receivables to financial institutions in a two-step process through a
bankruptcy-remote entity. 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 are generally equal to 15% of the outstanding net lease
receivables, may be reduced annually based upon the remaining outstanding lease
payment streams. In 2001, the Company changed its practice whereby it now
arranges equipment leases and other financing and no longer originates and holds
leases. While most of these financings are without recourse, in certain cases
the Company may offer a guaranty or other recourse provisions. At June 29, 2002,
the maximum contingent liability under all recourse provisions was approximately
$1,579,000. A reserve for estimated losses under recourse provisions has been
recorded based upon historical and industry experience, and is included in
accrued liabilities at June 29, 2002 and December 31, 2001.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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. On an ongoing basis, management evaluates its estimates and
judgements, including those related to the allowance for doubtful accounts,
realizability of inventory, reserve for warranty obligations, legal matters,
impairment of goodwill, and valuation of deferred tax assets. Management bases
its estimates and judgements on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgements about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different
16
assumptions or conditions, which could materially impact the Company's results
of operations and financial position.
Allowance for doubtful accounts. Management performs ongoing credit evaluations
of customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by a review of their current
credit information. Management continuously monitors collections and payments
from customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. If the financial condition of a specific customer or the Company's
general customer base were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Realizability of inventory. The Company values inventory at the lower of cost or
market. Management regularly reviews inventory quantities on-hand and records a
provision for excess and obsolete inventory based primarily on estimated
forecasts of product demand and historical usage, after considering the impact
of new products. If actual market conditions and product demand are less
favorable than projected, additional inventory write-downs may be required.
Warranty reserve. Currently, all products are warranted for one year for labor
and ten years for structural frames. Warranty periods for parts range from one
to three years depending on the part and the type of equipment. Prior to
December 31, 2000, the Company generally provided a three year warranty on
cardiovascular products. A warranty liability is recorded at the time of product
sale based on estimates that are developed from historical information and
certain assumptions about future events. Future warranty obligations are
affected by product failure rates, usage and service costs incurred in
addressing warranty claims. These factors are impacted by the level of new
product introductions and the mix of equipment sold to the commercial and
consumer markets. If actual warranty costs differ from management's estimates,
adjustments to the warranty liability would be required.
Legal matters. The Company has recorded a reserve related to certain legal
matters for which it is probable that a loss has been incurred and the range of
such loss can be determined. With respect to other matters, management has
concluded that a loss is only possible or remote and, therefore, no loss is
recorded. In addition, there are certain gain contingencies for which the
Company has not recorded an asset because realization is not considered highly
likely as of the balance sheet date. As additional information becomes
available, the Company will continue to assess whether losses from legal matters
are probable, possible or remote, the adequacy of accruals for probable loss
contingencies and the status of gain contingencies.
Impairment of goodwill. In assessing the recoverability of goodwill, management
is required to make assumptions regarding estimated future cash flows and other
factors to determine whether the fair value of the business supports the
carrying value of goodwill and net operating assets. This analysis includes
assumptions and estimates about future sales, costs, working capital, capital
expenditures, and cost of capital. If these assumptions and estimates change in
the future, the Company may be required to record an impairment charge related
to goodwill.
Valuation of deferred tax assets. The Company established, during the second
quarter 2002, a valuation allowance of $21,316,000 against the carrying value of
the net deferred tax assets. Approximately $57,000,000 of future taxable income
is needed to fully realize the Company's net deferred tax asset. If the
estimates and related assumptions relating to the likely utilization of the
deferred tax asset change in the future, the valuation allowance may change
accordingly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market risk
from the disclosure within the December 31, 2001 Form 10-K.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kirila et al v. Cybex International, Inc. et al
-----------------------------------------------
See Part 1 Item 3 of the Company's Report on Form 10-K for the year
ended December 31, 2001 for a description of these proceedings.
Hot New Products v. Cybex International, Inc. et al
---------------------------------------------------
See Part 1 Item 3 of the Company's Report on Form 10-K for the year
ended December 31, 2001 for a description of these proceedings.
Creighton et al v. Cybex International, Inc., et al
---------------------------------------------------
See Part 1 Item 3 of the Company's Report on Form 10-K for the year
ended December 31, 2001 for a description of these proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 7,
2002. At the meeting, action was taken on the following matters:
1. Joan Carter and Alan H. Weingarten were re-elected as directors
of the Company. The terms of office of John Aglialoro, James H.
Carll, David D. Fleming, Arthur W. Hicks Jr., and Jerry Lee
continued after the meeting.
2. An amendment to reserve an additional 500,000 shares of common
stock for issuance under the Company's 1995 Omnibus Incentive
Plan was approved.
3. The Company's 2002 Stock Retainer Plan for Nonemployee Directors
was approved.
The number of shares cast for, against or withheld, as well as the
number of abstentions and broker non-votes, on each matter considered
at the meeting, were as follows:
Shares Shares Abstentions/
Voted Voted Shares Broker
For Against Withheld Non-Votes
--------- ------- -------- ------------
1. Election of Directors
Joan Carter 8,188,432 -- 66,424 --
Alan H. Weingarten 8,187,446 -- 67,410 --
2. Amend the 1995 Omnibus Incentive
Plan 5,858,671 151,821 -- 2,244,364
3. Approval of the 2002 Stock
Retainer Plan for Nonemployee
Directors 5,894,754 101,693 -- 2,258,409
18
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit 99.1 - Statement of Chief Executive Officer
Exhibit 99.2 - Statement of Chief Financial Officer
(b) Reports on Form 8-K
-------------------
None
19
SIGNATURES
Pursuant to the requirements 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.
By: /s/ John Aglialoro
-----------------------------------------
August 13, 2002 John Aglialoro
President and Chief Executive Officer
By: /s/ Arthur W. Hicks, Jr.
-----------------------------------------
August 13, 2002 Arthur W. Hicks, Jr.
Chief Financial Officer
20