<PAGE>
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CYBEX INTERNATIONAL, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/x/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, $.10 par value, of the Registrant
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(2) Aggregate number of securities to which transaction applies:
4,292,943 shares
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(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): The filing fee of $8,371 is
equal to 1/50 of 1% of $41,856,194, which is the estimated aggregate market
value of the CYBEX Common Stock to be received in the Merger by holders of
Trotter Common Stock in accordance with the Merger Agreement, calculated by
multiplying (a) $9 3/4, which is the average of the high and low sale prices
reported in the consolidated reporting system on April 18, 1997, by (b)
4,292,943, which is the estimated maximum aggregate number of shares of
CYBEX Common Stock to be issued in the Merger, determined by multiplying the
number of shares of Trotter Common Stock outstanding as of December 31, 1996
(i.e., 3,800,000), by an exchange ratio of 1.12972, implied by the terms of
the Merger Agreement.
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(4) Proposed maximum aggregate value of transaction:
$41,856,194
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(5) Total fee paid:
Previously paid
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/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $8,976
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(2) Form, Schedule or Registration Statement No.: Schedule 14A File No. 0-4538
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(3) Filing Party: CYBEX International, Inc.
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(4) Date Filed: January 28, 1997
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<PAGE>
CYBEX INTERNATIONAL, INC.
APRIL 23, 1997
To Our Shareholders:
You are hereby cordially invited to attend the annual meeting (the
'Meeting') of the shareholders of CYBEX International, Inc., a New York
corporation (the 'Company'), to be held at the offices of Weil, Gotshal & Manges
LLP, 25th Floor Conference Center, located at 767 Fifth Avenue, New York, New
York 10153, on May 23, 1997, convening at 9:00 a.m., local time.
At the Meeting, holders of record of common shares, par value $.10 per
share, of the Company ('Company Common Stock') at the close of business on April
14, 1997 will be requested to consider and vote upon:
1. a proposal to adopt an Agreement and Plan of Merger, dated as of
December 27, 1996, as amended (the 'Merger Agreement'), among the Company,
Trotter Inc., a Delaware corporation ('Trotter'), and Cat's Tail, Inc., a
Delaware corporation and a wholly owned subsidiary of the Company ('Merger
Sub'), pursuant to which (a) Merger Sub will be merged with and into
Trotter (the 'Merger'), (b) Trotter (as the surviving corporation in the
Merger) will become a wholly owned subsidiary of the Company, (c) UM
Holdings, Ltd. ('UM'), the indirect sole holder of the common stock, $.01
par value, of Trotter ('Trotter Common Stock') will become the beneficial
owner of Company Common Stock in exchange for the shares of Trotter Common
Stock beneficially held by it and (d) options to purchase Trotter Common
Stock will be converted into options to purchase Company Common Stock.
Pursuant to the Merger Agreement, UM and the holders of options to purchase
Trotter Common Stock together will own 50.001% of all Company Common Stock
on a fully diluted basis (calculated using the treasury stock method and
assuming a price of $9.75 per share of Company Common Stock) immediately
following the Merger. UM will beneficially hold 49.49% of the issued and
outstanding shares of Company Common Stock immediately following the Merger
(an aggregate of 4,292,943 shares based on 4,381,555 shares of Company
Common Stock outstanding as of the Record Date);
2. a proposal to authorize an amendment (the 'Charter Amendment') to
the Restated Certificate of Incorporation of the Company to increase the
number of authorized shares of Company Common Stock from 15,000,000 shares
to 20,000,000 shares;
3. a proposal to amend the Company's 1995 Omnibus Incentive Plan (the
'Omnibus Plan') to increase the aggregate number of shares of Company
Common Stock that may be subject to Benefits (as defined in Omnibus Plan)
granted under the Omnibus Plan from 250,000 to 750,000 shares (the 'Plan
Amendment'); and
4. the election of two Directors of the Board of Directors of the
Company to serve until the Annual Meeting of Shareholders for the year 2000
and until their respective successors are duly elected and qualified.
5. such other business as properly may be presented at the Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY HAS DETERMINED THAT THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS, HAS
APPROVED THE MERGER AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED THEREBY), THE
CHARTER AMENDMENT AND THE PLAN AMENDMENT, AND RECOMMENDS THAT HOLDERS OF COMPANY
COMMON STOCK VOTE 'FOR' ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENT,
THE PLAN AMENDMENT AND ELECTION OF THE NOMINEES TO THE BOARD OF DIRECTORS OF THE
COMPANY.
You should read carefully the accompanying Notice of Meeting and the Proxy
Statement for details concerning the Merger, the Charter Amendment, the Plan
Amendment, the election of the nominees to the Board of Directors of the Company
and additional related information.
<PAGE>
It is important that your shares be represented at the Meeting. Whether or
not you plan to attend the Meeting, we encourage you to sign, date and return
the enclosed proxy card at your earliest convenience in the enclosed
postage-prepaid envelope. Your shares of Company Common Stock will be voted in
accordance with the instructions you have given in your proxy. If you attend the
Meeting, you may vote in person if you wish, even though you previously have
returned your proxy card. Your prompt cooperation will be greatly appreciated.
Very truly yours,
John C. Spratt
Chairman of the Board
J. Raymond Elliott
President and Chief Executive Officer
<PAGE>
CYBEX INTERNATIONAL, INC.
NOTICE OF ANNUAL MEETING OF HOLDERS OF COMMON STOCK
The annual meeting (the 'Meeting') of the holders of common shares, $.10
par value ('Company Common Stock'), of CYBEX International, Inc., a New York
corporation (the 'Company'), will be held at the offices of Weil, Gotshal &
Manges LLP, 25th Floor Conference Center, located at 767 Fifth Avenue, New York,
New York 10153 on May 23, 1997, convening at 9:00 a.m., local time, for the
purpose of considering and acting upon the following matters, which are
described more fully in the accompanying Proxy Statement:
1. To consider and act upon a proposal to adopt an Agreement and Plan
of Merger, dated as of December 27, 1996, as amended (the 'Merger
Agreement'), among the Company, Trotter Inc., a Delaware corporation
('Trotter'), and Cat's Tail, Inc., a Delaware corporation and a wholly
owned subsidiary of the Company ('Merger Sub'), pursuant to which (a)
Merger Sub will be merged with and into Trotter (the 'Merger'), (b) Trotter
(as the surviving corporation in the Merger) will become a wholly owned
subsidiary of the Company, (c) UM Holdings, Ltd. ('UM'), the indirect sole
holder of the common stock, $.01 par value, of Trotter ('Trotter Common
Stock') will become the beneficial owner of Company Common Stock in
exchange for the shares of Trotter Common Stock beneficially held by it and
(d) options to purchase Trotter Common Stock will be converted into options
to purchase Company Common Stock. Pursuant to the Merger Agreement, UM and
the holders of options to purchase Trotter Common Stock together will own
50.001% of all Company Common Stock on a fully diluted basis (calculated
using the treasury stock method and assuming a price of $9.75 per share of
Company Common Stock) immediately following the Merger. UM will
beneficially hold 49.49% of the issued and outstanding shares of Company
Common Stock immediately following the Merger (an aggregate of 4,292,943
shares based on (i) an exchange ratio of 1.12972 shares of Company Common
Stock for each share of Trotter Common Stock and (ii) 4,381,555 shares of
Company Common Stock outstanding as of the Record Date). THE MERGER (AND
THE RELATED TRANSACTIONS CONTEMPLATED THEREBY) ARE MORE FULLY DESCRIBED IN
THE ACCOMPANYING PROXY STATEMENT, AND THE FULL TEXT OF THE MERGER AGREEMENT
IS ATTACHED THERETO AS ANNEX A AND SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY.
2. To consider and act upon a proposal to amend the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
Company Common Stock from 15,000,000 shares to 20,000,000 shares (the
'Charter Amendment').
3. To consider and act upon a proposed amendment to the Company's 1995
Omnibus Incentive Plan (the 'Omnibus Plan') to increase the aggregate
number of shares of Company Common Stock that may be subject to Benefits
(as defined in Omnibus Plan) granted under the Omnibus Plan from 250,000 to
750,000 shares (the 'Plan Amendment').
4. To consider and act upon the election of two Directors of the Board
of Directors of the Company to serve until the Annual Meeting of
Shareholders for the year 2000 and until their respective successors are
duly elected and qualified.
5. To transact such other business as properly may be presented at the
Meeting or any adjournments or postponements thereof.
The Board of Directors of the Company has fixed the close of business on
April 14, 1997 as the record date for the purpose of determining the holders of
Company Common Stock who are entitled to receive notice of and to vote at the
Meeting and any adjournments or postponements thereof.
Although Company shareholder approval is not required under New York law
because the Company is not a constituent corporation in the Merger, under the
rules of the American Stock Exchange, on which the shares of Company Common
Stock are listed, the affirmative vote of the holders of a majority of the
shares of Company Common Stock voted at the Meeting (provided that a majority of
the shares of Company Common Stock is voted) is required for approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
Under New York law, the approval and adoption of the Charter Amendment by the
Company's shareholders will require the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock. Under New York law,
the affirmative vote of the holders of a majority of the shares of Company
Common Stock
<PAGE>
voted at the Meeting (provided that a majority of the shares of Company Common
Stock is voted) is required for approval and adoption of the Plan Amendment.
Under New York law, nominees for directors who receive a plurality of the votes
cast by the holders of the outstanding shares of Common Stock entitled to vote
at the Meeting will be elected.
YOUR VOTE IS IMPORTANT! PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE WHICH HAS BEEN PROVIDED FOR
YOUR CONVENIENCE AND WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
THE PROMPT RETURN OF PROXY CARDS WILL ENSURE THE PRESENCE OF A QUORUM. ANY
HOLDER OF COMPANY COMMON STOCK WHO SO DESIRES MAY REVOKE HIS OR ITS PROXY AT ANY
TIME PRIOR TO THE TIME IT IS EXERCISED BY (I) PROVIDING WRITTEN NOTICE TO SUCH
EFFECT TO THE SECRETARY OF THE COMPANY, (II) DULY EXECUTING A PROXY BEARING A
DATE SUBSEQUENT TO THAT OF A PREVIOUSLY FURNISHED PROXY, OR (III) ATTENDING THE
MEETING AND VOTING IN PERSON. ATTENDANCE AT THE MEETING WILL NOT IN ITSELF
CONSTITUTE A REVOCATION OF A PREVIOUSLY FURNISHED PROXY AND SHAREHOLDERS WHO
ATTEND THE MEETING IN PERSON NEED NOT REVOKE THEIR PROXY (IF PREVIOUSLY
FURNISHED) AND VOTE THEREAT IN PERSON.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS, HAS APPROVED THE MERGER
AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED THEREBY) AND THE CHARTER AMENDMENT
AND THE PLAN AMENDMENT, AND RECOMMENDS THAT THE HOLDERS OF COMPANY COMMON STOCK
VOTE 'FOR' ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENT, THE PLAN
AMENDMENT AND ELECTION OF THE NOMINEES TO THE BOARD OF DIRECTORS OF THE COMPANY.
By Order of the Board of Directors
John C. Spratt
Chairman of the Board
April 23, 1997
<PAGE>
PROXY STATEMENT
CYBEX INTERNATIONAL, INC.
2100 SMITHTOWN AVENUE
RONKONKOMA, NEW YORK 11779
PROXY STATEMENT RELATING TO
ANNUAL MEETING OF SHAREHOLDERS OF CYBEX INTERNATIONAL, INC.
TO BE HELD ON MAY 23, 1997
This Proxy Statement is being furnished to holders of common shares, $.10
par value ('Company Common Stock'), of CYBEX International, Inc., a New York
corporation (the 'Company'), in connection with the solicitation of proxies by
the Company's Board of Directors for use at the annual meeting of the holders of
Company Common Stock to be held at the offices of Weil, Gotshal & Manges LLP,
25th Floor Conference Center, located at 767 Fifth Avenue, New York, New York
10153, on May 23, 1997, convening at 9:00 a.m., local time, and at any
adjournments or postponements thereof (the 'Meeting'). At the Meeting, holders
of record as of April 14, 1997 of Company Common Stock will be requested to
consider and vote upon (i) the adoption of an Agreement and Plan of Merger,
dated as of December 27, 1996, as amended (the 'Merger Agreement'), among the
Company, Trotter Inc., a Delaware corporation ('Trotter'), and Cat's Tail, Inc.,
a Delaware corporation and a wholly owned subsidiary of the Company ('Merger
Sub'), (ii) an amendment (the 'Charter Amendment') to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
Company Common Stock from 15,000,000 shares to 20,000,000 shares, (iii) a
proposed amendment to the Company's 1995 Omnibus Incentive Plan (the 'Omnibus
Plan') to increase the aggregate number of shares of Company Common Stock that
may be subject to Benefits (as defined in Omnibus Plan) granted under the
Omnibus Plan from 250,000 to 750,000 shares (the 'Plan Amendment'), (iv) the
election of two nominees to the Board of Directors of the Company, and (v) such
other business as properly may be presented at the Meeting. Pursuant to the
Merger Agreement, (i) Merger Sub will be merged (the 'Merger') with and into
Trotter, which will be the surviving corporation in the Merger and become a
wholly owned subsidiary of the Company (Trotter being sometimes hereafter
referred to in such context as the 'surviving corporation'), (ii) UM Holdings,
Ltd. ('UM'), the indirect sole holder of the common stock, $.01 par value, of
Trotter ('Trotter Common Stock') will become the beneficial owner of Company
Common Stock in exchange for the shares of Trotter Common Stock beneficially
held by it and (iii) options to purchase Trotter Common Stock will be converted
into options to purchase Company Common Stock. Pursuant to the Merger Agreement,
UM and the holders of options to purchase Trotter Common Stock together will own
50.001% of all Company Common Stock on a fully diluted basis (calculated using
the treasury stock method and assuming a price of $9.75 per share of Company
Common Stock) immediately following the Merger, all as more fully described in
this Proxy Statement and as set forth in the Merger Agreement attached hereto as
Annex A and incorporated by reference herein (which should be read carefully and
in its entirety). UM and the holders of options to purchase Trotter Common Stock
will receive in the Merger, in the aggregate, 4,731,896 shares of Company Common
Stock valued at $42,253,837 (based on 4,381,555 shares of Company Common Stock
outstanding as of the Record Date and a market price for Company Common Stock of
$9 1/2 per share as of the Record Date). UM will beneficially hold 49.49% of the
issued and outstanding shares of Company Common Stock immediately following the
Merger (an aggregate of 4,292,943 shares based on (i) an exchange ratio of
1.12972 shares of Company Common Stock for each share of Trotter Common Stock
and (ii) 4,381,555 shares of Company Common Stock outstanding as of the Record
Date).
John Aglialoro and Joan Carter, who are married, are deemed to be the
beneficial owners of 100% of Trotter Common Stock prior to the Merger and, after
the Merger, will beneficially own 49.49% of the outstanding shares of Company
Common Stock. Accordingly, following the Merger, Mr. Aglialoro and Ms. Carter
will have the ability to significantly influence the outcome of all matters
submitted to a shareholder vote.
SEE 'SUMMARY--RISK FACTORS' ON PAGE 14 OF THIS PROXY STATEMENT FOR A
DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE CAREFULLY CONSIDERED BY HOLDERS OF
COMPANY COMMON STOCK IN DETERMINING HOW TO VOTE IN RESPECT OF THE MERGER
AGREEMENT.
Company Common Stock is traded on the American Stock Exchange ('AMEX'). The
closing sale price of Company Common Stock was $10.125 on December 27, 1996 (the
last trading day preceding the public announcement of the Merger), and was
$9 5/8 on April 22, 1997 (the last trading day preceding the date of this Proxy
Statement).
All information concerning Trotter contained in this Proxy Statement has
been furnished or prepared by Trotter, and all information concerning the
Company contained in this Proxy Statement has been furnished or prepared by the
Company.
This Proxy Statement and the related form of proxy are first being mailed
to holders of record of Company Common Stock on or about April 24, 1997.
The Annual Report of the Company for the year ended December 31, 1996,
including audited financial statements, accompanies this Proxy Statement.
THE SHARES OF COMPANY COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Proxy Statement is April 23, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. The periodic reports, proxy statements and other information
filed by the Company with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, at 450
Fifth Street, N.W., Washington, D.C. 20549, and also are available for
inspection at the following regional offices of the Commission: 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material also can be
obtained, at prescribed rates, from the Public Reference Section of the
Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding reporting companies under the Exchange Act,
including the Company, at http://www.sec.gov. In addition, periodic reports,
proxy statements and other information filed by the Company may be inspected at
the offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006-1881. If the Merger is consummated, the Company will continue to file
periodic reports, proxy statements and other information with the Commission
pursuant to the Exchange Act. See 'The Merger--Certain Consequences of the
Merger.'
NO PERSON IS AUTHORIZED TO PROVIDE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT
OTHER THAN THOSE CONTAINED HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROXY STATEMENT DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
Copies of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, including the financial statements and schedules thereto,
filed with the Securities and Exchange Commission are available without charge
to shareholders upon request to: CYBEX International, Inc., 2100 Smithtown
Avenue, Ronkonkoma, New York 11779, Attention: Corporate Secretary.
(i)
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION...................................................... i
SUMMARY.................................................................... 1
The Companies............................................................ 1
Annual Meeting of Shareholders........................................... 2
The Merger............................................................... 3
Other Matters............................................................ 11
COMPARATIVE PER SHARE DATA................................................. 12
COMPARATIVE MARKET PRICE INFORMATION AND DIVIDENDS......................... 13
RISK FACTORS............................................................... 14
COMPANY SELECTED CONSOLIDATED FINANCIAL DATA............................... 16
TROTTER INC. AND SUBSIDIARY SELECTED CONSOLIDATED FINANCIAL DATA........... 17
SELECTED COMBINED PRO FORMA FINANCIAL DATA................................. 18
THE MEETING................................................................ 19
General.................................................................. 19
Matters to Be Considered at the Meeting.................................. 19
Record Date; Quorum; Voting at the Meeting............................... 19
Proxies.................................................................. 20
THE MERGER................................................................. 21
Background of the Merger................................................. 21
Reasons for the Merger................................................... 23
Recommendation of the Company's Board of Directors....................... 25
Opinion of the Company's Financial Advisor............................... 25
Certain Consequences of the Merger....................................... 28
Board of Directors and Management of the Company After the Merger........ 29
Conduct of the Business of Trotter and the Company if the Merger Is Not
Consummated........................................................... 30
Material Contacts Between Trotter and the Company........................ 30
Interest of Certain Persons in the Merger................................ 30
Indemnification of Directors and Officers................................ 31
Accounting Treatment..................................................... 31
Certain Federal Income Tax Consequences.................................. 31
Regulatory Approvals..................................................... 32
Federal Securities Law Consequences...................................... 32
Stock Exchange Listing................................................... 32
No Appraisal Rights...................................................... 32
THE MERGER AGREEMENT....................................................... 33
The Merger............................................................... 33
Effective Time........................................................... 33
Conversion of Shares; Exchange of Stock Certificates; No Fractional
Shares................................................................ 33
Treatment of Stock Options............................................... 34
Representations and Warranties........................................... 34
Certain Covenants........................................................ 34
Conditions............................................................... 37
Termination.............................................................. 38
Fees and Expenses........................................................ 39
Modification or Amendment................................................ 39
(ii)
<PAGE>
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE COMPANY............................................... 40
Results of Operations.................................................... 40
Liquidity and Capital Resources.......................................... 42
INFORMATION CONCERNING THE COMPANY......................................... 44
General.................................................................. 44
Restructuring Plan....................................................... 44
Products................................................................. 45
Product Development...................................................... 46
Marketing, Sales and Services............................................ 47
Manufacturing and Sources of Supply...................................... 48
Patents and Licenses..................................................... 48
Competition.............................................................. 48
Governmental Regulation.................................................. 48
Associates............................................................... 49
Recent Developments...................................................... 49
Properties............................................................... 50
Legal Proceedings........................................................ 50
MANAGEMENT OF THE COMPANY.................................................. 51
Executive Officers and Directors......................................... 51
Director Compensation.................................................... 53
Meetings and Committees of the Board of Directors........................ 53
Certain Relationships and Related Transactions........................... 54
OWNERSHIP OF COMPANY COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................... 55
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION............. 57
PERFORMANCE GRAPH OF THE COMPANY........................................... 59
EXECUTIVE COMPENSATION..................................................... 60
INFORMATION CONCERNING TROTTER............................................. 64
Products................................................................. 64
Customers and Distribution............................................... 65
Marketing................................................................ 66
Warranties............................................................... 66
Competition.............................................................. 66
Product Development...................................................... 66
Manufacturing and Supply................................................. 66
Backlog.................................................................. 67
Patents and Trademarks................................................... 67
Insurance................................................................ 67
Litigation............................................................... 67
Employees................................................................ 67
Properties............................................................... 67
MANAGEMENT OF TROTTER...................................................... 68
Executive Officers and Directors......................................... 68
Director Compensation.................................................... 69
Executive Compensation................................................... 69
Stock Option Grants...................................................... 69
(iii)
<PAGE>
PAGE
----
Employment Agreements.................................................... 70
Stock Option Plans....................................................... 70
Executive Incentive Compensation Plan.................................... 70
401(k) Plan.............................................................. 70
Compensation Committee Interlocks and Insider Participation.............. 71
Certain Relationships and Related Transactions........................... 71
OWNERSHIP OF TROTTER COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................... 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR TROTTER................................................... 73
Results of Operations.................................................... 73
Seasonality.............................................................. 74
Liquidity and Capital Resources.......................................... 74
OTHER MATTERS TO BE CONSIDERED AT ANNUAL MEETING........................... 75
Proposal No. 2--Amendment to the Restated Certificate of Incorporation... 75
Proposal No. 3--Amendment to the 1995 Omnibus Incentive Plan............. 75
Proposal No. 4--Election of Directors.................................... 77
SHAREHOLDER PROPOSALS...................................................... 77
INDEPENDENT AUDITORS....................................................... 77
OTHER MATTERS.............................................................. 78
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
ANNEX A Agreement and Plan of Merger, dated as of December 27, 1996, as
amended, among the Company, Trotter and Merger Sub................ A-1
ANNEX B Opinion of Smith Barney Inc....................................... B-1
ANNEX C Proposed Amendment to the Restated Certificate of Incorporation of
CYBEX International, Inc.......................................... C-1
(iv)
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement and the Annexes hereto. Shareholders
are urged to read this Proxy Statement and the Annexes hereto carefully and in
their entirety. Unless otherwise defined herein, all capitalized terms used in
this Summary have the respective meanings assigned to them elsewhere in this
Proxy Statement.
Unless otherwise indicated, all beneficial ownership information and share
amounts set forth in this Proxy Statement assume that outstanding options to
purchase shares of Company Common Stock and Trotter Common Stock will not be
exercised prior to the Effective Time.
THE COMPANIES
CYBEX INTERNATIONAL,
INC.................... The Company designs, develops, manufactures and sells/
distributes strength training and cardiovascular
equipment used in fitness conditioning, sports
medicine and rehabilitation. These products are
marketed under a number of trademarks leading with
the name CYBEX(Registered). The Company operates in
one industry segment, the exercise equipment
industry, which includes institutional fitness
facilities, sports teams, research/educational
centers, hospitals, private practice physical
therapy clinics and rehabilitation centers. The
Company's wholly owned finance subsidiary, CYBEX
Financial Corp. ('CFC'), provides capital equipment
financing for CYBEX products primarily to its
domestic customer base. See 'Information Concerning
the Company.' The Company's revenues and total
assets as of or for the year ended December 31, 1996
represent 63% and 76% of the combined revenues and
assets, respectively. For the year ended December
31, 1996, the Company had a net loss from continuing
operations of $835,000 as compared to the combined
pro forma net income of $2,264,000.
The Company's executive offices are located at 2100
Smithtown Avenue, Ronkonkoma, New York 11779, and
its telephone number is (516) 585-9000.
CAT'S TAIL, INC.......... Merger Sub, a Delaware corporation and a wholly owned
subsidiary of the Company, was formed solely for the
purpose of effecting the Merger and has not engaged
in any activities other than those incident to its
organization and consummation of the Merger.
TROTTER INC.............. Trotter designs, manufactures and distributes, under
its own brand name, professional quality, premium
priced fitness equipment for the home and commercial
markets. Its targeted customers are affluent
individuals interested in home fitness programs and
commercial customers such as health clubs, corporate
fitness centers, hotels and educational and
governmental institutions. Trotter's cardiovascular
products include exercise treadmills and a
stairclimber; its strength training equipment
includes selectorized single station products,
free-weight equipment and multi-station gyms.
Trotter's revenues and total assets as of or for the
year ended December 31, 1996 represent 37% and 24%
of the combined
1
<PAGE>
revenues and assets, respectively. For the year
ended December 31, 1996, Trotter had net income of
$1,968,000 as compared to the combined pro forma net
income of $2,264,000.
Trotter's executive offices are located at 10 Trotter
Drive, Medway, Massachusetts 02053, and its
telephone number is 508-533-4300.
ANNUAL MEETING OF SHAREHOLDERS
TIME, DATE AND PLACE..... The Meeting will be held at 9:00 a.m., local time, on
May 23, 1997, at the offices of Weil, Gotshal &
Manges LLP.
PURPOSE OF THE MEETING... The purpose of the Meeting is to consider and vote
upon (i) a proposal to adopt the Merger Agreement,
(ii) a proposal to amend the Company's Restated
Certificate of Incorporation to increase the number
of authorized shares of Company Common Stock (the
'Charter Amendment'), (iii) a proposed amendment to
the Company's 1995 Omnibus Incentive Plan (the
'Omnibus Plan') to increase the aggregate number of
shares of Company Common Stock that may be subject
to Benefits (as defined in Omnibus Plan) granted
under the Omnibus Plan from 250,000 to 750,000
shares (the 'Plan Amendment'), (iv) the election of
two directors to the Board of Directors of the
Company to serve until the Annual Meeting of
Shareholders for the year 2000 and (v) such other
business as properly may be presented at the Meeting
or any adjournments or postponements thereof.
RECORD DATE, SHARES
ENTITLED TO VOTE;
QUORUM................. Only holders of record of shares of Company Common
Stock at the close of business on April 14, 1997
(the 'Record Date') are entitled to notice of and to
vote at the Meeting. At the Record Date, there were
4,381,555 shares of Company Common Stock
outstanding, each of which is entitled to one vote
on each matter to be acted upon or which properly
may be presented at the Meeting.
VOTE REQUIRED............ Under New York law, Company shareholder approval of
the Merger is not required because the Company is
not a constituent corporation in the Merger.
However, under the rules of the AMEX, on which the
shares of Company Common Stock are listed, approval
of shareholders is required as a prerequisite to
approval of applications to list additional shares
to be issued as consideration for an acquisition of
the stock of another company where the issuance of
common stock results in an increase in outstanding
common shares of 20% or more. Therefore, under the
rules of the AMEX, the affirmative vote of the
holders of a majority of the outstanding shares of
Company Common Stock voted at the Meeting (provided
that a majority of the shares of Company Common
Stock is voted) is required for approval and
adoption of the Merger Agreement and the
transactions contemplated thereby. Under New York
law, the approval and adoption of the Charter
Amendment by
2
<PAGE>
the Company's shareholders will require the
affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock. Under
New York law, the affirmative vote of the holders of
a majority of the shares of Company Common Stock
voted at the Meeting (provided that a majority of
the shares of Company Common Stock is voted) is
required for approval and adoption of the Plan
Amendment. Under New York law, nominees for
directors who receive a plurality of the votes cast
by the holders of the outstanding shares of Common
Stock entitled to vote at the Meeting will be
elected. See 'The Meeting--Record Date; Quorum;
Voting at the Meeting--Proxies.'
As of the Record Date, the directors and executive
officers of the Company and their affiliates
beneficially owned in the aggregate approximately
3.9% of the outstanding Company Common Stock.
The Company is not aware of the voting intentions of
any of its shareholders with regard to any of the
matters to be considered at the Meeting.
THE MERGER
EFFECTS OF THE MERGER;
MERGER CONSIDERATION;
NO FRACTIONAL SHARES... In the Merger: (i) Merger Sub will be merged with and
into Trotter, and Trotter, as the surviving
corporation in the Merger, will become a wholly
owned subsidiary of the Company; (ii) all shares of
Trotter Common Stock outstanding immediately prior
to the Effective Time will be converted into shares
of Company Common Stock and all options to purchase
Trotter Common Stock outstanding immediately prior
to the Effective Time (the 'Trotter Stock Options')
will be converted to options to purchase Company
Common Stock, and the holder of Trotter Common Stock
and the holders of Trotter Stock Options will
receive, in the aggregate, 50.001% of Company Common
Stock on a fully diluted basis (calculated assuming
all outstanding options were exercised, with option
proceeds used to repurchase shares, and a price of
$9.75 per share of Company Common Stock) following
the Effective Time of the Merger (the 'Total Merger
Consideration'); and (iii) at the Effective Time,
each holder of a certificate representing shares of
Trotter Common Stock will cease to have any rights
with respect to such shares, except the right to
receive for each share of Trotter Common Stock the
number of shares of Company Common Stock equal to
the Total Merger Consideration divided by the number
of shares of Trotter Common Stock issued and
outstanding on a fully diluted basis (assuming
issuance of all Trotter Common Stock subject to the
Trotter Stock Plans (as defined below) immediately
before the Effective Time (the 'Merger
Consideration').
Issuances of Company Common Stock will be rounded
upward to the nearest whole share and no fractional
shares of Company
3
<PAGE>
Common Stock will be issued in the Merger to the
holder of Trotter Common Stock.
Based upon the equity capitalization of the Company
and Trotter as of the Record Date, and giving effect
to the Merger, the total number of shares of Company
Common Stock outstanding immediately following the
Effective Time will be 8,674,498 shares, and UM
Holdings, Ltd. ('UM'), the indirect sole stockholder
of Trotter Common Stock, together with the holders
of Trotter Stock Options, will own approximately
50.001% of the shares of Company Common Stock on a
fully diluted basis (calculated using the treasury
stock method and assuming a price of $9.75 per share
of Company Common Stock) with the current holders of
Company Common Stock, together with the holders of
options to purchase Company Common Stock (the
'Company Stock Options'), owning the remaining
49.999% on a fully diluted basis (calculated
assuming all options were exercised, with proceeds
used to repurchase shares, and assuming a price of
$9.75 per share of Company Common Stock). The equity
value range for Trotter derived from certain
financial analyses described in this Proxy Statement
(see 'Opinion of the Company's Financial Advisor')
was approximately $24.5 million to $80.2 million, or
approximately $6.30 to $20.68 per share, as compared
to the equity value implied by the Merger
Consideration, on a fully diluted basis, of
approximately $41.6 million, or approximately $10.73
per share, based on the closing stock price for
Company Common Stock of $9 1/2 per share on the
Record Date.
John Aglialoro and Joan Carter, who are married, are
deemed to be the beneficial owners of 100% of
Trotter Common Stock prior to the Merger and, after
the Merger, will beneficially own 49.49% of the
outstanding shares of Company Common Stock.
EXCHANGE OF
CERTIFICATES........... After the Effective Time, the holder of record of
Trotter Common Stock at the Effective Time will
receive from the Company instructions and letters of
transmittal for exchanging certificates evidencing
shares of Trotter Common Stock for the number of
shares of Company Common Stock that it is entitled
to receive in the Merger. The holder of Trotter
Common Stock should not surrender its certificates
until it receives such instructions and letters of
transmittal after the Effective Time. See 'The
Merger Agreement--Conversion of Shares; Exchange of
Stock Certificates; No Fractional Shares.'
REASONS FOR THE MERGER... The commercial fitness industry has been undergoing
rapid consolidation as a significant number of
single product manufacturers align themselves
through acquisition or strategic alliances with
other manufacturers to sell a broader product line.
In order for the Company to maintain a leadership
position in the fitness equipment industry,
management and the Board of Directors believe that
it is essential to have a significant market
position in the cardiovascular market. The bringing
together of the Company and Trotter combines the
4
<PAGE>
Company's strength-training portfolio of products
with Trotter's well-regarded line of treadmills and
its distribution capabilities to the consumer
market. Treadmills are the fastest growing
individual fitness product and represent the largest
single product category. Treadmills and stepper/
climbers represented approximately 40% of all
fitness dollar sales worldwide in 1996. The
cardiovascular equipment market is growing
significantly faster than the strength-training
equipment market. The combination of the Company and
Trotter creates a company with the ability to offer
customers a complete product line for commercial
fitness settings. Moreover, the Company contemplates
potential cost savings resulting from the
combination. These savings relate to plant
rationalization, greater manufacturing efficiencies
through use of production facilities, and
elimination of product development, selling, general
and administrative redundancies.
OWNERSHIP OF COMPANY
COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT............. As of the Record Date, the executive officers and
directors of the Company (8 persons as a group)
owned approximately 3.9% of the outstanding Company
Common Stock. Neither Trotter nor any of its
subsidiaries, affiliates, directors or executive
officers owns any shares of Company Common Stock.
See 'The Merger--Interests of Certain Persons in the
Merger' and 'Ownership of Company Common Stock by
Certain Beneficial Owners and Management.'
OPINION OF THE COMPANY'S
FINANCIAL ADVISOR...... Smith Barney Inc. ('Smith Barney'), financial advisor
to the Company, has delivered to the Board of
Directors of the Company a written opinion dated
December 27, 1996 to the effect that, as of the date
of such opinion and based upon and subject to
certain matters stated therein, the Merger
Consideration was fair, from a financial point of
view, to the Company. The full text of the written
opinion of Smith Barney dated December 27, 1996,
which sets forth the assumptions made, matters
considered and limitations on the review undertaken,
is attached as Annex B to this Proxy Statement and
should be read carefully in its entirety. Smith
Barney's opinion is directed to the Board of
Directors of the Company and relates only to the
fairness of the Merger Consideration from a
financial point of view to the Company, does not
address any other aspect of the Merger or related
transactions and does not constitute a
recommendation to any shareholder as to how such
shareholder should vote at the Meeting. See 'The
Merger--Opinion of the Company's Financial Advisor.'
RECOMMENDATION OF THE
COMPANY'S BOARD OF
DIRECTORS.............. The Board of Directors of the Company, by vote of the
directors present, unanimously has determined that
the Merger is fair to and in the best interests of
the Company and its shareholders, has approved the
Merger Agreement (and the transactions contemplated
thereby), and recommends adoption of the
5
<PAGE>
Merger Agreement by the holders of Company Common
Stock. The foregoing recommendation is based upon a
variety of factors discussed in 'The Merger--Reasons
for the Merger' and '--Recommendation of the
Company's Board of Directors.'
CERTAIN CONSEQUENCES OF
THE MERGER............. Upon consummation of the Merger, Trotter will become a
wholly owned subsidiary of the Company and the
holder of Trotter Common Stock will become a holder
of Company Common Stock. At the Effective Time, the
Certificate of Incorporation of Merger Sub in effect
immediately prior to such time will become the
Certificate of Incorporation of the surviving
corporation, and the By-laws of Merger Sub in effect
immediately prior to such time will become the
By-laws of the surviving corporation, in each case
until thereafter amended or restated. See 'The
Merger--Certain Consequences of the Merger.'
MANAGEMENT OF THE COMPANY
AFTER THE MERGER....... Pursuant to the Merger Agreement, the members of the
Board of Directors of the Company at the Effective
Time shall be comprised of nine directors, four of
which shall be designated by the Company and five of
which shall be designated by Trotter. The initial
designation of such directors among the three
classes of the Board of Directors of the Company
will be agreed to by the Company and Trotter, the
designees of each party to be divided equally among
such classes; provided, however, that if, prior to
the Effective Time, any of such designees shall
decline or be unable to serve, the party which
designated such person will designate another person
to serve in such person's stead. Promptly following
the Effective Time, Peter Haines, currently the
President and Chief Executive Officer of Trotter,
will be appointed the President and Chief Executive
Officer of the Company. See 'The Merger-- Management
of the Company After the Merger' and '--Interests of
Certain Persons in the Merger.'
CONDUCT OF THE BUSINESS
OF THE COMPANY IF THE
MERGER IS NOT
CONSUMMATED............ If the Merger is not consummated, it is expected that
the business and operations of the Company will
continue to be conducted substantially as it
currently is being conducted.
INTERESTS OF CERTAIN
PERSONS IN THE MERGER.. Trotter Stock Options. At the Effective Time, each
outstanding Trotter Stock Option will be assumed by
the Company. Each Trotter Stock Option so assumed by
the Company will continue to have, and be subject
to, the same terms and conditions set forth in
Trotter's 1993 Non-Qualified Stock Option Plan or
options for directors, as applicable (collectively,
the 'Trotter Stock Plans') immediately prior to the
Effective Time, except that (i) such Trotter Stock
Option will be exercisable for that number of whole
shares of Company Common Stock equal to the product
of the number of shares of Trotter Common Stock that
were issuable upon
6
<PAGE>
exercise of such Trotter Stock Option immediately
prior to the Effective Time, multiplied by the
Merger Consideration, rounded up to nearest whole
number of shares of Company Common Stock, (ii) the
per share exercise price will be equal to the
quotient determined by dividing the exercise price
per share of Trotter Common Stock at which such
Trotter Stock Option was exercisable immediately
prior to the Effective Time by the Merger
Consideration, rounded up to the nearest whole cent,
and (iii) each Trotter Stock Option will be
immediately exercisable for a term of five years. At
the Effective Time, holders of Trotter Stock Options
will have the right to purchase 374,559 shares of
Company Common Stock at an exercise price of $5.82
per share and 64,394 shares of Company Common Stock
at an exercise price equal to the price per share of
Company Common Stock at the Effective Time (based on
4,381,555 shares of Company Common Stock outstanding
as of the Record Date). Based on a market price for
Company Common Stock of $9 1/2 per share as of the
Record Date, such shares are valued at $1,378,377,
net of the aggregate exercise price of such shares.
See 'The Merger--Interest of Certain Persons in the
Merger.'
Company Stock Options. The approval of the Merger by
the Board of Directors of the Company constituted
was a 'change in control' under the terms of the
Company's Amended and Restated 1987 Stock Option
Plan (the '1987 Plan') and the consummation of the
Merger will be a 'change in control' under the terms
of the Company's 1995 Omnibus Incentive Plan (the
'Omnibus Plan' and together with the 1987 Plan, the
'Company Stock Plans'). Consequently, at the
Effective Time, each outstanding Company Stock
Option issued pursuant to the Company Stock Plans
will be immediately exercisable.
In addition, the consummation of the Merger will be a
'change of control' under the terms of the
employment agreement between the Company and J.
Raymond Elliott, the current Chief Executive Officer
of the Company. Consequently, at the Effective Time,
Mr. Elliott's Company Stock Options will be
immediately exercisable and he will have the right
to purchase 25,000 shares of Company Common Stock at
an exercise price of $10 per share. Based on a
market price for Company Common Stock of $9 1/2 per
share as of the Record Date, such shares are valued
at $0, net of the aggregate exercise price of such
shares.
At the Effective Time, holders of Company Stock
Options will have the right to purchase 151,050
shares of Company Common Stock at exercise prices
varying from $9.38 to $18.75 per share. Based on a
market price for Company Common Stock of $9 1/2 per
share as of the Record Date, such shares are valued
at $1,920, net of the aggregate exercise price of
such shares. At the Effective Time, all directors
and officers of the Company as a group will have the
right to purchase
7
<PAGE>
63,750 shares of Company Common Stock valued at $0,
net of the aggregate exercise price of such shares,
(based on a market price for Company Common Stock of
$9 1/2 per share as of the Record Date).
See 'The Merger--Interest of Certain Persons in the
Merger.'
Company Employment Agreements. The Company and J.
Raymond Elliott, the current Chief Executive Officer
of the Company, are parties to an employment
agreement. Pursuant to the terms of this employment
agreement, Mr. Elliott has the right to terminate
employment upon a change of control, in which case
he is entitled to receive an amount equal to 2.99
multiplied by his base salary. If the Company does
not extend or renew the employment agreement at the
end of its term, the Company is required to pay Mr.
Elliott his base salary over the next 12 months. The
consummation of the Merger will result in a change
of control pursuant to Mr. Elliott's employment
agreement and pursuant to the terms of such
employment agreement, Mr. Elliott will be entitled
to receive an amount equal to $897,000, of which 50%
is payable in equal installments over the 12 months
following termination and the balance is payable in
equal installments over the next 24 months. Upon
consummation of the Merger, Mr. Elliott will
terminate his employment pursuant to the terms of
his agreement. The Board of Directors has resolved
that the Company secure, by irrevocable letter of
credit or otherwise, the balance of the payments due
to Mr. Elliott under his employment agreement at the
Effective Time.
The Company and Robert McNally, the current Chief
Financial Officer of the Company, are parties to a
severance agreement pursuant to which the Company
agreed to pay Mr. McNally severance of $488,250 at
the rate of $15,750 per month for a period of 28
months after March 31, 1997. The consummation of the
Merger will be a 'change of control' under the terms
of the severance agreement and, as a result, all
severance payments will be accelerated and will
become immediately due and payable within 30 days
after the Effective Time.
See 'The Merger--Interest of Certain Persons in the
Merger.'
Indemnification. The Merger Agreement preserves
certain indemnification rights of the executive
officers and directors of the Company after the
Merger which currently are in effect. See 'The
Merger Agreement--Certain Covenants.'
EFFECTIVE TIME OF THE
MERGER................. The Merger will become effective on the date that a
Certificate of Merger is filed with the Secretary of
State of the State of Delaware or at such time
thereafter as provided in the Certificate of Merger.
CONDITIONS TO THE MERGER;
TERMINATION OF THE
MERGER AGREEMENT....... The obligations of the Company and Trotter to
consummate the Merger are subject to the
satisfaction of certain conditions, including, among
others, the accuracy, in all material respects,
8
<PAGE>
of the representations and warranties and the
performance, in all material respects, of the
covenants and obligations of the respective parties
to the Merger Agreement; adoption of the Merger
Agreement by the requisite vote of the holders of
Company Common Stock; the expiration of any
applicable waiting period in respect of the Merger
under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the 'HSR Act') (such
waiting period expired on March 8, 1997); no
temporary restraining order or preliminary or
permanent injunction or other order by any federal
or state court preventing consummation of the Merger
shall have been issued and be continuing in effect,
and the Merger and the other transactions
contemplated by the Merger Agreement shall not have
been prohibited under any applicable federal or
state law or regulation; and an opinion of Smith
Barney to the effect that the consideration to be
received in the Merger is fair from a financial
point of view to the Company, and such opinion not
having been withdrawn. See 'The Merger Agreement--
Conditions.'
The Company has the right to terminate the Merger
Agreement prior to the approval of the Merger
Agreement by the shareholders of the Company, if, as
a result of an Acquisition Proposal by a party other
than Trotter or any of its affiliates, the Company's
Board of Directors determines in its good faith
judgment that its fiduciary duties under applicable
law require that such Acquisition Proposal be
accepted, provided, however, that (i) the Board of
Directors of the Company shall have been advised in
writing by outside counsel that notwithstanding a
binding commitment to consummate an agreement of the
nature of the Merger Agreement entered into in the
proper exercise of its applicable fiduciary duties,
such fiduciary duties would also require the
directors to reconsider such commitment as a result
of such Acquisition Proposal; and (ii) prior to any
such termination, the Company shall, and shall cause
its respective financial and legal advisors to,
negotiate with Trotter to make such adjustments in
the terms and conditions of the Merger Agreement as
would enable the Company to proceed with the
transactions contemplated therein. 'Acquisition
Proposal' means a proposal or offer (other than by
the other party to the Merger Agreement) for a
tender or exchange offer, merger, consolidation or
other business combination involving the party or
any material subsidiary of the party or any proposal
to acquire in any manner a substantial equity
interest in or a substantial portion of the assets
of the party or any material subsidiary.
The Merger Agreement also is subject to termination by
the Company or Trotter if the Effective Time shall
not have occurred on or before June 30, 1997. See
'The Merger--Termination.'
TOPPING FEE.............. If the Company terminates the Merger Agreement because
of an Acquisition Proposal and consummates a
transaction for the merger, consolidation or other
business combination of the
9
<PAGE>
Company with an unrelated third party within twelve
months after the date of termination of the Merger
Agreement, then, provided that Trotter shall not
have materially breached any of the representations,
warranties, covenants or agreements made on its
part, the Company will pay to Trotter, within five
business days following Trotter's written request
therefor, the sum of $2,000,000 plus all actual
out-of-pocket costs and expenses (not to exceed
$250,000 in the aggregate) incurred by Trotter
through the date of termination in connection with
the Merger Agreement and the transactions
contemplated thereby. See 'The Merger--Fees and
Expenses.'
NO APPRAISAL RIGHTS...... Holders of Company Common Stock are not entitled to
appraisal rights under the New York Business
Corporation Law, as amended (the 'NYBCL'), in
connection with the Merger because the Company is
not a constituent corporation to the Merger. See
'The Merger--No Appraisal Rights.'
REGULATORY APPROVALS..... Under the HSR Act and the rules promulgated
thereunder, the Merger cannot be consummated until
requisite pre-merger notification has been filed and
certain information has been furnished to the
Federal Trade Commission and the Antitrust Division
of the Department of Justice. The required waiting
period under the HSR Act expired on March 8, 1997,
without any request for additional documentary or
other information. See 'The Merger--Regulatory
Approvals.'
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES....... The Merger is intended to qualify as a reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the 'Code'). See
'The Merger--Certain Federal Income Tax
Consequences.'
ACCOUNTING TREATMENT..... The Merger will be accounted for using the purchase
method for accounting and financial reporting
purposes. Based upon the outstanding shares of
Company Common Stock and Trotter Common Stock as of
the Record Date, the holder of the Trotter Common
Stock, together with the holders of the Trotter
Stock Options, will receive 50.001% of the shares of
Company Common Stock, on a fully diluted basis
(calculated assuming all outstanding options were
exercised, with option proceeds used to repurchase
shares, and a price of $9.75 per share of Company
Common Stock) as described in the Merger Agreement.
In addition, at the Effective Time, Peter C. Haines,
the President and Chief Executive Officer of Trotter
will be named the President and Chief Executive
Officer of the Company and Trotter will designate
the majority of the members of the Company's Board
of Directors. Therefore, Trotter has been deemed to
be the acquiror for accounting purposes.
RISK FACTORS............. SEE 'RISK FACTORS' ON PAGE 14 FOR A DISCUSSION OF
CERTAIN MATTERS WHICH SHOULD BE CONSIDERED BY
HOLDERS OF COMPANY COMMON STOCK IN CONSIDERING
WHETHER TO APPROVE AND ADOPT THE MERGER AGREEMENT.
10
<PAGE>
OTHER MATTERS
CHARTER AMENDMENT........ At the Meeting, shareholders of the Company will also
be asked to approve and adopt an amendment to the
Company Charter to increase the number of authorized
shares of Company Common Stock from 15,000,000
shares to 20,000,000 shares (the 'Charter
Amendment'). The Charter Amendment will provide the
Company with continued flexibility to declare stock
splits or dividends in the future when appropriate
or the issuance of additional shares (in financings
or acquisitions) when appropriate. Aside from the
issuances of Company Common Stock pursuant to
employee stock options and the Merger, the Company
does not currently have plans for the issuance of
additional shares of Company Common Stock. Holders
of Company Common Stock are not entitled to pre-
emptive rights under the NYBCL in connection with
the Charter Amendment. See 'Other Matters to be
Considered at Annual Meeting--Proposal No. 2--
Amendment to the Restated Certificate of
Incorporation.'
PLAN AMENDMENT........... At the Meeting, shareholders of the Company will also
be asked to approve and adopt an amendment to the
Company's 1995 Omnibus Incentive Plan (the 'Omnibus
Plan') to increase the aggregate number of shares of
Company Common Stock that may be subject to Benefits
(as defined in Omnibus Plan) granted under the
Omnibus Plan from 250,000 to 750,000 shares. The
Board of Directors has approved the increase of
shares subject to Benefits under the Omnibus Plan to
enable the Company to fulfill its obligations under
the Merger Agreement to assume all outstanding
Trotter Stock Options under Trotter Stock Plans.
Additionally, in order to continue to obtain the
beneficial effects of the Omnibus Plan, it will be
necessary to increase the number of shares available
under the Omnibus Plan to provide for future awards
of Benefits. Aside from the assumption of all
outstanding Trotter Stock Options pursuant to the
Merger Agreement, the Company does not currently
have plans for future awards of Benefits. See 'Other
Matters to be Considered at Annual Meeting--Proposal
No. 3 Amendment to the 1995 Omnibus Incentive Plan.'
ELECTION OF DIRECTORS.... At the Meeting, shareholders of the Company will also
be asked to vote for and elect two persons to the
Board of Directors of the Company. Each director
elected at the Meeting will hold office until the
Annual Meeting of shareholders for the year 2000 and
until their respective successors are duly elected
and qualified. See 'Management of the Company' and
'Other Matters to be Considered at the Meeting--
Proposal No. 4--Election of Directors.'
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following sets forth the book value, cash dividends and loss from
continuing operations per share of Company Common Stock and the book value, cash
dividends and income from continuing operations per share of Trotter Common
Stock. The combined pro forma per share information is based on the historical
financial statements of the Company and Trotter as adjusted to reflect
consummation of the Merger (see 'Unaudited Pro Forma Combined Financial
Statements'). The Trotter equivalent pro forma per share information is based on
the combined pro forma information as adjusted for the exchange ratio. The
information set forth below should be read in conjunction with the respective
consolidated financial statements of the Company and Trotter, including the
notes thereto, and the Unaudited Pro Forma Combined Financial Statements
appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
TROTTER
CYBEX COMBINED TROTTER EQUIVALENT
HISTORICAL PRO FORMA HISTORICAL PRO FORMA(2)
---------- ------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Per Share Amounts(1):
Book Value....................... $ 8.12 $4.57 $0.37 $ 5.16
Cash Dividends................... -- -- -- --
Income (Loss) from Continuing
Operations.................... (0.19) 0.26 0.52 0.29
</TABLE>
- ------------------
(1) Amounts are as of and for the year ended December 31, 1996.
(2) The Trotter equivalent pro forma per share amounts are obtained by
multiplying the combined pro forma amounts by the exchange ratio of 1.12972.
12
<PAGE>
COMPARATIVE MARKET PRICE INFORMATION AND DIVIDENDS
The Company. Shares of Company Common Stock are listed for trading on the
AMEX under the symbol 'CYB.' The table below sets forth, for the Company's
fiscal quarters commencing in fiscal 1995 through the first quarter of fiscal
1997, the reported high and low sales prices of Company Common Stock as reported
on the AMEX for all periods presented, based on published financial sources. The
Company has paid no cash dividends since August 1990. The market price for
Company Common Stock on December 27, 1996, the last trading day preceding the
public announcement of the Merger, and as of April 22, 1997 the most recent
practicable date, was $10.125 and $9 5/8, respectively.
<TABLE>
<CAPTION>
PRICE PER
SHARE
OF COMPANY
COMMON STOCK
----------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1995 (ended December 31, 1995)
First Quarter................................... $15 1/8 $11 1/4
Second Quarter.................................. 13 3/4 10 1/2
Third Quarter................................... 12 1/8 9 1/2
Fourth Quarter.................................. 11 3/4 8 5/8
Fiscal 1996 (ended December 31, 1996)
First Quarter................................... 14 1/8 9 1/8
Second Quarter.................................. 12 7/8 10 1/4
Third Quarter................................... 12 1/8 9 3/4
Fourth Quarter.................................. 11 7/8 9
Fiscal 1997 (ending December 31, 1997)
First Quarter................................... 11 7/8 8 15/16
</TABLE>
Following the Effective Time, shares of Company Common Stock are expected
to continue to be traded on the AMEX. As of the close of business on the Record
Date, the Company had 556 shareholders of record of Company Common Stock.
Following the Effective Time, all current shareholders will continue to own the
same number of shares of Company Common Stock as they did prior to the Effective
Time but their percentage ownership will be approximately one-half of their
percentage ownership prior to the Effective Time. As a result, Surgical
Appliance Industries, Inc. and Dimensional Fund Advisors Inc., the two persons
known to the Company to be the beneficial owners of more than 5% of the
outstanding shares of Company Common Stock, will own approximately 6.1% and
3.2%, respectively, of the outstanding shares of Company Common Stock and all
directors and officers of the Company as a group will own approximately 2.0% of
the outstanding shares of Company Common Stock. See 'Ownership of Company Common
Stock by Certain Beneficial Owners and Management.'
DUE THE FACT THAT THE MARKET PRICE OF SHARES OF COMPANY COMMON STOCK
INHERENTLY IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE SHARES OF COMPANY
COMMON STOCK THAT THE HOLDER OF SHARES OF TROTTER COMMON STOCK WILL RECEIVE IN
THE MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE TIME.
Trotter. There is no established public trading market for shares of
Trotter Common Stock, all of which are owned by UM Equity Corp., a wholly owned
subsidiary of UM.
Until 1996, UM maintained a central cash management function for all of its
subsidiaries, including Trotter. Settlement of cash disbursement and collection
transactions by UM on behalf of Trotter have been recorded through equity in the
historical financial statements. See Trotter Financial Statements, including
Notes thereto. Trotter made net distributions to UM for 1994 and 1995 of
$1,159,000 and $6,471,000, respectively. No distributions were made to UM during
1996.
John Aglialoro and Joan Carter, who are married and the principal
stockholders of UM, are deemed to be the beneficial owners of 100% of Trotter
Common Stock prior to the Merger. See 'Ownership of Trotter Common Stock by
Certain Beneficial Owners and Management.'
13
<PAGE>
RISK FACTORS
In determining how to vote shares of Company Common Stock at the Meeting,
holders of such shares should carefully consider all of the information
contained in this Proxy Statement and, in particular, the following factors:
Difficulties Associated with Integrating Operations of the Company and
Trotter. The Company and Trotter believe that they can successfully integrate
and manage the combined operations of the Company and Trotter. However, because
of the inherent uncertainties associated with efforts to integrate and manage
the operations of the two companies (e.g., integration of the different
distribution channels and the potential impact of employee turnover), there can
be no assurance that any specific level of cost savings or operating synergies
will be realized, or that there will not be other expenses or charges to
earnings resulting from the combined operations that were not anticipated. It is
expected that the Company will establish reserves and incur asset write-downs
totalling approximately $7,481,000, net of tax, for merger costs and other
non-recurring charges expected to be incurred in connection with the Merger and
integration of operations. A portion of these charges will reduce the Company's
net income by approximately $1,705,000 for the period in which the Merger is
consummated. In addition, the Company will incur a one-time, after-tax charge of
$2,500,000 for research and development upon consummation of the Merger. The
results of the Merger, including these charges, will have the effect of reducing
the Company's tangible net worth from $34.3 million at December 31, 1996 to
$30.6 million on a combined pro forma basis. These reductions in net income and
tangible net worth could have a negative impact on the market price of Company
Common Stock. See '--Dilution to the Company Shareholders' and 'The Company--
Unaudited Pro Forma Combined Financial Statements.'
Control by Trotter Stockholder. As a result of the Merger, UM, the
beneficial owner of 100% of the outstanding shares of Trotter Common Stock and
John Aglialoro and Joan Carter, who are married and the principal stockholders
of UM, will be deemed to be the beneficial owners of approximately 49.49% of the
outstanding Company Common Stock immediately following the Merger. Accordingly,
following the Merger, UM, Mr. Aglialoro and Ms. Carter will have the ability, by
voting shares of Company Common Stock, to cause or significantly influence (i)
the election of the Company's Board of Directors and, thus, the direction and
future operations of the Company, and (ii) the outcome of all other matters
submitted to the shareholders of the Company after the Merger, including
mergers, consolidations, and the sale of all or substantially all of the
Company's assets. See 'Ownership of Trotter Common Stock By Certain Beneficial
Owners and Management.'
Fluctuation in Value of Merger Consideration. The market price of shares
of Company Common Stock is inherently subject to fluctuation. Therefore, the
value of the shares of Company Common Stock that the holder of Trotter Common
Stock will receive in the Merger may increase or decrease prior to the Effective
Time. There is neither a minimum nor a maximum number of shares of Company
Common Stock that must be issued pursuant to the Merger Agreement. Regardless of
any increase or decrease in the price of Company Common Stock, UM and the
holders of Trotter Stock Options will receive, in the aggregate, 50.001% of all
Company Common Stock on a fully diluted basis (calculated using the treasury
stock method and assuming a price of $9.75 per share of Company Common Stock).
Fluctuations in the market price of Company Common Stock may be the result
of the prospects of the Company, market assessments of the likelihood that the
Merger will be consummated and the timing thereof (which assessments may be
unsubstantiated), general market conditions and other factors, many of which are
beyond the control of the Company or Trotter.
Dependence on Key Individuals. The Company's future success will depend in
significant part upon the continued service of certain key individuals,
principally Peter C. Haines, who upon the Merger will be elected to the position
of President and Chief Executive Officer, Raymond Giannelli, to be elected Vice
President-Research and Development and Jeffrey B. Leeson, to be elected Vice
President-Strategic Planning and Operations. The Company's future success will
also be dependent in significant part upon the Company's ability to attract and
retain highly qualified managerial, product development and sales and marketing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its existing key managerial, technical or
other personnel or that it can attract and retain such employees in the future.
The loss of key personnel or the inability to hire or retain qualified personnel
in the future could have a material adverse effect upon the Company's results of
operations.
14
<PAGE>
Lender Consents; Need for Future Financing; The Merger requires the
consents of Trotter and Company lenders and will result in the Company and
Trotter not being in compliance with certain financial ratios and certain other
restrictive covenants of their long-term debt agreement and credit facility. In
particular, one financing agreement with a remaining outstanding balance of
$1,925,000 as of January 31, 1997 requires that a minimum current ratio of
2.5:1.00 be maintained. It is unlikely that the Company after the Effective Time
will achieve such level in 1997. In addition, the ongoing operations of CYBEX
Financial Corp. require arrangements with third party financial institutions to
provide funding to support its leasing programs.
The Company and Trotter have obtained the necessary waivers and consents
from their lending institutions with respect to all but two of the Company's
credit facilities. In the event that the Company is not able to obtain waivers
or consents with respect to such facilities, (i) $1,925,000 may become
immediately due and payable under the first facility and (ii) the $5,000,000
line of credit under the second facility may be canceled. The Company believes
that it will be successful in obtaining the necessary waivers and consents with
respect to these facilities; however, there can be no assurance that such
waivers and consents will be obtained. If such waivers and consents are not
obtained, the Company intends to pay off the $1,925,000 loan and refinance it
with a loan from the existing Trotter lender.
The Company and Trotter believe they will be successful in securing
commitments from other financial institutions to continue to participate in
purchasing portions of the Company's lease receivables; however, there can be no
assurance that such arrangements will be obtained.
Potential Acquisitions. In light of continuing consolidation in the
fitness industry, as part of its business strategy, the Company may from time to
time acquire assets and businesses principally relating to or complementary to
its operations. Any acquisitions by the Company will be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, potential exposure to unknown liabilities of acquired companies or
to acquisition costs and expenses exceeding amounts anticipated for such
purposes, fluctuations in the Company's quarterly and annual operating results
due to the costs and expenses of acquiring and integrating new businesses or
technologies, the difficulty and expense of assimilating the operations and
personnel of the acquired businesses, the potential disruption of the Company's
ongoing businesses and diversion of management time and attention, the potential
failure to achieve anticipated financial, operating and strategic benefits from
such acquisitions, difficulties in establishing and maintaining uniform
standards, controls, procedures and policies, and the impairment of
relationships with and possible loss of key employees and customers of acquired
businesses as a result of changes in management and ownership. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with such acquisitions.
Dilution to Company Shareholders. At December 31, 1996, the Company's
tangible net book value was approximately $34.3 million, or $7.84 per common
share. Tangible net book value per share is equal to the Company's total
tangible assets less total liabilities divided by the total number of shares of
Common Stock outstanding. After giving effect to the Merger, the Company's pro
forma as-adjusted tangible net book value at December 31, 1996 would have been
approximately $30.6 million, or $3.52 per share. This represents an immediate
dilution in tangible net book value of $4.32 per share to the existing Company
shareholders.
15
<PAGE>
COMPANY SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years in
the period ended December 31, 1996 are derived from the consolidated financial
statements of CYBEX International, Inc. (formerly Lumex, Inc.) which have been
audited by Ernst & Young LLP, independent auditors, and which, for the
three-year period ended December 31, 1996, are derived from the audited
financial statements of CYBEX International, Inc. included elsewhere in this
Proxy Statement. Statement of Operations Data reflects only the results of
continuing operations. The financial data set forth below should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Company' and the CYBEX International, Inc.
Historical Consolidated Financial Statements and notes thereto included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $53,849 $54,781 $70,420 $ 75,448 $80,711
Costs of sales.................................. 28,891 32,225 41,757 47,924 48,405
------- ------- ------- -------- -------
Gross profit.................................... 24,958 22,556 28,663 27,524 32,306
Selling, general and administrative expenses.... 22,325 25,961 28,440 41,843 32,718
------- ------- ------- -------- -------
Operating income (loss)......................... 2,633 (3,405) 223 (14,319) (412)
Interest expense................................ (245) (367) (1,143) (1,723) (882)
Interest income................................. 685 1,134 2,048 1,582 650
Loss from joint venture......................... -- -- -- -- (159)
------- ------- ------- -------- -------
Income (loss) from continuing operations before
income tax provision (benefit)............... 3,073 (2,638) 1,128 (14,460) (803)
Income tax provision (benefit).................. 854 (1,333) 135 (3,344) 32
------- ------- ------- -------- -------
Income (loss) from continuing operations........ $ 2,219 $(1,305) $ 993 $(11,116) $ (835)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Income (loss) per share of Common Stock:
Continuing operations........................ $ .51 $ (.31) $ .23 $ (2.55) $ (.19)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Weighted Average Number of Common Shares..... 4,325 4,201 4,315 4,351 4,392
------- ------- ------- -------- -------
------- ------- ------- -------- -------
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $30,863 $31,702 $37,158 $ 27,692 $ 24,629
Net assets of discontinued
operations................................... -- -- -- 37,214 --
Total assets.................................... 69,037 85,766 94,168 98,918 63,487
Long-term debt (net of current maturities)...... 5,131 12,076 12,771 2,715 1,986
Stockholders' equity............................ 47,970 48,736 52,637 40,634 35,538
</TABLE>
16
<PAGE>
TROTTER INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1995 and 1996
and for each of the years in the three-year period ended December 31, 1996, have
been derived from the financial statements of Trotter, audited by Arthur
Andersen LLP, independent public accountants, included elsewhere in this Proxy
Statement. The selected consolidated financial data as of December 31, 1992,
1993 and 1994 and for the years ended December 31, 1992 and 1993 have been
derived from the audited financial statements of Trotter not included herein.
The following selected consolidated financial data should be read in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations for Trotter' and Trotter's Consolidated Financial Statements and
Notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................... $22,886 $32,607 $41,365 $43,719 $47,605
Cost of sales..................................... 13,247 19,075 24,836 27,860 29,541
------- ------- ------- ------- -------
Gross profit.................................... 9,639 13,532 16,529 15,859 18,064
Selling, general and administrative expenses...... 7,630 11,305 12,260 12,762 13,797
------- ------- ------- ------- -------
Operating income................................ 2,009 2,227 4,269 3,097 4,267
Interest income................................... -- -- -- 4 49
Interest expense.................................. (231) (210) (219) (260) (1,004)
------- ------- ------- ------- -------
Income before income taxes........................ 1,778 2,017 4,050 2,841 3,312
Income taxes...................................... 732 780 1,675 1,171 1,344
------- ------- ------- ------- -------
Net income........................................ $ 1,046 $ 1,237 $ 2,375 $ 1,670 $ 1,968
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per share.............................. $ .28 $ .33 $ .63 $ .44 $ .52
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Shares used in computing net income per share..... 3,800 3,800 3,800 3,800 3,800
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ (375) $(1,521) $ 594 $ 5,206 $ 4,205
Total assets...................................... 10,442 16,562 19,306 21,067 20,367
Long-term debt.................................... 4,300 4,100 3,900 14,825 11,369
Total liabilities................................. 6,987 13,515 15,043 21,369 18,971
Stockholder's equity (deficit).................... 3,455 3,047 4,263 (572) 1,396
</TABLE>
17
<PAGE>
SELECTED COMBINED PRO FORMA FINANCIAL DATA
The selected combined pro forma financial data presented below reflects the
Merger, assuming the transaction had occurred as of December 31, 1996, in the
case of the pro forma balance sheet data, and as of January 1, 1996, in the case
of the pro forma income statement data. See 'The Company--Unaudited Pro Forma
Combined Financial Statements.'
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
INCOME STATEMENT DATA(1):
Net sales.............................................. $120,528
Cost of sales.......................................... 72,061
------------------
Gross profit......................................... 48,467
Selling, general and administrative expenses........... 43,184
------------------
Operating income..................................... 5,283
Interest expense, net.................................. (1,187)
Loss on joint venture.................................. (159)
------------------
Income from continuing operations before income
taxes................................................ 3,937
Income taxes........................................... 1,673
------------------
Income from continuing operations...................... $ 2,264
------------------
------------------
Income from continuing operations per share(2)(4)...... $ .26
------------------
------------------
Shares used in computing income per share(2)........... 8,776
------------------
------------------
<CAPTION>
DECEMBER 31, 1996
------------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 8,724
Working capital........................................ 26,682
Total assets........................................... 94,844
Long-term debt (net of current maturities)............. 11,946
Stockholders' equity................................... 39,648
Book value per share(3)(4)............................. 4.57
</TABLE>
- ------------------
(1) Excludes acquired research and development costs of $2,500,000 and after-tax
costs related to the Sharpsville facility closing of $1,705,000, both of
which will be charged to the statement of operations upon the consummation
of the Merger.
(2) Computed on the basis described in Note 6 of Notes to Unaudited Pro Forma
Combined Financial Statements.
(3) Computed by dividing pro forma stockholders' equity by the combined pro
forma number of shares of common stock outstanding, excluding stock options.
(4) The CYBEX historical book value per share as of December 31, 1996 was $8.12
and its loss from continuing operations per share for the year ended
December 31, 1996 was $(0.19).
18
<PAGE>
THE MEETING
GENERAL
This Proxy Statement is being furnished to holders of shares of Company
Common Stock in connection with the solicitation of proxies by the Company's
Board of Directors for use at the Meeting to be held at the offices of Weil,
Gotshal & Manges LLP, 25th Floor Conference Center, located at 767 Fifth Avenue,
New York, New York 10153, on May 23, 1997, convening at 9:00 a.m., local time,
and at any adjournments or postponements thereof. This Proxy Statement and the
accompanying forms of proxy are first being mailed to holders of Company Common
Stock on or about April 24, 1997.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of shares of Company Common Stock will be requested
to consider and vote upon (i) a proposal to adopt the Merger Agreement, (ii) a
proposal to amend the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Company Common Stock (the 'Charter
Amendment'), (iii) a proposal to amend the Company's Omnibus Plan to increase
the number of shares of Company Common Stock that may be subject to Benefits (as
defined in the Omnibus Plan) granted under the Omnibus Plan from 250,000 to
750,000 shares (the 'Plan Amendment'), (iv) the election of two Directors of the
Company to serve until the Annual Meeting of Shareholders for the year 2000 and
until their respective successors are duly elected and qualified and (v) such
other business as properly may come before the Meeting or any adjournments or
postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS, BY VOTE OF THE DIRECTORS PRESENT,
UNANIMOUSLY HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS
OF THE COMPANY AND ITS SHAREHOLDERS, HAS APPROVED THE MERGER AGREEMENT (AND THE
TRANSACTIONS CONTEMPLATED THEREBY), THE CHARTER AMENDMENT AND THE PLAN
AMENDMENT, AND RECOMMENDS THAT HOLDERS OF COMPANY COMMON STOCK VOTE 'FOR'
ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENT, THE PLAN AMENDMENT AND
THE ELECTION OF THE NOMINEES TO THE BOARD OF DIRECTORS OF THE COMPANY. SEE
'BACKGROUND OF THE MERGER,' '--REASONS FOR THE MERGER' AND '--RECOMMENDATION OF
THE COMPANY'S BOARD OF DIRECTORS.'
RECORD DATE; QUORUM; VOTING AT THE MEETING
The Company's Board of Directors has fixed April 14, 1997 as the Record
Date. Accordingly, only holders of record of shares of Company Common Stock at
the Record Date will be entitled to notice of and to vote at the Meeting. At the
Record Date, there were 4,381,555 shares of Company Common Stock outstanding and
entitled to vote, and approximately 556 holders of record. Each holder of record
of Company Common Stock on the Record Date is entitled to cast one vote per
share in respect of the proposal to adopt the Merger Agreement, the proposals to
amend the Company's Restated Certificate of Incorporation and the Company's 1995
Omnibus Plan and the election of the nominees to the Board of Directors of the
Company, and the other matters, if any, properly submitted for the vote of such
holders, either in person or by proxy, at the Meeting. The presence, in person
or by proxy, of the holders of a majority of the outstanding Company Common
Stock entitled to vote at the Meeting is necessary to constitute a quorum at the
Meeting.
Under New York law Company shareholder approval of the Merger is not
required because the Company is not a constituent corporation to the Merger.
However, under the rules of the AMEX, on which the shares of Company Common
Stock are listed, approval of shareholders is required as a prerequisite to
approval of applications to list additional shares to be issued as consideration
for an acquisition of the stock of another company where the issuance of common
stock results in an increase in outstanding common shares of 20% or more.
Therefore, under the rules of the AMEX, the affirmative vote of a majority of
the shares of Company Common Stock voted at the Meeting (provided that a
majority of the outstanding shares of Company Common Stock is voted) is required
for approval and adoption of the Merger Agreement. The affirmative vote of the
holders of at least the majority of the outstanding shares of Company Common
Stock is required under New York law for approval and adoption of the Charter
Amendment. Abstentions are treated as votes against approval and broker
non-votes are not considered in the calculation of the majority, although they
do reduce the number of 'Votes For' required. As of the Record Date, the
directors and executive officers of the Company and their affiliates held in the
aggregate approximately 3.9% of the outstanding shares of Company Common Stock.
Under New York law, the affirmative vote of the holders of a majority of the
shares of Company Common Stock voted at the Meeting (provided that a majority of
the shares of Company Common Stock is voted) is required for
19
<PAGE>
approval and adoption of the Plan Amendment. Under New York law, nominees for
directors who receive a plurality of the votes cast by the holders of the
outstanding shares of Common Stock entitled to vote at the Meeting will be
elected. Abstentions, broker non-votes and withheld votes are not counted in
determining the number of votes cast for any nominee for director. The Company
is not aware of the voting intentions of any of its shareholders with regard to
any of the matters to be considered at the Meeting.
PROXIES
This Proxy Statement is being furnished to holders of Company Common Stock
in connection with the solicitation of proxies by and on behalf of the Board of
Directors of the Company for use at the Meeting.
Shares of Company Common Stock represented by properly executed proxies
received at or prior to the Meeting that have not been revoked will be voted at
the Meeting in accordance with the instructions contained therein. Shares of
Company Common Stock represented by properly executed proxies for which no
instruction is provided will be voted for adoption of the Merger Agreement, the
Charter Amendment, the Plan Amendment and the election of the nominees to the
Board of Directors of the Company. Holders of Company Common Stock are requested
to complete, sign, date and return promptly the enclosed proxy card in the
postage-prepaid envelope provided for such purpose to ensure that their shares
are voted. Any holder of Company Common Stock who so desires may revoke his or
its proxy at any time prior to the time it is exercised by (i) providing written
notice to such effect to the Secretary of the Company, (ii) duly executing a
proxy bearing a date subsequent to that of a previously furnished proxy or (iii)
attending the Meeting and voting in person. Attendance at the Meeting will not
in itself constitute a revocation of a previously furnished proxy, and
shareholders who attend the Meeting in person need not revoke their proxy (if
previously furnished) and vote in person.
If the Meeting is postponed or adjourned for any reason, at any subsequent
reconvening of the Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the initial convening of the Meeting (except
for any proxies that theretofore effectively have been revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous meeting.
If any other matters properly are presented at the Meeting for
consideration, including consideration of a motion to adjourn the Meeting to
another time and/or place (including for the purpose of soliciting additional
proxies), the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment. The persons named in the enclosed form of proxy will not exercise the
discretionary authority conferred by the form of proxy to use proxies voting
against the Merger Agreement to vote for the adjournment of the Meeting to
solicit additional proxies to obtain the requisite votes of the holders of
Company Common Stock for adoption of the Merger Agreement.
If any beneficial owner of Company Common Stock holds such stock in 'street
name' and wishes to vote his or its stock at the Meeting, such owner must obtain
from the relevant nominee holding Company Common Stock a properly executed
'legal proxy' identifying the beneficial owner as a holder of Company Common
Stock, authorizing the beneficial owner to act on behalf of the nominee-record
owner at the Meeting and identifying the number of shares (and certificate
numbers, if applicable) in respect of which the authorization is granted.
The Company and Trotter will share equally the cost of soliciting proxies
from the holders of Company Common Stock, including the cost of printing and
mailing this Proxy Statement. In addition to solicitation by mail, directors,
officers and employees of the Company may solicit proxies by telephone,
facsimile transmission or otherwise. Such directors, officers and employees of
the Company will not be specially compensated for such solicitation, but may be
reimbursed for out-of-pocket expenses incurred in connection therewith.
Brokerage firms, fiduciaries and other custodians who forward soliciting
material to the beneficial owners of Company Common Stock held of record by them
will be reimbursed for their reasonable expenses incurred in forwarding such
material. The Company has retained Shareholder Communications Corporation, at an
estimated cost of approximately $7,500, plus reimbursement of out-of-pocket
expenses, to assist in its solicitation of proxies from brokers, nominees,
institutions and individuals. Arrangements also will be made with custodians,
nominees and fiduciaries for the forwarding of proxy solicitation materials to
beneficial owners of shares of Company Common Stock held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
incurred in connection therewith.
20
<PAGE>
THE MERGER
BACKGROUND OF THE MERGER
The timing, terms and conditions of the Merger Agreement are the result of
arm's-length negotiations between representatives of the Company and Trotter.
Set forth below is a summary of the background of these negotiations.
During late 1995 and early 1996, the Company's management retained The
Monitor Group, a consulting firm, to assist it in developing an industry study
describing the trends and competitive landscape in the fitness industry as well
as addressing the Company's ongoing prospects. After reviewing such study and
considering the Company's long-term strategic objectives and alternatives, the
Company's management reached the conclusion that the Company's ability to
succeed long-term in the fitness equipment industry on a stand alone basis was
uncertain due to the Company's lack of success in developing any significant
market position in cardiovascular products, thus hindering the Company from
offering its customers a comprehensive cardiovascular and strength equipment
product line. After discussions with management with respect to such industry
study and a review of the Company's long-term prospects, the Board of Directors
of the Company decided to engage Smith Barney to investigate the strategic
alternative of combining the Company's operations with another entity in order
to provide the Company with critical mass and a competitive cardiovascular
product line.
On April 24, 1996, Jerry Lee, a member of Trotter's Board of Directors,
telephoned Jack Spratt, Chairman of the Company, and inquired informally as to
whether the Company would be interested in exploring a possible transaction
between the two companies. Mr. Spratt indicated that, although the Company's
Board of Directors had not made any final determinations as to the future
direction of the Company, he believed consideration of such a transaction
merited further investigation.
In the spring and summer of 1996, approximately 47 prospective buyers were
contacted to solicit the potential interest of such buyers in a transaction with
the Company. Of these prospective buyers, six submitted preliminary indications
of interest. All proposals, other than the proposal received by Trotter and one
other potential purchaser ('Buyer A'), contemplated a leveraged buy-out of the
assets or common stock of the Company for cash at valuations below the then
current market price of the Company. The Company therefore decided to pursue
discussions only with Buyer A and Trotter.
In July 1996, representatives of the Company, together with the Company's
legal and financial advisors, met with representatives of Trotter and Trotter's
legal and financial advisors to discuss a possible business combination
involving the companies. During this meeting, Mr. Aglialoro, Chairman of
Trotter, expressed an interest in pursuing a business combination between
Trotter and the Company. Mr. Spratt suggested that a business combination
presented significant potential strategic, operating, and cost advantages to the
Company and merited further consideration. Representatives from each company
then agreed to take the steps necessary to evaluate such a business combination,
including appropriate due diligence.
On August 6, 1996, at a special meeting of the Board of Directors, members
of management and representatives of Smith Barney updated the Board as to the
results of the process undertaken on behalf of the Company to solicit
indications of interest in a transaction with the Company and the discussions
held to date concerning a possible transaction, including the general structures
and valuation ranges proposed by those parties that had submitted preliminary
indications of interest. After discussion, the Board of Directors instructed
management and Smith Barney to continue the due diligence process in order to
evaluate the merits of the business combination proposed by Trotter and to
continue discussions with Buyer A.
On September 11, 1996, Mr. Aglialoro and Mr. Spratt met to discuss the
progress of the evaluation and to agree upon a schedule to complete the
analysis. Subsequently at a meeting held that same day, the Company's management
made a presentation to Trotter describing the Company in detail, including its
operations, the markets in which it competes, its domestic and international
strategies, and internal initiatives underway to improve operations.
Additionally, Ray Elliott, the Company's President, and Peter Haines, President
of Trotter, were asked for their preliminary views as to the combination. Both
replied that they believed the new entity would have significant strategic,
operating, and cost advantages based on plant rationalization, greater
manufacturing efficiencies through use of production facilities, and elimination
of product development, selling, general and administrative redundancies. After
such meeting, and continuing the next day, representatives of Trotter conducted
a due diligence review of the Company.
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On September 19, 1996, representatives of Buyer A met with members of the
Company's management. At such meeting, the Company's management made a
presentation describing the Company's operations, competitive markets, strategic
plans and initiatives undertaken to improve operations. Buyer A subsequently
performed a due diligence review of the Company, but did not submit a final
offer to the Company.
During September and October, 1996, both the Company and Trotter continued
to review and analyze each others' operations.
On October 9, 1996, the Company's management, Mr. Spratt, and a committee
of the Board of Directors met with Trotter's management and certain directors at
Trotters' Medway, Massachusetts facility. Mr. Haines introduced management of
Trotter, gave a tour of the facility, and made a presentation describing Trotter
in detail, including its operations, the markets in which it competes, its
domestic and international strategies, and internal initiatives underway to
improve operations. Additionally, Mr. Haines discussed his vision for a combined
entity and highlighted the potential strategic, operating, and cost advantages
presented by such combination. Mr. Haines also presented to the Company's
directors the estimate of potential cost savings based on the elimination of
manufacturing, administrative and product development redundancies which the
companies' management teams had jointly developed.
The Board of Directors of the Company held a telephonic conference call on
October 22, 1996 to review and discuss the proposed business combination with
Trotter. Mr. Spratt and Mr. Elliott began with a brief description of the
discussions which had taken place between the two companies since the Company's
August 6, 1996 Board meeting. Smith Barney then summarized the economic terms of
the proposed business combination and reviewed with the Board certain financial
information relating to the two companies. The Company's management also
discussed with the Board its findings which resulted from the due diligence it
had conducted over the previous weeks, its view on potential benefits of the
proposed business combination, and its belief that the proposed business
combination presented the Company with significant operating and strategic
benefits and was therefore in the best interests of the shareholders. The
Company's management restated its belief that the Company's ability to succeed
long-term in the fitness equipment industry was uncertain and that the proposed
business combination would enhance such ability to succeed, and recommended that
the Company proceed with discussions with Trotter.
On October 30, 1996, Trotter submitted a proposal for the business
combination outlining the terms under which it would be willing to proceed with
the proposed business combination, including that Trotter receive a 50.01% pro
forma ownership in the combined company. Such proposal also outlined an
adjustment mechanism with respect to certain contingent liabilities of the
Company, whereby the Trotter pro forma ownership in the combined company could
be increased to 58% depending on the amount of such contingent liabilities at
the closing of the transaction.
On November 6, 1996, the Company's Board of Directors held a regularly
scheduled meeting at which members of management and representatives of Smith
Barney were present. During such meeting, representatives of Smith Barney
discussed certain financial aspects of the proposal submitted by Trotter on
October 30, 1996 including, among other things, the adjustment feature proposed
by Trotter, and the potential impact of the relative pro forma ownership of the
companies' shareholders on the goodwill resulting from a transaction between the
two companies. Members of management also discussed the results of interviews of
certain members of Trotter management, which were conducted by the Company's
human resources consulting firm and a committee of the Company's Board of
Directors. After further review and discussion of the proposal, the Board of
Directors instructed Mr. Spratt and management to proceed with its negotiations
and, pending the results of such negotiations, to present the final proposed
terms of the transaction to the Company's Board of Directors.
On November 11, 1996, the Company and Trotter entered into an agreement
which provided each company an exclusive opportunity to negotiate the terms of a
merger agreement and related documentation and conduct due diligence until
December 20, 1996. Although such agreement was terminated by representatives of
Trotter on December 9, 1996, the parties subsequently continued negotiations and
due diligence.
During the week of November 11, 1996, representatives of the Company
discussed with representatives of Trotter the Company's views with respect to
Trotter's proposal of October 30, 1996, and delivered a counterproposal
outlining the Company's position with respect to the proposed business
combination. Such
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counterproposal provided for the Company to receive a 58% pro forma ownership of
the combined company with no adjustment mechanism with respect to certain
contingent liabilities of the Company.
On December 9, 1996, Mr. Spratt and Mr. Aglialoro conducted negotiations
telephonically and agreed to negotiate further, considering a transaction in
which Trotter would receive a 50.001% pro forma ownership of the combined
company and that such pro forma ownership would not be subject to any adjustment
mechanism with respect to certain contingent liabilities of the Company. In
addition, Mr. Spratt and Mr. Aglialoro agreed to the accounting treatment of the
transaction outlined by their advisors. Each of the companies and their advisors
continued to negotiate the terms of the merger agreement and related documents
and perform mutual legal and business due diligence.
The Board of Directors held a telephonic conference call on December 23,
1996 to consider the proposed merger. At such meeting, legal counsel to the
Company reviewed with the Board the provisions of the proposed merger agreement
and the Board's fiduciary duties in connection with such transaction. In
addition, Smith Barney delivered to the Board its opinion to the effect that, as
of such date and based upon and subject to certain matters set forth in such
opinion, the Merger Consideration was fair, from a financial point of view, to
the Company, and reviewed with the Board the financial analyses performed by
Smith Barney in connection with such opinion (see '--Opinion of the Company's
Financial Advisor'). After further deliberations, the Board of Directors
determined at such meeting that the proposed Merger was fair to and in the best
interests of the Company and its shareholders. Shortly thereafter, the Company's
Board, by unanimous vote, approved the Merger Agreement, authorized management
to complete negotiations and to execute the Merger Agreement and related
transaction documents, and recommended that the Company's shareholders adopt the
Merger Agreement.
The Merger Agreement was executed by the parties effective December 27,
1996 and the parties issued a joint press release on December 30, 1996.
REASONS FOR THE MERGER
The Board of Directors of the Company believes that the terms of the Merger
are fair to and in the best interests of the Company and its shareholders, and,
by vote of the directors present, unanimously has approved the Merger Agreement
(and the transactions contemplated thereby). In its evaluation, the directors
considered a number of factors in the course of their deliberations.
As detailed in the 1995 Restructuring Plan, the Company's Board of
Directors determined that both earnings and ultimately share price would be
improved by concentrating resources in the fitness industry. The first major
step was taken with the sale of the Lumex Division, intended to both reduce debt
and focus the organization and the investment community on the Company's
substantial position as a fitness equipment manufacturer. The next step was to
position the Company for growth within the industry by ensuring an array of
state-of-the-art product offerings and by achieving a critical mass and cost
structure which would represent a competitive advantage.
The commercial fitness industry, in which the Company competes, has been
undergoing rapid consolidation as a significant number of single product
manufacturers have sought to expand their product lines through acquisition or
strategic alliances with other manufacturers. In order to maintain a leadership
position in the fitness industry, management and the Board of Directors believe
it is essential to have a significant position in the cardiovascular equipment
market to complement its reputation for strength equipment. In addition,
including cardiovascular equipment in the product line has some urgency since
without it, the Company is placed at a competitive disadvantage for its strength
products since many customers desire to purchase a 'package' (i.e., strength
equipment and cardiovascular equipment) of products from a single manufacturer.
Certain manufacturers offering a 'package' of products may have the ability to
leverage sales of their strength products against the Company's strength
products. Therefore, the most expeditious strategy is to combine with another
manufacturer who already has a major presence in the cardiovascular market. This
will permit the Company to market a full range of products with quality
reputations and brand names to meet the needs of its customers.
The Board considers the combination of the Company with Trotter an
excellent fit to increase shareholder value. The resulting merged entity has
synergies in 1) manufacturing, 2) marketing, 3) distribution, 4) administration
and 5) product development.
o Manufacturing efficiency will result as five plants are reduced to two
with resultant cost decreases in not only facility, but manufacturing
overhead, product development, and other redundancies. Although these
opportunities on the cost side may have been possible with another
partner should one have emerged, Trotter had significantly better
synergistic fit in facility and research and development functions and
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Trotter management has consistently demonstrated profitability by
managing its cost structure to be in line with revenue growth.
o Both companies are in the premium quality, premium price segment of the
fitness industry. The Company has also developed lower cost strength and
bike products to extend the line. Trotter's position in the high-end
cardiovascular market is comparable to the Company's reputation as a
strength manufacturer. Sales of cardiovascular fitness equipment are
growing at a faster rate than strength equipment. In addition, there is
overlap in marketing expenditures including attendance at trade shows and
advertising costs.
o The distribution channels of the Company and Trotter are very
complimentary as each opens a new market for the other. Trotter's
consumer sales through a strong independent dealer network will provide
additional distribution for the Company's strength line. The consumer
fitness equipment market is larger and growing at a faster rate than the
commercial market. The Company contributes one of the best international
dealerships in the fitness industry.
Although Trotter's own strength products compete commercially with the
Company, the Company's direct sales force is a competitive advantage
which will be even more effective with the ability to offer a complete
cardiovascular and strength package.
o The Company and Trotter have redundant administrative systems and
functions. The consolidation of the two companies will result in
economies unobtainable by the Company on its own.
In addition to the obvious synergies to be obtained in the merger, the
Company believes Trotter's history of sales growth, consistent profitability and
strong cash flow makes it an attractive merger partner. The Company's attempts
to enter the consumer market have been unsuccessful and was discontinued. The
Company concluded the most viable way to enter this market and enhance its
market share of cardiovascular products was a merger with Trotter.
In addition, in making its decision, the Board of Directors of the Company
considered that the issuance of shares of Company Common Stock in the Merger
would result in ownership dilution of the current shareholders of the Company
but concluded that such dilution would be offset by the benefits to be attained
by the Company as a result of the Merger. Additionally, the Board of Directors
of the Company noted, without considering specific quantitative analyses, that
the Merger would result in book value dilution to the Company's shareholders,
but decided that book value was not necessarily indicative of the Company's
future performance or profitabilty and that such dilution would be outweighed by
the benefits anticipated to result from the Merger. In its deliberations, the
Board of Directors also considered other potentially negative factors,
including, among other things: (i) the possibility of management disruption
associated with the Merger and the difficulties associated with integrating the
operations of the Company and Trotter; (ii) the risk that the benefits sought to
be achieved by the Merger would not be achieved; and (iii) the effects of the
loss of the current senior management of the Company after the consummation of
the Merger. The Board of Directors of the Company also noted that, while on a
percentage basis Trotter is expected to contribute less of the pro forma
combined revenues and gross profit in 1997 and 1998 and less of the pro forma
combined pretax income and net income in 1997 relative to the ownership
percentage of Trotter shareholders in the combined company, the estimated
percentage contributions of Trotter to the pro forma combined EBITDA and EBIT in
1997 and 1998 exceed, and to the pro forma combined pretax income and net income
in 1998 are approximately equivalent to, the ownership percentage of Trotter
shareholders in the combined company (see '--Opinion of the Company's Financial
Advisor').
The Board of Directors of the Company also took into account the fact that
approximately 47 prospective buyers were contacted to solicit potential interest
in a transaction with the Company and that Trotter was the only party that had
submitted a final offer to the Company, and also considered the opinion of Smith
Barney as to the fairness of the Merger Consideration from a financial point of
view and the financial analyses performed by Smith Barney in connection with
such opinion, including the estimated equity value range for Trotter derived
from such financial analyses as compared to the equity value for Trotter implied
by the Merger Consideration (see '--Opinion of the Company's Financial
Advisor').
The foregoing discussion of the information and factors considered by the
Company's Board of Directors is not intended to be exhaustive but is intended to
include the material factors considered by the directors. In view of the variety
of factors considered by the Company's Board of Directors, the directors did not
find it practical to, and did not, quantify or otherwise assign relative weight
to the specific factors considered and individual directors may have ascribed
differing weights to different factors.
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After taking into consideration all of the factors set forth above,
together with the presentations of management, and the Company's legal and
financial advisors, the Board of Directors of the Company, by vote of the
directors present, unanimously determined that the Merger is fair to and in the
best interests of the Company and its shareholders and that the Company should
proceed with the Merger at this time.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
At a special meeting of the Company's Board of Directors held on December
23, 1996, the directors, by vote of the directors present, unanimously
determined that the Merger is fair to and in the best interests of the Company
and its shareholders, approved the Merger Agreement (and the transactions
contemplated thereby), and recommended that holders of Company Common Stock vote
at the Meeting for adoption of the Merger Agreement.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Smith Barney was retained by the Company to act as its financial advisor in
connection with the Merger. In connection with such engagement, the Company
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the Company of the consideration to be paid by the Company in the
Merger. On December 23, 1996, at a meeting of the Board of Directors of the
Company held to evaluate the proposed Merger, Smith Barney delivered an oral
opinion (subsequently confirmed by delivery of a written opinion dated December
27, 1996) to the Board of Directors of the Company to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Merger Consideration was fair, from a financial point of view, to
the Company.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of the Company and certain senior officers and
other representatives and advisors of Trotter and UM concerning the businesses,
operations and prospects of the Company and Trotter. Smith Barney examined
certain publicly available business and financial information relating to the
Company and certain business and financial information relating to Trotter as
well as certain financial forecasts and other information and data for the
Company and Trotter which were provided to or otherwise discussed with Smith
Barney by the respective managements of the Company, Trotter and UM, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Merger. Smith Barney reviewed the financial terms
of the Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of Company
Common Stock; the historical and projected earnings and other operating data of
the Company and Trotter; and the capitalization and financial condition of the
Company and Trotter. Smith Barney also considered, to the extent publicly
available, the financial terms of certain other similar transactions recently
effected which Smith Barney considered relevant in evaluating the Merger and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations Smith
Barney considered relevant in evaluating those of the Company and Trotter. Smith
Barney also evaluated the potential pro forma financial impact of the Merger on
the Company. In addition to the foregoing, Smith Barney conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Smith Barney deemed appropriate in arriving at its opinion.
Smith Barney noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Smith Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data furnished to or otherwise reviewed by or
discussed with Smith Barney, the respective managements of the Company, Trotter
and UM advised Smith Barney that such forecasts and other information and data
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the managements of the Company, Trotter and UM as to
the future financial performance of the Company and Trotter and the strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney assumed, with the consent of the Board of Directors of the Company,
that the Merger will be treated as a tax-free reorganization for federal income
tax purposes. Smith Barney's opinion, as set forth therein, relates to the
relative values of the Company and Trotter. Smith Barney did not express any
opinion as to what the value of Company Common Stock actually will be when
issued pursuant to the Merger or the price at which Company Common Stock will
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trade subsequent to the Merger. Smith Barney did not make and was not provided
with an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or Trotter nor did Smith Barney make
any physical inspection of the properties or assets of the Company or Trotter.
In connection with its engagement, Smith Barney was requested to approach, and
held discussions with, certain third parties to solicit indications of interest
in a possible transaction with the Company. Although Smith Barney evaluated the
Merger Consideration from a financial point of view, Smith Barney was not asked
to and did not recommend the specific consideration payable in the Merger, which
was determined through negotiation between the Company and Trotter. No other
limitations were imposed by the Company on Smith Barney with respect to the
investigations made or procedures followed by Smith Barney in rendering its
opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED DECEMBER 27,
1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED
HEREIN BY REFERENCE. HOLDERS OF THE COMPANY COMMON STOCK ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED TO THE
BOARD OF DIRECTORS OF THE COMPANY AND RELATES ONLY TO THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE COMPANY, DOES NOT ADDRESS
ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In preparing its opinion to the Board of Directors of the Company, Smith
Barney performed a variety of financial and comparative analyses, including
those described below. The summary of such analyses does not purport to be a
complete description of the analyses underlying Smith Barney's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Smith Barney made numerous assumptions with respect to the Company, Trotter,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company and Trotter. The estimates contained in such analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Smith Barney's opinion and
financial analyses were only one of many factors considered by the Board of
Directors of the Company in its evaluation of the Merger and should not be
viewed as determinative of the views of the Board of Directors of the Company or
management with respect to the Merger Consideration or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
13 selected publicly traded companies in the sports and fitness industry,
consisting of: K2 Inc., Cannondale Corporation, Huffy Corporation, Ride, Inc.,
Johnson Worldwide Associates, Inc., Marker International, First Team Sports,
Morrow Snowboards, Inc., GT Bicycles, Inc., Roadmaster Industries, CML Group,
Inc., Rawlings Sporting Goods Company, Inc. and Variflex, Inc. (collectively,
the 'Selected Companies'). Smith Barney compared market values of the Selected
Companies as multiples of, among other things, estimated calendar 1996 and 1997
net income, and adjusted market values (equity market value, plus total debt and
the book value of preferred stock, less cash and cash equivalents) of the
Selected Companies as multiples of latest 12 months revenue, earnings before
interest, taxes, depreciation and amortization ('EBITDA') and earnings before
interest and taxes ('EBIT'). Net income projections for the Selected Companies
were based on estimates of selected investment banking firms. All multiples were
based on closing stock prices as of December 20, 1996. Applying a range of
multiples (excluding outliers) of estimated calendar 1996 and 1997 net income
and latest 12 months revenue, EBITDA and EBIT of the Selected Companies of 12.9x
to 18.2x, 10.5x to 16.0x, 0.62x to 1.80x, 7.0x to 10.7x and 8.8x to 12.6x,
respectively, to similar financial data for Trotter (as adjusted by the
management of the Company) resulted in an equity reference range for Trotter of
approximately $24.5 million to $55.5 million, or approximately $6.30 to $14.30
per share, as
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compared to the equity value implied by the Merger Consideration of
approximately $11.01 per share of Trotter Common Stock based on a stock price
for Company Common Stock of $9.75 per share.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid in two selected transactions in the sports and
fitness industry, consisting of (acquiror/target): American Brands, Inc./Cobra
Golf Incorporated and NIKE, Inc./Canstar Sports Inc. (collectively, the
'Selected Transactions'). Smith Barney compared, among other things, the
purchase prices paid in such transactions as a multiple of latest 12 months net
income and the transaction values in such transactions as a multiple of latest
12 months revenue, EBITDA and EBIT. All multiples for the Selected Transactions
were based on information available at the time of announcement of the
transaction. Applying multiples or ranges of multiples (excluding outliers) of
latest 12 months net income, revenue, EBITDA and EBIT for the Selected
Transactions of 20.8x to 32.8x, 1.4x, 8.6x to 12.8x and 9.4x to 13.1x,
respectively, to similar financial data for Trotter resulted in an equity
reference range for Trotter of approximately $40.8 million to $56.9 million, or
approximately $10.51 to $14.66 per share, as compared to the equity value
implied by the Merger Consideration of approximately $11.01 per share of Trotter
Common Stock based on a stock price for Company Common Stock of $9.75 per share.
No company, transaction or business used as a comparison in the '--Selected
Company Analysis' or '--Selected Merger and Acquisition Transactions Analysis'
is identical to the Company, Trotter or the Merger. Accordingly, an analysis of
the results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies, Selected Transactions
or the business segment, company or transaction to which they are being
compared.
Contribution Analysis. Smith Barney analyzed, among other things, the
respective contributions of the Company and Trotter to the estimated revenue,
gross profit, EBITDA, EBIT, pretax income and net income of the combined company
for fiscal years 1996 (year-to-date) through 1998. In the case of the Company,
such analysis was based on internal estimates of the management of the Company
with respect to the fitness product line of the Company, including an estimated
allocation of the Company's operating costs, and after giving effect to the
utilization of the Company's net operating losses ('NOLs'). Such estimates
reflected estimates with respect to the Company's head office expenses, LIFO
charges and bonus compensation and did not reflect estimates with respect to the
outcome of ongoing arbitration between the Company and Fuqua Enterprises, Inc.,
the sale of the Company's building in Ronkonkoma, New York or estimated losses
related to the operations of the Company's isokinetic product line. In the case
of Trotter, such analysis was based on internal estimates of the management of
Trotter, as adjusted downward by the management of the Company. This analysis
indicated that (i) in fiscal year 1996 (year-to-date), the Company would
contribute approximately 59.2% of revenue, 60.1% of gross profit, 49.8% of
EBITDA, 42.9% of EBIT, 48.9% of pretax income and 61.4% of net income, and
Trotter would contribute approximately 40.8% of revenue, 39.9% of gross profit,
50.2% of EBITDA, 57.1% of EBIT, 51.1% of pretax income and 38.6% of net income,
of the combined company, (ii) in fiscal year 1997, the Company would contribute
approximately 60.3% of revenue, 62.4% of gross profit, 47.9% of EBITDA, 48.4% of
EBIT, 55.8% of pretax income and 65.7% of net income, and Trotter would
contribute approximately 39.7% of revenue, 37.6% of gross profit, 52.1% of
EBITDA, 51.6% of EBIT, 44.2% of pretax income and 34.3% of net income, of the
combined company, and (iii) in fiscal year 1998, the Company would contribute
approximately 58.3% of revenue, 60.6% of gross profit, 46.0% of EBITDA, 46.2% of
EBIT, 50.8% of pretax income and 50.8% of net income, and Trotter would
contribute approximately 41.7% of revenue, 39.4% of gross profit, 54.0% of
EBITDA, 53.8% of EBIT, 49.2% of pretax income and 49.2% of net income, of the
combined company. Immediately following consummation of the Merger, shareholders
of the Company, together with the holders of Company Stock Options, and Trotter,
together with the holders of Trotter Stock Options, would own approximately
49.999% and 50.001%, respectively, of the combined company.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of Trotter for fiscal years 1997
through 2001, based on internal estimates of the management of Trotter, as
adjusted downward by the management of the Company. The stand-alone discounted
cash flow analysis of Trotter was determined by (i) adding (x) the present value
of projected free cash flows over the five-year period from 1997 to 2001 and (y)
the present value of Trotter's estimated terminal value in year 2001 and (ii)
subtracting the current net debt of Trotter. The range of estimated terminal
values for Trotter at the end of the five-year period was calculated by applying
terminal multiples ranging from 6.0x to 8.0x to Trotter's projected
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2001 EBITDA, representing Trotter's estimated value beyond the year 2001. The
cash flows and terminal values of Trotter were discounted to present value using
discount rates ranging from 10% to 14%. This analysis resulted in an equity
reference range for Trotter of approximately $49.7 million to $80.2 million, or
approximately $12.80 to $20.68 per share, as compared to the equity value
implied by the Merger Consideration of approximately $11.01 per share based on a
stock price for Company Common Stock of $9.75 per share.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of the Company for fiscal years ending 1997 and
1998, both before and after giving effect to the utilization of the Company's
NOLs, based on internal estimates of the management of the Company, including an
estimated allocation of the Company's operating costs for the fitness product
line. Such estimates reflected estimates with respect to the Company's head
office expenses, LIFO charges and bonus compensation and did not reflect
estimates with respect to the outcome of ongoing arbitration between the Company
and Fuqua Enterprises, Inc., the sale of the Company's building in Ronkonkoma,
New York or estimated losses related to the operations of the Company's
isokinetic product line. The results of the pro forma merger analysis suggested
that the Merger could be accretive to the Company's EPS in each of the fiscal
years analyzed, both before and after giving effect to the utilization of NOLs
and assuming certain potential synergies anticipated by the managements of the
Company and Trotter to result from the Merger were achieved and that the Merger
closed in the first quarter of 1997. The actual results achieved by the combined
company may vary from projected results and the variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) indications of interest
received from third parties other than Trotter with respect to a potential
transaction with the Company; (ii) the historical and projected financial
results of the Company and Trotter; (iii) the history of trading prices and
volume for Company Common Stock; and (iv) the pro forma ownership of the
combined company.
Pursuant to the terms of Smith Barney's engagement, the Company has agreed
to pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to 2% of the total consideration (including
liabilities assumed) payable in connection with the Merger. The Company has also
agreed to reimburse Smith Barney for reasonable travel and other out-of-pocket
expenses incurred by Smith Barney in performing its services, including the fees
and expenses of its legal counsel, and to indemnify Smith Barney and related
persons against certain liabilities, including liabilities under the federal
securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised the Company that, in the ordinary course of
business, Smith Barney and its affiliates may actively trade or hold the
securities of the Company for their own account or for the account of customers
and, accordingly, may at any time hold a long or short position in such
securities. Smith Barney has in the past provided certain investment banking
services to the Company unrelated to the proposed Merger, for which services
Smith Barney has received compensation. In addition, Smith Barney and its
affiliates (including Travelers Group Inc. and its affiliates) may maintain
relationships with the Company and Trotter.
Smith Barney is a nationally recognized investment banking firm and was
selected by the Company based on Smith Barney's experience, expertise and
familiarity with the Company and its business. Smith Barney regularly engages in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
CERTAIN CONSEQUENCES OF THE MERGER
Based upon the capitalization of the Company and Trotter as of the Record
Date and giving effect to the Merger the total number of shares of Company
Common Stock outstanding immediately following the Effective Time will be
8,674,498 shares (based on 4,381,555 shares of Company Common Stock outstanding
as of the Record Date), and the current shareholders of the Company, in the
aggregate, will own approximately 50.51% of the outstanding shares of Company
Common Stock and UM, as the indirect sole stockholder of Trotter will
beneficially own 49.49% of the outstanding shares of Company Common Stock. The
Company has agreed to cause the additional shares of Company Common Stock to be
issued in the Merger, and the shares of Company Common Stock to be reserved for
issuance pursuant to the Trotter Stock Options, to be listed on the AMEX,
subject to official notice of issuance.
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<PAGE>
BOARD OF DIRECTORS AND MANAGEMENT OF THE COMPANY AFTER THE MERGER
Pursuant to the Merger Agreement, the members of the Board of Directors of
the Company at the Effective Time shall be comprised of nine directors, four of
whom shall be designated by the Company and five of whom shall be designated by
Trotter. The initial designation of such directors among the three classes of
the Board of Directors of the Company will be agreed to by the Company and
Trotter, the designees of each party to be divided equally among such classes;
provided, however, that if, prior to the Effective Time, any of such designees
shall decline or be unable to serve, the party which designated such person will
designate another person to serve in such person's stead. See '--Interest of
Certain Persons in the Merger.'
At the Effective Time, the following persons shall be elected or appointed
to the position listed opposite their name and will be the Executive Officers of
the Company:
<TABLE>
<CAPTION>
NAME PRESENT AFFILIATION POSITION
- --------------------- -------------------- -----------------------------------------------
<S> <C> <C>
Peter C. Haines...... Trotter President and Chief Executive Officer
William S. Hurley.... Trotter Vice President and Chief Financial Officer
Raymond Gianelli..... Trotter Vice President--Research and Development
Jeffrey B. Leeson.... Company Vice President--Strategic Planning and
Operations
Karen Slein.......... Trotter Vice President--Human Resources
Joan Carter.......... Trotter Secretary
</TABLE>
Jeffrey Leeson has been designated by Trotter for appointment as Vice
President--Strategic Planning and Operations of the Company following the
Effective Time. Mr. Leeson is currently, and has been since 1992, Vice
President--Operations of the Company. From 1991-1992 he was Vice President of
Operation at Cuno, Inc. and from 1989 to 1991, he was Director of Operations at
Thermos Company. Karen Slein has been designated by Trotter for appointment as
Vice President--Human Resources of the Company following the Effective Time. Ms.
Slein joined Trotter in 1995 as Manager of Human Resources and was promoted to
Director of Human Resources in June 1996. From 1992 to 1995, she was Director of
Human Resources for EcoScience, a publicly traded biotechnology company in the
business of developing, manufacturing and selling natural pest control products.
Prior to that, she spent seven years as Manager of Administration for New
England Shrimp Company. See 'Management of Trotter' for certain information
regarding the other executive officers of the Company following the Effective
Time.
At the Effective Time, the following persons shall comprise the Board of
Directors of the Company:
<TABLE>
<CAPTION>
NAME PRESENT AFFILIATION YEAR TERM WILL EXPIRE
- ------------------------ ------------------- ---------------------
<S> <C> <C>
John Aglialoro.......... Trotter 2000
James Carll............. -- 1998
Joan Carter............. Trotter 1999
Kay Knight Clarke....... Company 2000
Arthur W. Hicks, Jr..... Trotter 1998
Thomas W. Kahle......... Company 1999
Jerry Lee............... Trotter 2000
Robert R. McMillan...... Company 1998
Alan H. Weingarten...... Company 1999
</TABLE>
James Carll has been designated by Trotter for appointment to the Board of
Directors of the Company following the Effective Time. Mr. Carll, age 48, is an
attorney who since 1978 has been associated with, and since 1983 a stockholder
of, the law firm of Archer & Greiner, a Professional Corporation, which acts as
general counsel for Trotter and its parent, UM. Mr. Carll also serves on the
Board of Directors of UM and Southern Jersey Bancorp, a bank holding company.
See 'Management of the Company' and 'Management of Trotter' for certain
information regarding the other members of the Board of Directors of the Company
following the Effective Time.
29
<PAGE>
CONDUCT OF THE BUSINESS OF TROTTER AND THE COMPANY IF THE MERGER IS NOT
CONSUMMATED
If the Merger is not consummated, it is expected that the business and
operations of Trotter and the Company each will continue to be conducted
substantially as they currently are being conducted.
MATERIAL CONTACTS BETWEEN TROTTER AND THE COMPANY
Other than the discussions and negotiations relating to, and the execution
of, the Merger Agreement discussed in 'The Merger--Background of the Merger,'
and other related transaction documentation, neither Trotter nor the Company
knows of any past, present or proposed material contracts, arrangements,
understandings, relationships, negotiations or transactions in the last five
years between the Company or its affiliates and Trotter or its affiliates.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Trotter Stock Options. At the Effective Time, each outstanding option to
purchase shares of Trotter Common Stock (each a 'Trotter Stock Option') under
Trotter Stock Plans, whether vested or unvested, will be assumed by the Company.
Each Trotter Stock Option so assumed by the Company will continue to have, and
be subject to, the same terms and conditions set forth in the applicable Trotter
Stock Plan immediately prior to the Effective Time, except that (i) such Trotter
Stock Option will be exercisable for that number of whole shares of Company
Common Stock equal to the product of the number of shares of Trotter Common
Stock that were issuable upon exercise of such Trotter Stock Option immediately
prior to the Effective Time, multiplied by the Merger Consideration, rounded up
to the nearest whole number of shares of Company Common Stock, (ii) the per
share exercise price will be equal to the quotient determined by dividing the
exercise price per share of Trotter Common Stock at which such Trotter Stock
Option was exercisable immediately prior to the Effective Time by the Merger
Consideration, rounded up to the nearest whole cent, and (iii) each Trotter
Stock Option will be immediately exercisable for a term of five years. At the
Effective Time, holders of Trotter Stock Options will have the right to purchase
374,559 shares of Company Common Stock at an exercise price of $5.82 per share
and 64,394 shares of Company Common Stock at an exercise price equal to the
price per share of Company Common Stock at the Effective Time (based on
4,381,555 shares of Company Common Stock outstanding as of the Record Date).
Based on a market price for Company Common Stock of $9 1/2 per share as of the
Record Date, such shares are valued at $1,378,377, net of the aggregate exercise
price of such shares.
At the Effective Time, the Company will issue to each holder of an
outstanding Trotter Stock Option a document evidencing the foregoing assumption
of such Trotter Stock Option by the Company.
As of the Record Date, executive officers and directors of Trotter had
outstanding Trotter Stock Options as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
TROTTER COMMON STOCK
SUBJECT TO EXERCISE
NAME OF INDIVIDUAL POSITION OUTSTANDING OPTIONS PRICE
- ------------------------ ---------------------------------------- -------------------- --------
<S> <C> <C> <C>
Peter C. Haines......... President and Chief Executive Officer 190,000 $ 6.58
William S. Hurley....... Vice President and Chief Financial 38,000(1) (1)
Officer
William Curran.......... Vice President--Manufacturing 38,000 $ 6.58
Raymond Gianelli........ Vice President--Research and Development 19,000(2) $ 6.58(2)
Arthur W. Hicks, Jr..... Treasurer, Director 38,000 $ 6.58
Jerry Lee............... Director 3,800 $ 6.58
</TABLE>
- ------------------
(1) Consists of 38,000 shares underlying options which will be granted on the
later of the Effective Time and March 31, 1997, with an exercise price equal
to the then fair market value of Trotter Common Stock.
(2) Includes 9,500 shares underlying options which will be granted on the later
of the Effective Time and March 31, 1997, with an exercise price equal to
the then fair market value of Trotter Common Stock.
Company Stock Options. All of the Company Stock Options issued pursuant to
the 1987 Plan that were unvested prior the date of the Merger Agreement have
become vested as a result of the approval of the Merger by the Board of
Directors of the Company. All of the Company Stock Options issued pursuant to
the Omnibus Plan that are currently unvested will become vested as a result of
the consummation of the Merger. At the Effective Time, Company Stock Options to
purchase 151,050 shares of the Company Common Stock will be immediately
exercisable at exercise prices varying from $9.38 to $18.75 per share. Based on
a market price for Company
30
<PAGE>
Common Stock of $9 1/2 per share as of the Record Date, such shares are valued
at $1,920, net of the aggregate exercise price of such shares. At the Effective
Time, all directors and officers of the Company as a group will have the right
to purchase 63,750 shares of Company Common Stock valued at $0, net of the
aggregate exercise price of such shares (based on a market price for Company
Common Stock of $9 1/2 per share as of the Record Date).
Company Employment Agreements. The Company and J. Raymond Elliott, the
current Chief Executive Officer of the Company, are parties to an employment
agreement. Pursuant to the terms of this employment agreement, Mr. Elliott has
the right to terminate employment upon a change of control, in which case he is
entitled to receive an amount equal to 2.99 multiplied by his base salary. The
consummation of the Merger will result in a change of control pursuant to Mr.
Elliott's employment agreement and pursuant to the terms of such employment
agreement, Mr. Elliott will be entitled to receive an amount equal to $897,000,
of which 50% is payable in equal installments over the 12 months following
termination and the balance is payable in equal installments over the next 24
months. If the Company does not extend or renew the employment agreement at the
end of its term, the Company is required to pay Mr. Elliott his base salary over
the next 12 months. Upon consummation of the Merger, Mr. Elliott will terminate
his employment pursuant to the terms of his agreement. The Board of Directors
has resolved that the Company secure by irrevocable letter of credit or
otherwise the balance of the payments due to Mr. Elliott under his employment
agreement at the Effective Time.
The Company and Robert McNally, the current Chief Financial Officer of the
Company, are parties to a severance agreement pursuant to which the Company
agreed to pay Mr. McNally severance of $488,250 at the rate of $15,750 per month
for a period of 28 months after March 31, 1997. The consummation of the Merger
will be a 'change of control' under the terms of the severance agreement and, as
a result, all severance payments will be accelerated and will become immediately
due and payable within 30 days after the Effective Time.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Merger Agreement preserves certain indemnification rights of the
executive officers and directors of the Company which currently are in effect.
See 'The Merger Agreement--Certain Covenants.'
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method for accounting
and financial reporting purposes. Based upon the outstanding shares of Company
Common Stock and Trotter Common Stock, as of the Record Date, the holder of
Trotter Common Stock, together with the holders of the Trotter Stock Options,
will receive 50.001% of the shares of Company Common Stock on a fully diluted
basis (calculated assuming all outstanding options were exercised, with option
proceeds used to repurchase shares, and a price of $9.75 per share of Company
Common Stock) as described in the Merger Agreement. In addition, at the
Effective Time, the Chief Executive Officer of Trotter will be named the Chief
Executive Officer of the Company and Trotter will designate the majority of the
Members of the Company's Board of Directors. Therefore, Trotter has been deemed
to be the acquiror for accounting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material United States
federal income tax consequences of the Merger. This discussion is based upon the
Code, regulations, proposed or promulgated thereunder, judicial precedent
relating thereto, and current rulings and administrative practice of the
Internal Revenue Service (the 'Service'), in each case as in effect as of the
date hereof and all of which are subject to change at any time, possibly with
retroactive effect. It is assumed that shares of Trotter Common Stock are held
as 'capital assets' within the meaning of Section 1221 of the Code (i.e.,
property held for investment). This discussion does not address all aspects of
Federal income taxation that might be relevant to particular holders of Trotter
Common Stock in light of their status or personal investment circumstances; nor
does it discuss the consequences to such holders who are subject to special
treatment under the Federal income tax laws, such as foreign persons, dealers in
securities, regulated investment companies, life insurance companies, other
financial institutions, tax-exempt organizations, pass-through entities,
taxpayers who hold Trotter Common Stock as part of a 'straddle,' 'hedge' or
'conversion transaction' or who have a 'functional currency' other than the
United States dollar. In addition, this discussion does not address the tax
consequences to holders of options under the Trotter stock option plans or other
persons who have received their Trotter Common Stock as compensation. Neither
the Company nor Trotter has requested or will receive a ruling from the Service
as to the tax consequences of the Merger.
31
<PAGE>
THE HOLDER OF TROTTER COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO IT OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code.
Assuming the Merger is treated as a reorganization within the meaning of
Section 368(a) of the Code, no gain or loss will be recognized for Federal
income tax purposes by the Company, Merger Sub or Trotter as a result of the
Merger. A holder of Trotter Common Stock will not recognize gain or loss on the
exchange of shares of Trotter Common Stock for Company Common Stock pursuant to
the Merger. The aggregate tax basis of the Company Common Stock received by such
holder will be the same as the aggregate tax basis of the Trotter Common Stock
surrendered therefor. The holding period of the Company Common Stock will
include the holding period of the Trotter Common Stock surrendered therefor.
If the Merger does not qualify as a 'tax-free reorganization,' the holder
of Trotter Common Stock would be treated as if it sold its Trotter Common Stock
in a taxable transaction. In such event, the holder of Trotter Common Stock
would recognize gain or loss with respect to each share of Trotter Common Stock
surrendered equal to the difference between the shareholder's basis in such
share and the fair market value, at the Effective Time, of the Company Common
Stock received in exchange therefor (plus any cash received for fractional
shares). In such event, the shareholder's aggregate basis in the Company Common
Stock so received would equal its fair market value, and the shareholder's
holding period for such stock would begin the day after the Effective Time.
REGULATORY APPROVALS
Antitrust. Under the HSR Act and the rules promulgated thereunder by the
Federal Trade Commission (the 'FTC'), the Merger cannot be consummated until
requisite pre-merger notifications have been filed and certain information has
been furnished to the FTC and the Antitrust Division of the Department of
Justice (the 'Antitrust Division') and specified waiting period requirements
have been satisfied. The Company and Trotter filed notification and report forms
under the HSR Act with the FTC and the Antitrust Division on February 6, 1997.
The required waiting period under the HSR Act expired on March 8, 1997, without
any request for additional documentary or other information. At any time before
or after the Effective Time, and notwithstanding that the HSR Act waiting period
has expired, the Antitrust Division or any state could take such action under
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin consummation of the Merger or seeking divestiture of
substantial assets of the Company or Trotter. Private parties also may seek to
take legal action under the antitrust laws under certain circumstances.
The Company and Trotter believe that the Merger can be effected in
compliance with federal and state antitrust laws. However, there can be no
assurance that a challenge to consummation of the Merger on antitrust grounds
will not be made or that, if such a challenge were made, the Company and Trotter
would prevail or would not be required to accept certain conditions, including
certain divestitures, in order to consummate the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
The issuance in the Merger of shares of Company Common Stock has not been
registered under the Securities Act and, therefore, such shares will not be
freely transferable and may not be resold except pursuant to an effective
registration statement under the Securities Act or an exemption therefrom.
STOCK EXCHANGE LISTING
The Company will use all reasonable efforts to cause the shares of Company
Common Stock to be issued in the Merger and the shares of Company Common Stock
to be reserved for issuance upon exercise of Company Stock Options to be
approved for listing on the AMEX, subject to official notice of issuance, prior
to the Effective Time. It is a condition to the Company's obligation to
consummate the Merger that the shares of Company Common Stock to be issued in
the Merger be authorized for listing on the AMEX upon official notice of
issuance.
NO APPRAISAL RIGHTS
Holders of Company Common Stock are not entitled to appraisal rights under
the NYBCL in connection with the Merger because the Company is not a constituent
corporation to the Merger.
32
<PAGE>
THE MERGER AGREEMENT
The following is a summary of all material provisions of the Merger
Agreement, which is attached as Annex A to this Proxy Statement and is
incorporated herein by reference. This summary is qualified in its entirety by
reference to the full text of the Merger Agreement which is incorporated herein
by reference. Capitalized terms used and not defined below have the respective
meanings assigned to them in the Merger Agreement. All holders of Company Common
Stock are encouraged to read the Merger Agreement carefully and in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the satisfaction or waiver
of the terms and conditions contained therein, including the requisite adoption
thereof by the holders of a majority of the outstanding shares of Company Common
Stock, Merger Sub will be merged with and into Trotter, and Trotter will be the
surviving corporation in the Merger and become a wholly owned subsidiary of the
Company.
EFFECTIVE TIME
The Merger Agreement provides that, subject to the satisfaction or waiver
of the terms and conditions contained therein, including the requisite adoption
thereof by the holders of a majority of the outstanding shares of Company Common
Stock, the Merger will become effective on the date on which a Certificate of
Merger is filed with the Secretary of State of the State of Delaware or at such
time thereafter as provided in the Certificate of Merger.
CONVERSION OF SHARES; EXCHANGE OF STOCK CERTIFICATES; NO FRACTIONAL SHARES
At the Effective Time, pursuant to the Merger Agreement (i) all of the
shares of Trotter Common Stock outstanding immediately prior to the Effective
Time will, by virtue of the Merger and without any action on the part of any
holder thereof, be converted into the right to receive, and shall be exchanged
for, shares of fully-paid and non-assessable Company Common Stock and (ii)
Trotter Stock Options will be converted to options to purchase Company Common
Stock. Pursuant to the Merger Agreement, the holder of Trotter Common Stock and
holders of Trotter Stock Options will receive, in the aggregate, 50.001% of all
shares of Company Common Stock on a fully diluted basis calculated assuming all
outstanding options were exercised, with option proceeds used to repurchase
shares, and a price of $9.75 per share for Company Common Stock immediately
following the Effective Time (the 'Total Merger Consideration'). The amount of
shares of Company Common Stock to be received upon conversion of each share of
Trotter Common Stock (the 'Merger Consideration') shall equal the Total Merger
Consideration, divided by the number of shares of Trotter Common Stock issued
and outstanding on a fully diluted basis (assuming issuance of all Trotter
Common Stock subject to the Trotter Stock Plans immediately before the Effective
Time) at the Effective Time. Issuances of Company Common Stock will be rounded
upward to the nearest whole share and no fractional shares of Company Common
Stock will be issued in the Merger to the holder of Trotter Common Stock and the
holders of Trotter Stock Options. Based on 4,381,555 shares of Company Common
Stock outstanding as of the Record Date, 4,292,943 shares of Company Common
Stock will be issued in the Merger.
As soon as reasonably practicable after the Effective Time, the Company
will provide to each record holder of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Trotter Common Stock whose shares were converted in the Merger into the right to
receive shares of Company Common Stock: (i) a letter of transmittal (specifying
that delivery will be effected, and risk of loss and title to the certificates
will pass, only upon delivery of the certificates to the Company) and (ii)
instructions for use in effecting the surrender of the certificates in exchange
for certificates representing shares of Company Common Stock. Upon surrender of
a certificate for cancellation to the Company, together with such letter of
transmittal, duly executed, the holder of such certificate will be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Company Common Stock and the certificate so surrendered will be
canceled.
Until surrendered, each certificate will be deemed after the Effective Time
to represent only the right to receive upon such surrender the certificate
representing shares of Company Common Stock.
33
<PAGE>
All shares of Company Common Stock issued upon surrender of certificates
representing shares of Trotter Common Stock will be deemed to have been issued
in full satisfaction of all rights pertaining to such shares of stock.
TREATMENT OF STOCK OPTIONS
At the Effective Time, each Trotter Stock Option under Trotter Stock Plans,
whether vested or unvested, will be assumed by the Company. Each Trotter Stock
Option so assumed by the Company will continue to have, and be subject to, the
same terms and conditions set forth in the applicable Trotter Stock Plan
immediately prior to the Effective Time, except that (i) such Trotter Stock
Option will be exercisable for that number of whole shares of Company Common
Stock equal to the product of the number of shares of Trotter Common Stock that
were issuable upon exercise of such Trotter Stock Option immediately prior to
the Effective Time, multiplied by the Merger Consideration, rounded up to
nearest whole number of shares of Company Common Stock, (ii) the per share
exercise price will be equal to the quotient determined by dividing the exercise
price per share of Trotter Common Stock at which such Trotter Stock Option was
exercisable immediately prior to the Effective Time by the Merger Consideration,
rounded up to the nearest whole cent, and (iii) each Trotter Stock Option will
be immediately exercisable for a term of five years.
At the Effective Time, the Company will issue to each holder of an
outstanding Trotter Stock Option a document evidencing the foregoing assumption
of such Trotter Stock Option by the Company, assuming the approval by the
shareholders of Proposal No. 3. See 'Other Matters--Proposal No. 3--Amendment to
the 1995 Omnibus Incentive Plan.'
The Company further has agreed to take all corporate action necessary to
reserve for issuance a sufficient number of shares of Company Common Stock for
delivery upon exercise of Trotter Stock Options in accordance with the
provisions described above. The Company has agreed to file a Registration
Statement on Form S-8 for the shares of Company Common Stock issuable with
respect to the assumed Trotter Stock Options, no later than ten days after the
Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. These include representations and warranties by the Company and
Trotter with respect to it and its subsidiaries as to, among other things:
corporate organization and qualification; capitalization; authority; consents;
approvals; non-contravention and compliance with law; opinion of the Company's
financial advisor; litigation; filings by the Company with the Commission;
financial statements; no undisclosed liabilities; absence of changes; employee
matters; information included in this Proxy Statement; tax matters; intangible
property; material contracts; environmental protection; and other matters.
CERTAIN COVENANTS
The Merger Agreement contains certain covenants and agreements, certain of
which are summarized below.
Conduct of Business of the Company. Except as contemplated by the Merger
Agreement, during the period from December 27, 1996 to the Effective Time, each
of the Company and Trotter will, and will cause each of their respective
subsidiaries to, conduct its operations in the ordinary course of business
consistent with past practice and, to the extent consistent therewith, and use
all commercially reasonable efforts to preserve intact their current business
organizations and goodwill, preserve the goodwill and relationships with
customers, suppliers and others having business dealings with them and, subject
to prudent management of workforce needs and ongoing programs currently in
force, keep available the services of their present officers and employees.
Without limiting the generality of the foregoing, and except as otherwise
expressly provided in the Merger Agreement, prior to the Effective Time, neither
the Company nor Trotter nor any of their respective subsidiaries will, without
the prior written consent of the other party, which consent shall not be
unreasonably withheld: (i) declare or pay any dividends on or make other
distributions in respect of any of their capital stock other than to such party
or its wholly owned subsidiaries; (ii) split, combine or reclassify any of their
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares
34
<PAGE>
of their capital stock; (iii) redeem, repurchase or otherwise acquire any shares
of their capital stock, other than for the purpose of funding employee stock
ownership plans in accordance with past practice; (iv) issue, agree to issue,
deliver, sell, award, pledge, dispose of or otherwise encumber or authorize or
propose the issuance, delivery, sale, award, pledge, disposal or other
encumbrance of, any shares of their capital stock of any class or any securities
convertible into or exchangeable for, or any rights, warrants or options to
acquire, any such shares or convertible or exchangeable securities, other than
intercompany issuances of capital stock, and other than issuances (A) in the
case of the Company and its subsidiaries, of Company Common Stock pursuant to
the exercise of stock options or rights issued under the Company Stock Plans
outstanding as of the date of the Merger Agreement, and (B) in the case of
Trotter, shares of Trotter Common Stock pursuant to the exercise of stock
options issued under the Trotter Stock Plans outstanding as of the date of the
Merger Agreement and the grant of options on the later of the Effective Time and
March 31, 1997, as set forth in the Merger Agreement; (v) amend or propose to
amend its respective certificate of incorporation, by-laws or regulations, or
similar organic documents; (vi) acquire, or publicly propose to acquire, or
agree to acquire, by merger or consolidation with, or by purchase or otherwise,
a substantial equity interest in or a substantial portion of the assets of, any
Person (as defined in the Merger Agreement) or division thereof, nor shall any
party acquire or agree to acquire a material amount of assets; (vii) incur or
guarantee any indebtedness (including any debt borrowed or guaranteed or
otherwise assumed including, without limitation, the issuance of debt securities
or warrants or rights to acquire debt) or enter into any 'keep well' or other
agreement to maintain any financial statement condition of another person or
enter into any arrangement having the economic effect of any of the foregoing
other than (A) indebtedness or guarantees in the ordinary course of business
consistent with past practice (such as the issuance of commercial paper, the use
of existing credit facilities or hedging activities); (B) long-term indebtedness
not aggregating more than $500,000; (C) arrangements between such party and its
subsidiaries or among its subsidiaries; or (D) in connection with the refunding
of existing indebtedness; (viii) except as may be required by applicable law or
as contemplated by the Merger Agreement, (A) enter into, adopt or amend or
increase the amount or accelerate the payment or vesting of any benefit or
amount payable under, any employee benefit plan or other contract, agreement,
commitment, arrangement, plan or policy maintained by, contributed to or entered
into by such party or any of its subsidiaries, or increase, or enter into any
contract, agreement, commitment or arrangement to increase in any manner, the
compensation or fringe benefits, or otherwise to extend, expand or enhance the
engagement, employment or any related rights, of any director, officer or other
employee of such party or any of its subsidiaries, except for normal increases
in the ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to such party or any of its subsidiaries or (B) enter into or amend any
employment, severance or special pay arrangement with respect to the termination
of employment or other similar contract, agreement or arrangement with any
director or officer or other employee other than in the ordinary course of
business consistent with past practice; (ix) willfully take any action that
would or is reasonably likely to result in a material breach of any provision of
the Merger Agreement, or in any of its representations and warranties set forth
in the Merger Agreement being untrue on and as of the Effective Time; or (x)
except in the ordinary course of business consistent with past practice, modify,
amend, terminate, renew or fail to use reasonable business efforts to renew any
material contract or agreement to which such party or any subsidiary of such
party is a party or waive, release or assign any material rights or claims.
Employee Matters. Except as otherwise provided in the Merger Agreement,
the Company and its subsidiaries will honor, without modification, all
contracts, agreements, collective bargaining agreements and commitments of the
parties prior to the date of the Merger Agreement that apply to any current or
former employee or current or former director of the parties; provided, however,
that this undertaking is not intended to prevent the Company from enforcing such
contracts, agreements, collective bargaining agreements and commitments in
accordance with their terms, including, without limitation, any reserved right
to amend, modify, suspend, revoke or terminate any such contract, agreement,
collective bargaining agreement or commitment. At the Effective Time, the
Trotter Stock Options Plans will be terminated and prior to the Effective Time,
the Company and Trotter will cooperate in establishing employee benefit plans
for the surviving company in the Merger and for the transition of the existing
plans of both the Company and Trotter.
No Solicitations. From and after the date of the Merger Agreement, the
Company and Trotter will not, and will not authorize or permit any of their
respective representatives to, directly or indirectly, solicit, initiate or
encourage (including by way of furnishing information) or take any other action
to facilitate knowingly any
35
<PAGE>
inquiries or the making of any proposal which constitutes or may reasonably be
expected to lead to an Acquisition Proposal (as defined below) from any Person,
or engage in any discussion or negotiations relating thereto or accept any
Acquisition Proposal; provided, however, that notwithstanding any other
provision of the Merger Agreement, the Company may (i) at any time prior to
obtaining the approval of the Company's shareholders engage in discussions or
negotiations with a third party who (without any solicitation, initiation,
encouragement, discussion or negotiation, directly or indirectly, by or with the
Company or its representatives after the date of the Merger Agreement) seeks to
initiate such discussions or negotiations and may furnish such third party
information concerning the Company and its business, properties and assets if,
and only to the extent that, (A) (x) the third party has first made an
Acquisition Proposal that is financially superior to the Merger and not subject
to any financing conditions (as determined in good faith in each case by the
Company's Board of Directors after consultation with its financial advisors) and
(y) the Company's Board of Directors shall conclude in good faith, after
considering applicable provisions of state law, on the basis of written advice
of outside counsel that such action is necessary for the Board of Directors to
act in a manner consistent with its fiduciary duties under applicable law and
(B) prior to furnishing such information to or entering into discussions or
negotiations with such Person, the Company (x) provides prompt notice to Trotter
to the effect that it is furnishing information to or entering into discussions
or negotiations with such Person and (y) receives from such Person an executed
confidentiality agreement in reasonably customary form on terms not more
favorable to such Person than the terms contained in the confidentiality
agreement (as defined in the Merger Agreement); (ii) comply with Rule 14e-2
promulgated under the Exchange Act with regard to a tender or exchange offer,
and/or (iii) accept an Acquisition Proposal from a third party, provided the
Company terminates the Merger Agreement. Each party has ceased and terminated
all solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted prior to the date of the Merger Agreement by such
party or its representatives with respect to the foregoing. Each party will
notify the other of any such discussions or negotiations, requests for
information or the receipt of any Acquisition Proposal, including the identity
of the Person or group involved and the terms and conditions of any Acquisition
Proposal. As used herein, 'Acquisition Proposal' shall mean a proposal or offer
(other than by the other party to the Merger Agreement) for a tender or exchange
offer, merger, consolidation or other business combination involving the party
or any material subsidiary of the party or any proposal to acquire in any manner
a substantial equity interest in or a substantial portion of the assets of the
party or any material subsidiary.
Indemnification of Directors and Officers. To the extent, if any, not
provided by an existing right of indemnification or other agreement or policy,
from and after the Effective Time, the Company shall, to the fullest extent
permitted by applicable law, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of the Merger Agreement, or
who becomes prior to the Effective Time, an officer, director or employee of any
of the parties to the Merger Agreement or any subsidiary (each an 'Indemnified
Party' and collectively, the 'Indemnified Parties') against (i) all losses,
expenses (including reasonable attorney's fees and expenses), claims, damages or
liabilities or, subject to the proviso of the next succeeding sentence, amounts
paid in settlement, arising out of actions or omissions occurring at or prior to
the Effective Time (and whether asserted or claimed prior to, at or after the
Effective Time) that are, in whole or in part, based on or arising out of the
fact that such person is or was a director, officer or employee of such party
(the 'Indemnified Liabilities'), and (ii) all Indemnified Liabilities to the
extent they are based on or arise out of or pertain to the transactions
contemplated by the Merger Agreement. In the event of any such loss, expense,
claim, damage or liability (whether or not arising before the Effective Time),
(i) the Company shall pay the reasonable fees and expenses of counsel selected
by the Indemnified Parties, which counsel shall be reasonably satisfactory to
the Company, promptly after statements therefor are received and otherwise
advance to such Indemnified Party upon request reimbursement of documented
expenses reasonably incurred, in either case to the extent not prohibited by the
NYBCL, (ii) the Company will cooperate in the defense of any such matter and
(iii) any determination required to be made with respect to whether an
Indemnified Party's conduct complies with the standards set forth under the
NYBCL and the certificate of incorporation or by-laws of the Company shall be
made by independent counsel mutually acceptable to the Company and the
Indemnified Party; provided, however, that the Company shall not be liable for
any settlement effected without its written consent (which consent shall not be
unreasonably withheld). The Indemnified Parties as a group may retain only one
law firm with respect to each related matter except to the extent there is, in
the opinion of counsel to an Indemnified Party,
36
<PAGE>
under applicable standards of professional conduct, a conflict on any
significant issue between positions of such Indemnified Party and any other
Indemnified Party or Indemnified Parties.
For a period of six years after the Effective Time, the Company shall cause
to be maintained in effect policies of directors and officers' liability
insurance maintained by the Company and Trotter for the benefit of those persons
who are currently covered by such policies on terms no less favorable than the
terms of such current insurance coverage; provided, however, that the Company
shall not be required to expend in any year an amount in excess of 200% of the
annual aggregate premiums currently paid by the Company and Trotter for such
insurance; and provided, further, that if the annual premiums of such insurance
coverage exceed such amount, the Company shall be obligated to obtain a policy
with the best coverage available, in the reasonable judgment of the Board of
Directors of the Company, for a cost not exceeding such amount.
In the event the Company or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in either such case, proper provisions shall be made so that
the successors and assigns of the Company shall assume the above indemnification
obligations.
To the fullest extent permitted by law, from and after the Effective Time,
all rights to indemnification as of the date of the Merger Agreement in favor of
the employees, agents, directors and officers of the Company, Trotter and their
respective subsidiaries with respect to their activities as such prior to the
Effective Time, as provided in their respective certificates of incorporation
and by-laws in effect on the date thereof, or otherwise in effect on the date
hereof, shall survive the Merger and shall continue in full force and effect for
a period of not less than six years from the Effective Time.
Other Covenants. Each of the Company, Trotter and Merger Sub, with respect
to the Merger, has agreed to, and cause its subsidiaries to, execute such
further documents and instruments and to take such further actions as may
reasonably be requested by any other party in order to consummate the Merger in
accordance with the terms of the Merger Agreement, including, without
limitation: (i) cooperation in the preparation and filing of the Proxy Statement
and the Registration Statement, any filings that may be required under the HSR
Act, and any amendments to any thereof; (ii) the taking of all action reasonably
necessary, proper or advisable to secure any necessary permits, consents or
approvals; and (iii) the execution of any additional instruments, including the
Certificate of Merger, necessary to consummate the transactions contemplated by
the Merger Agreement; provided, however, that as described elsewhere in this
Proxy Statement the Company may postpone a previously-scheduled meeting of
Company shareholders in the event that the Company's Board of Directors by
majority vote determines in its good faith judgment, after consultation with and
based upon the advice of independent legal counsel, that it is necessary to do
so in order to comply with its fiduciary duties to shareholders under applicable
law and, at the time of such determination, the Company has received a bona fide
Acquisition Proposal that has not been withdrawn.
CONDITIONS
The respective obligations of each of the Company, Trotter and Merger Sub,
to consummate the Merger are subject to the following conditions, among others:
(i) the approval of the majority of the outstanding shares of Company Common
Stock shall have been obtained; (ii) no temporary restraining order or
preliminary or permanent injunction or other order by any federal or state court
preventing consummation of the Merger shall have been issued and be continuing
in effect, and the Merger and the other transactions contemplated by the Merger
Agreement shall not have been prohibited under any applicable federal or state
law or regulation; (iii) all waiting periods applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated and all
approvals of, or filings with, any Governmental Authority required to consummate
the transactions contemplated hereby shall have been obtained or made, other
than immaterial approvals and filings, the failure to obtain or make which would
have no material adverse effect on the Company or Trotter or, following the
Effective Time, the Company; (iv) the Commission shall have declared the
Registration Statement effective, no stop orders suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued, and no
proceeding for that purpose, and no similar proceeding in respect of this Proxy
Statement, shall have been initiated or threatened in writing by the Commission;
(v) the shares of Company Common Stock
37
<PAGE>
issuable to the stockholder of Trotter pursuant to the Merger Agreement and such
other shares required to be reserved for issuance in connection with the Merger
shall have been authorized for listing on the AMEX upon official notice of
issuance; and (vi) the fairness opinion of Smith Barney shall not have been
withdrawn.
The Company, Trotter and Merger Sub have agreed to waive the conditions set
forth in clause (iv) above.
The obligations of Trotter to effect the Merger are further subject to the
following additional conditions: (i) the Company (and/or its appropriate
subsidiaries) will have performed in all material respects its agreements and
covenants contained in or contemplated by the Merger Agreement required to be
performed by it at or prior to the Effective Time; (ii) the representations and
warranties of the Company set forth in the Merger Agreement shall be true and
correct in all material respects on and as of the Effective Time with the same
effect as though such representations and warranties had been made on and as of
the Effective Time (except for representations and warranties that expressly
speak only as of a specific date or time other than the date of the Merger
Agreement or the Effective Time which need only be true and correct as of such
date or time); (iii) Trotter shall have received a certificate signed by the
Chief Financial Officer of the Company to the effect that, to the best of such
officer's knowledge, the conditions set forth in clauses (i) and (ii) above have
been satisfied; and (iv) Trotter shall have received a certificate, signed by
the Chief Financial Officer of the Company.
The obligation of the Company and Merger Sub to effect the Merger is
further subject to the additional conditions that: (i) Trotter (and/or its
appropriate subsidiaries) will have performed in all material respects its
agreements and covenants contained in or contemplated by the Merger Agreement
required to be performed by it at or prior to the Effective Time; (ii) the
representations and warranties of Trotter set forth in the Merger Agreement
shall be true and correct in all material respects on and as of the Effective
Time with the same effect as though such representations and warranties had been
made on and as of the Effective Time (except for representations and warranties
that expressly speak only as of a specific date or time other than the date of
the Merger Agreement or the Effective Time which need only be true and correct
as of such date or time); (iii) the Company shall have received a certificate
signed by the Chief Financial Officer of Trotter to the effect that, to the best
of such officer's knowledge, the conditions set forth in clauses (i) and (ii)
above have been satisfied; and (iv) the Company shall have received
certificates, signed by the Chief Financial Officer of Trotter and the Chief
Financial Officer of UM Equity Corp., respectively.
At any time prior to the Effective Time, each of the Company, Trotter and
Merger Sub may waive compliance with any of the agreements or conditions
contained in the Merger Agreement, to the extent permitted by applicable law.
Any agreement on the part of a party to any such waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the shareholders of the respective
parties thereto contemplated thereby: (i) by mutual written consent of the
Boards of Directors of the Company and Trotter; (ii) by either Trotter or the
Company (A) if there has been a material breach of any representation, warranty,
covenant or agreement on the part of the other set forth in the Merger
Agreement, which breach has not been cured within 20 business days following
receipt by the breaching party of notice of such breach or adequate assurance of
such cure shall not have been given by or on behalf of the breaching party
within such 20 business-day period, or (B) if any state or federal law, order,
rule or regulation is adopted or issued, which has the effect, as supported by
the written opinion of outside counsel for such party, of prohibiting the
Merger, or by any party to the Merger Agreement hereto if any court of competent
jurisdiction in the United States or any State shall have issued an order,
judgment or decree permanently restraining, enjoining or otherwise prohibiting
the Merger, and such order, judgment or decree shall have become final and
nonappealable; (iii) by any party to the Merger Agreement, by written notice to
the other parties, if the Effective Time shall not have occurred on or before
June 30, 1997 (the 'Initial Termination Date'); provided, however, that such
right to terminate shall not be available to any party whose failure to fulfill
any obligation under the Merger Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before the Initial Termination
Date; (iv) by any party to the Merger Agreement, by written notice to the other
parties, if the approval of the Company's shareholders shall not have been
obtained at a the Meeting; or (v) by the Company, prior to the approval of the
Merger Agreement by the Company's shareholders, upon five days' prior
38
<PAGE>
notice to Trotter, if, as a result of an Acquisition Proposal by a party other
than Trotter or any of its affiliates, the Board of Directors of the Company
determines in good faith that their fiduciary obligations under applicable law
require that such Acquisition Proposal be accepted; provided, however, that (i)
the Board of Directors of the Company shall have been advised in writing by
outside counsel that notwithstanding a binding commitment to consummate an
agreement of the nature of the Merger Agreement entered into in the proper
exercise of their applicable fiduciary duties, such fiduciary duties would also
require the directors to reconsider such commitment as a result of such
Acquisition Proposal and (ii) prior to any such termination, the Company shall,
and shall cause its respective financial and legal advisors to, negotiate with
Trotter to make such adjustments in the terms and conditions of the Merger
Agreement as would enable the Company to proceed with the transactions
contemplated therein.
Effect of Termination. In the event of termination of the Merger Agreement
by either the Company or Trotter there shall be no liability on the part of
either the Company or Trotter or their respective officers or directors under
the Merger Agreement, except the following provisions shall survive the
termination of the Merger Agreement: (i) the Topping Fee (described below); (ii)
fees and expenses owed by each party in accordance with the terms of the Merger
Agreement; (iii) the parties' obligations under the Confidentiality Agreement;
(iv) the parties' representations with respect to brokers; and (v) the parties'
waiver of a jury trial and special, indirect, consequential or punitive damages.
Topping Fee. If the Company terminates the Merger Agreement to accept an
Acquisition Proposal and consummates a transaction for the merger, consolidation
or other business combination of the Company with an unrelated third party
within twelve months after the date of termination of the Merger Agreement,
then, provided that Trotter shall not have materially breached any of the
representations, warranties, covenants or agreements made on its part, the
Company shall pay to Trotter, within five business days following Trotter's
written request therefor, an amount equal to the sum of $2,000,000 plus all
actual out-of-pocket costs and expenses (not to exceed $250,000 in the
aggregate) incurred by Trotter through the date of termination in connection
with the Merger Agreement and the transactions contemplated thereby.
FEES AND EXPENSES
Each of the Company, Merger Sub and Trotter has agreed to bear its own
expenses in connection with the Merger, except all out-of-pocket printing and
solicitation costs in connection with this Proxy Statement shall be shared
equally by the Company and Trotter.
MODIFICATION OR AMENDMENT
The Merger Agreement may be amended by the Boards of Directors of the
parties thereto, at any time before or after approval by the shareholders of the
Company and Trotter and prior to the Effective Time, but after such approvals,
no such amendment shall (i) alter or change the amount or kind of shares, rights
or any of the proceedings of the treatment of shares under the Merger Agreement
or (ii) alter or change any of the terms and conditions of the Merger Agreement
if any of the alterations or changes, alone or in the aggregate, would
materially adversely affect the rights of holders of Company Common Stock or
Trotter Common Stock, except for alterations or changes that could otherwise be
adopted by the Board of Directors of the Company, without the further approval
of such shareholders, as applicable. The Merger Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
thereto.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE COMPANY
On April 3, 1996, the Company completed the sale of substantially all the
assets of its Lumex Division for $40,750,000 in cash. Accordingly, the results
of operations of the Lumex Division have been reflected as discontinued
operations.
The following discussion regarding results of operations, including
statistics presented, refers solely to continuing operations unless otherwise
stated.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data from the Company Selected Consolidated Financial Data presented
as both a percentage of net sales and as a percentage change from the prior
year:
<TABLE>
<CAPTION>
% INCREASE
(DECREASE)
-------------
1995 1996
VS. VS.
1994 1995 1996 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 7.1% 7.0%
Cost of sales................................ 59.3 63.5 60.0 14.8 1.0
----- ----- -----
Gross profit................................. 40.7 36.5 40.0 (4.0) 17.4
Selling, general and administrative
expenses................................... 40.4 55.5 40.5 47.1 (21.8)
----- ----- -----
Operating income (loss)...................... .3 (19.0) (0.5) * *
Interest expense............................. (1.6) (2.3) (1.1) 50.7 (48.8)
Interest income.............................. 2.9 2.1 0.8 (22.8) (58.9)
Loss from joint venture...................... -- -- (0.2) * *
----- ----- -----
Income (loss) from continuing operations
before income taxes........................ 1.6% (19.2)% (1.0)% * *
----- ----- -----
----- ----- -----
</TABLE>
- ------------------
* Not meaningful
The reported results of operations for the years ended December 31, 1995
and 1996 were significantly affected by nonrecurring and certain infrequent
charges of $10.2 million and $2.2 million, respectively. Of such charges $7.4
million was unexpended and remained in reserves at December 31, 1995 and $5.5
million was unexpended at December 31, 1996, which is expected to be fully
utilized in 1997. See Note C to the Consolidated Financial Statements for
further information.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Continuing operations in 1996 resulted in a loss of $835,000, compared to a
loss of $11,116,000 in 1995. Included in these results were $2.2 million and
$10.2 million of one-time and nonrecurring charges in 1996 and 1995,
respectively, which have been reflected in selling, general and administrative
expenses, except for $2.3 million of the 1995 charges which have been reflected
in cost of sales.
Net sales increased 7.0% in 1996, to $80,711,000, as compared to
$75,448,000 in 1995. Excluding shipments of consumer fitness equipment phased
out in December 1995, net sales increased 11.6%.
Shipments of the Company's institutional strength products grew 18%, fueled
by the continued strong growth of the VR2, the Company's second generation
variable resistance weight training machines; plate loaded; and free weight
product lines. Shipments of cardiovascular products grew 5%, as the growth in
the institutional treadmill line more than offset lower shipments of the Bike
and the Semi.
Sales to the domestic rehabilitation market were flat compared to the prior
year as the strong growth in shipments of both strength and cardiovascular
fitness products to this market offset the continued decline in
40
<PAGE>
shipments of isokinetic rehabilitation products. The decline in isokinetic
rehabilitation product shipments resulted from the impact of less selling
activity from a consolidated sales force, national healthcare reimbursement
issues and the continued emphasis on managed care.
International sales rose 20.5% as strong growth in shipments of both
strength and cardiovascular products more than offset a small decline in
shipments of isokinetic rehabilitation products.
Cost of sales as a percentage of sales improved to 60% in 1996, as compared
to 63.5% in 1995 largely due to $2.3 million in nonrecurring charges recorded in
1995 for phasing down production of unprofitable or older product lines.
Excluding the nonrecurring charges recorded in 1995 cost of sales as a
percentage of sales improved slightly in 1996 resulting primarily from a more
favorable product mix and increased production efficiencies for products
introduced in the prior year, offset by the impact of increased international
shipments which have lower margins.
Selling, general and administrative ('SG&A') expenses were $9,125,000 lower
in 1996 compared to 1995. Excluding nonrecurring and one-time charges of
$7,900,000 in 1995 and $2,200,000 in 1996, SG&A expenses were $3.4 million lower
in 1996 as compared to 1995, despite higher sales levels. These expense
reductions were largely attributable to the restructuring plan initiated in the
fourth quarter of 1995 which included, among other things, the consolidation of
the separate fitness and rehabilitation sales forces, the realignment of the
customer service department, the phase out of consumer fitness products and the
reduction in the general workforce.
Included as part of the nonrecurring and one-time charges recorded in 1996
were the following:
o $540,000 of incremental costs incurred for the prospective merger
with Trotter Inc.
o $900,000 of expenses related to the closing of the Company's
Woodinville manufacturing facility and phase out of the consumer
fitness product line.
o $380,000 of costs related to the relocation of the Company's head
offices to Colorado.
o $380,000 of other expenses, including consulting fees paid related
to the completion of the first phase of the Company's overall
systems upgrade project.
Product development expenses, included in SG&A expenses, were $4.0 million
in 1996, approximately $1.0 million lower than the prior year, the result of
workforce reductions after the completion in 1995 of the CYBEX Norm and VR2
product lines.
Interest expense was $841,000, or 48.8% lower in 1996 as compared to 1995
primarily due to lower average outstanding balances as the Company repaid $28
million of borrowings in April 1996 from proceeds received from the sale of the
Lumex Division.
Interest income declined $932,000, or 58.9%, in 1996 as compared to 1995
due to lower average outstanding balances held in the Company's lease receivable
portfolio.
The Company has recorded refundable taxes of $2,718,000 resulting from net
operating losses incurred in 1995 and 1996. The Company has significant
carryforward tax losses and has not recorded any additional tax benefit for
financial statement purposes.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Continuing operations in 1995 resulted in a net loss of $11,116,000,
compared to net income in the prior year of $993,000. The loss is attributable
primarily to non-recurring charges in 1995, which have been reflected in
selling, general and administrative expense.
Net sales increased 7.1%, to $75,448,000 in 1995, as compared to
$70,420,000 in 1994. Sales to the domestic institutional fitness market grew
more than 11% in 1995 as compared to 1994, fueled by the introduction of VR2,
its second generation variable resistance weight training machines, and
continued strong growth of the CYBEX Plate Loaded Series, introduced in 1994.
Sales of cardiovascular products were lower in 1995 as severe competitive
pricing practices impacted shipments of THE BIKE and THE SEMI, more than
offsetting sales of the new Q45 institutional treadmill.
41
<PAGE>
Sales to the domestic rehabilitation market were 17% lower in 1995 as the
market continued to constrict due to the impact of national healthcare
reimbursement issues and the continued emphasis on managed care. During 1995,
the Company introduced NORM, its lower-priced, latest generation extremity
testing and rehabilitation system designed to provide clinicians a comprehensive
rehabilitation program with instant access to one of the world's largest on-line
isokinetic normative databases.
International sales grew 27.8% as product shipments increased significantly
into both the rehabilitation and institutional fitness market segments.
Cost of sales increased to 63.5% of sales in 1995 from 59.3% of sales in
1994 largely the result of recording $2.3 million in nonrecurring charges for
phasing down production of unprofitable or older product lines. Excluding
nonrecurring charges cost of sales increased to 60.5% of sales in 1995 as the
benefits of increased production volume and product mix were more than offset by
start up manufacturing costs for new products, higher raw material costs and a
larger proportion of shipments being made to the international market where
product pricing is lower.
Selling, general and administrative costs rose 47.1%, to $41,843,000 in
1995 as compared to $28,440,000 in 1994, due in large part to the nonrecurring
charges recorded in the fourth quarter of 1995 of approximately $5.9 million and
additional one-time charges of approximately $2.0 million recorded earlier in
the year. Included as part of the nonrecurring charges recorded in the fourth
quarter were the following:
o $2.3 million of costs related to the consolidation of the Company's
sales forces and elimination of approximately 75 sales,
administrative and engineering positions;
o $.7 million of expenses for warranty costs related to certain older
product lines;
o $1.3 million of costs related to contractual obligations and
settlements;
o $1.6 million of other expenses related to realignment of the CYBEX
business.
One-time charges incurred earlier in 1995 included a $750,000 settlement to
a contractual dispute, approximately $700,000 in severance and paid recruitment
costs for senior executive management changes, and professional fees for
corporate services provided exceeding $550,000.
Product development expenses included as a part of selling, general and
administrative expenses increased 24.4% or $993,000, to $5,058,000 in 1995 due
to planned increases in spending to accelerate the development and introduction
during 1995 of major new products including the VR2 product line, NORM and the
Q45 institutional treadmill.
Selling, general and administrative costs in 1995 also included increased
costs in the expansion of international markets, the amortization of rights and
licenses acquired in 1995, higher shipping costs and were further impacted by
favorable experience in self-insurance reserves in 1994 not repeated in 1995.
Interest expense rose to $1,723,000 in 1995 compared to $1,143,000 in 1994
principally due to increased borrowings.
Interest income was 22.8% lower in 1995 than 1994 due to lower average
balances held in the Company's lease portfolio as the Company regularly sold
portions of its portfolio to provide continued funding for its leasing
activities.
The effective tax benefit rate for continuing operations in 1995 was 23.1%,
the result of a deferred tax valuation allowance of $2,698,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's working capital was approximately $24.6
million, including cash and cash equivalents of $7.1 million; its current ratio
was 2.0 to 1; and total long-term borrowings were less than $5.8 million. The
Company's financial condition was improved by the sale of the Lumex Division,
completed on April 3, 1996, for $40.75 million in cash.
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Cash used in operating activities in 1996 was $12.2 million. Cash used in
operating activities from continuing operations in 1996 was $8.3 million.
Excluding the impact of the leasing activities of CFC and payments made related
to $8.2 million of nonrecurring charges recorded in the fourth quarter of 1995,
the continuing operations provided $4.5 million of cash. The Company's lease
financing programs for customers resulted in $9.7 million of new leases being
written during 1996, which have been or are expected to be refinanced through
periodic sales of bundled leases to third party financial institutions. Proceeds
received from the sales of the leases are included in financing activities
discussed below. During 1996, the Company also made payments totaling more than
$3.1 million related to nonrecurring charges. Cash was generated from improved
asset management, including a $1.9 million reduction in trade receivables and a
$2.1 million reduction in inventories.
In 1995, cash used in operating activities was $18.5 million. Cash used in
operating activities from continuing operations, was $18.1 million. Excluding
the impact of the leasing activities and payments made for nonrecurring charges,
the continuing operations used $8.4 million of cash, primarily resulting from a
$5.7 million increase in trade receivables from strong fourth quarter shipments
and an increase of $2.6 million in inventories related to new products
introduced in 1995. Cash used for new leases written in 1995 was $9.2 million
and payments for nonrecurring charges totaled $500,000.
Cash provided by investing activities in 1996 was $37.8 million principally
resulting from the sale of the Lumex Division in April, 1996. Cash used in
investing activities in 1995 was $13.4 million, the result of capital
expenditures and the purchase of certain licenses and rights.
Capital expenditures, principally funded from operations and long-term
debt, were $3,614,000, $9,593,000 and $1,061,000 in 1994, 1995 and 1996,
respectively.
Cash used in financing activities was $20.3 million in 1996, reflecting the
net effect of the repayment of $30 million of short and long-term debt from the
proceeds from the sale of the Lumex Division and the proceeds received from
sales of lease receivables of $7.0 million and $2.5 million of a term loan
secured by lease receivables. In 1995, financing activities provided $24.0
million in cash principally from $15.7 million of net short and long-term
borrowings and $8.3 million from the sale of leases.
The Company sells portions of its lease portfolio under several different
limited or full recourse programs. Leases are secured by the equipment sold as
well as personal guarantees and often require cash down payments. These
provisions, combined with the Company's ability to refurbish and re-market
returned equipment, have effectively limited the Company's exposure to losses on
lease defaults. Losses under these programs were not significant during the past
three years.
At December 31, 1996, the Company's long-term debt represented 6% of total
equity. The Company has a $5 million bank line of credit under which, subsequent
to the sale of the Lumex Division, there have been no outstanding borrowings.
Management expects the cash flow generated from its operations and the sale of
its Ronkonkoma, New York manufacturing facility, together with vendor financing
available for capital equipment purchases, will be sufficient to meet its
capital expenditure requirements (including $900,000 for a new powder coating
system) and working capital needs, including the balance of payments of
approximately $1.8 million, related to nonrecurring and one-time charges. CFC,
the Company's finance subsidiary, is expected to support its operations through
periodic sales of its lease portfolios to third party financial institutions.
The sale of leases have varying recourse provisions and at December 31, 1996,
the maximum contingent liability under such provisions was $9.2 million.
The merger requires the consents of Trotter and Company lenders and will
result in the Company and Trotter not being in compliance with certain financial
ratios and certain other restrictive covenants of their long-term debt
agreements and credit facilities. In addition, the ongoing operations of CYBEX
Financial Corp. require arrangements with third party financial institutions to
provide funding to support its leasing programs.
The Company and Trotter believe they will be successful in obtaining the
necessary waivers and consents from their lending institutions and in securing
commitments from other financial institutions to continue to participate in
purchasing portions of the Company's lease receivables. If such waivers and
arrangements are not obtained, the Company and Trotter believe that other
sources of financing will be available to support the needs of the combined
operations.
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INFORMATION CONCERNING THE COMPANY
GENERAL
The Company designs, develops, manufactures and sells/distributes strength
training and cardiovascular exercise equipment used in fitness conditioning,
sports medicine and rehabilitation. These products are marketed under a number
of trademarks leading with the name CYBEX(Registered). The Company operates in
one industry segment, the exercise equipment industry, which includes
institutional fitness facilities, sports teams, research/educational centers,
hospitals, private practice physical therapy clinics and rehabilitation centers.
The Company's revenues, and total assets as of and for the year ended December
31, 1996 represent 63% and 76% of the combined revenues and assets,
respectively. For the year ended December 31, 1996, the Company had a net loss
from continuing operations of $835,000 as compared to the combined pro forma net
income of $2,264,000.
On April 3, 1996, the Company sold substantially all of the assets of its
Lumex Division business, as more fully described below under the caption
'Restructuring Plan.'
The Company has a wholly owned finance subsidiary, CYBEX Financial Corp.
('CFC'), which provides capital equipment financing for CYBEX products primarily
to its domestic customer base. CFC is operated as a separate business unit with
separate profit and loss responsibilities.
RESTRUCTURING PLAN
In December 1995, the Board of Directors of the Company announced a
strategic plan to restructure the Company's operations which included the
decision to sell the Lumex Division business. The Lumex Division had been
engaged in the healthcare industry for 49 years designing, manufacturing and
marketing a wide range of specialty patient seating, bath safety products,
mobility products and therapeutic support systems for use by patients at home
and in health care facilities such as hospitals and nursing homes.
On April 3, 1996, the Company completed the sale of substantially all the
assets of its Lumex Division to Fuqua Enterprises, Inc. ('Fuqua') for
$40,750,000 in cash. Accordingly, the Company has reflected the results of
operations of the Lumex Division as Discontinued Operations for financial
statement purposes for all years presented, as further described in Note B to
the accompanying consolidated financial statements.
The asset sale agreement with Fuqua contains representations, warranties,
covenants and indemnification provisions of the Company customary for
transactions of this type. The representations, warranties and covenants of all
parties to the agreement generally survive for one year after the date of
closing. The agreement also provides for a post-closing adjustment to the sales
price based on the change in the net assets of the Lumex Division from December
31, 1995, through the closing date. The Company has received notice from Fuqua
that Fuqua believes the stated amount of the net assets of the Lumex Division as
of the closing date are overstated by $9.3 million. The Company has determined
to proceed to arbitration to resolve parts of this dispute. An initial
submission to the arbitrator was made by Fuqua in March 1997. The Company has
applied to the New York County Supreme Court for a determination of the scope of
the arbitration clause contained in the purchase price provision of the asset
sale agreement. On April 18, 1997, the court issued an interim stay of the
arbitration proceedings pending a hearing of the Company's application. The
Company intends to make its initial submission to the arbitrator after a
decision by the court. Fuqua has also notified the Company of claims for
breaches of certain of the Company's representations and warranties in the asset
sale agreement involving substantially the same matters submitted to the
arbitrator. The Company recorded a $4.0 million charge to discontinued
operations in 1996 ($3.6 million in the fourth quarter) representing a change in
its estimated loss on the sale of the Lumex Division including accruals for
professional fees and other expenses.
In connection with the December 1995 restructuring announcement, the
Company also initiated a plan to restructure its remaining CYBEX operations to
improve manufacturing processes, increase productivity and competitiveness and
sharply reduce operating expenses. As part of its efforts to reduce operating
costs the Company consolidated its separate rehabilitation and fitness sales
forces into one combined group, phased down production and servicing of
unprofitable product lines and eliminated approximately 75 sales, administrative
and engineering positions. The Company recorded a 1995 fourth quarter charge to
earnings of approximately $8.2 million before taxes which charges included,
among other items, severance payments related to
44
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organizational restructuring of the CYBEX business and the writedown of
inventories specific to its older rehabilitation products. (See Note C to the
consolidated financial statements.)
PRODUCTS
The Company develops, manufactures, distributes and services fitness and
rehabilitation equipment. These products can generally be grouped into three
major categories: strength systems; cardiovascular products; and testing and
rehabilitation products.
The contribution to net sales of the Company's three product lines over the
past three years is as follows (dollars in millions):
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ---------------- ----------------
NET NET NET
SALES PERCENT SALES PERCENT SALES PERCENT
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Strength Systems................... $39.8 57% $44.7 59% $51.5 64%
Cardiovascular Products............ 14.9 21 16.5 22 16.4 20
Testing and Rehabilitation
Products......................... 15.7 22 14.2 19 12.8 16
----- ------- ----- ------- ----- -------
Total Sales...................... $70.4 100% $75.4 100% $80.7 100%
----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- -------
</TABLE>
Strength Systems. The Company manufactures variable resistance weight
training machines marketed under the trademark 'CYBEX Strength Systems'
(previously as 'Eagle Fitness Systems by CYBEX'). The Company entered the
strength training market in 1983 with its acquisition of Eagle Performance
Systems, Inc., and has expanded the number of variable resistance machines since
then from 12 to 29. Each machine exercises a major muscle group in relative
isolation, and features adjustable seats and pads, utilizes aircraft cable to
provide a smooth and quiet low maintenance operation, weight selection
adjustments that are accessible from the exercise position and design
configurations that maximize the use of floor space.
In 1989, the Company introduced a free-weight product line of 17 benches
and stations. Since then, the free-weight product line has been expanded to 43.
The free-weight line is complemented by a line of barbells and plates.
In 1990, CYBEX Strength Systems was expanded to include the CYBEX 'Modular
Systems.' This product line, while inheriting the advanced design and high
performance features of the Cybex variable resistance and free weight strength
systems, introduced a revolutionary concept to the multi-gym field. Each Modular
System may be configured to accommodate up to eight stations, including four
selectorized weight and four body weight stations, from 25 available work
stations all utilizing a fraction of the space that individual weight stations
would require. The CYBEX 'Tandem System' integrates two Modular Systems in a
back-to-back format to create a circuit or expand a strength training area in a
space-efficient manner.
The CYBEX Plate Loaded Series was introduced in 1994. Designed to combine
the controlled resistance profile, convenience and safety of a variable
resistance machine, it preserves the natural feel of free weights for people
accustomed to working out with free weights while providing for low maintenance
and a smaller space commitment for gym owners. This product line now includes 20
different machines.
In 1995, the Company introduced its VR2 second generation variable
resistance weight training machines which included the unique patented Dual Axis
Technology. Using this technology the exercise movement is defined by the user,
rather than by the machine. Resistance is applied to the targeted muscle groups
from two directions simultaneously, providing an increased exercise intensity,
while retaining a biomechanically correct arc of movement. The Cybex VR2
equipment offers a more attractive appearance, greater ease of use and
additional safety features, such as the weight stack guard and locking aircraft
pin. Cybex VR2 provides for a natural complement to the original Cybex VR
Classic line. During 1996, the number of VR2 machines was expanded from 12 to
19.
In April, 1997, the Company plans to introduce a new 15 piece line of
variable resistance weight training machines with shipments beginning in May.
The New VR (also referred to internally as Metric) will be the natural successor
to most of the units in CYBEX VR Classic line. The New VR is value engineered
based on the
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<PAGE>
experience gained most recently in the development of VR2 providing our
customers with a high-quality competitively-priced line with CYBEX signature
feel and biomechanical correctness.
Cardiovascular Products. In 1992, the Company introduced THE BIKE, a cycle
ergometer. THE BIKE was designed by integrating the most popular features that
were identified by customer focus groups. These features include a
biomechanically contoured design, numerous pre-programmed operating modes and
profiles, as well as a durable structural steel frame and multi-position handle
bars. A year later the Company expanded its offering of cardiovascular products
to include THE SEMI. THE SEMI is a semi-recumbent cycle ergometer that
incorporates the same features as THE BIKE and is designed to complement THE
BIKE in both function and appearance. In April 1997, the Company will introduce
both standard and 'elite' models of a new low-cost Bike with shipments scheduled
to begin in June. This new Bike will be structured to provide competitive price
points and favorable margins. The standard model will incorporate specially
designed features which emphasize the three major points of contact--the hands,
feet and seat. The elite model will include heart rate, increased programming
and the capability for RS232 ports and cardio-theater linking.
In 1995, the Company continued expanding its line of cardiovascular
products to include THE MILL, a treadmill featuring the exclusive CYBEX
Controlled Impact System. The Controlled Impact System allows the user to select
from nine different settings the firmness of the deck surface in response to
their stride, weight and level of fitness. Other features include a computerized
control panel, manual or pre-set workout profiles, inclines up to 15% and speeds
from 1.0 to 12.0 mph. THE MILL is designed to provide a natural complement to
the CYBEX family of cardiovascular products.
Fastex. In 1994, the Company acquired the exclusive worldwide rights to
distribute FASTEX, a functional activity system for testing and exercise for use
in the rehabilitation and commercial fitness markets. The FASTEX patented
computer-guided, force measuring floor permits clinicians to objectively
identify and quantify a patient's functional weaknesses or limitations. FASTEX
can then be used as an exercise and training system to strengthen and improve
the deficit while documenting the patient's progress through a series of
computer prompted exercises created by the clinician to improve strength,
stability, reaction time and patient confidence.
Testing and Rehabilitation Products. In 1995, the Company introduced NORM,
its latest generation extremity testing and rehabilitation system. This testing
and rehabilitation product utilizes isokinetic resistance to provide accurate
and reproducible measurement of dynamic performance and functional capability.
Isokinetic resistance is an automatically accommodating resistance which varies
in opposition to the amount of force applied against it. NORM, which stands for
Normative Outcomes for Rehabilitation Management, provides clinicians with
instant access to the world's largest on-line isokinetic normative database
which provides immediate objective documentation to assess patient needs. As
with earlier generations of CYBEX testing and rehabilitation products, NORM
provides clinicians with isokinetic concentric resistance, eccentric loading and
continuous passive motion (CPM). These features, along with its twenty three
standard set up patterns, compact design and windows-based software, enable
clinicians to provide a comprehensive rehabilitation program at lower cost while
opening up new markets through pre-placement screenings, return to work
evaluations and worker compensation assessments.
As part of its strategic planning process, the Company is evaluating its
isokinetic rehabilitation product line. Alternatives include relocating,
downsizing, selling or merging this product line. The Company's isokinetic
products, sold principally to private practice physical therapists, sports
medicine facilities and hospitals, have come under severe pressure in recent
years primarily due to changes in the U.S. healthcare reimbursement system.
PRODUCT DEVELOPMENT
The Company employed 26 persons as part of its New Product Development
Group at December 31, 1996, to improve existing products and develop new
designs. This group has expertise in mechanical and electrical design,
isokinetic technology, computer applications, software design and development,
and application and integration of sophisticated technology to functional
biomechanics.
The Company also uses independent health care professionals and works
closely with university researchers to review the Company's designs and test new
products.
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The cost of the Company's product development activities, including
salaries and employee benefits, materials used and allocated facility expenses,
amounted to $4,065,000 in 1994, $5,058,000 in 1995 and $3,990,000 in 1996.
Product development costs are expensed as incurred. Product development
activities will continue to be a significant factor in the Company's long-term
growth.
MARKETING, SALES AND SERVICES
The Company's institutional fitness and rehabilitation products are
marketed in the United States through 19 sales representatives and five
independent sales agents supported by two directors of sales and two sales
managers. Sales are made directly to users such as professional sports teams,
university physical education and physiology departments, gym owners, health
clubs, orthopedic surgeons, hospital physical therapy departments, private
practice physical therapists, sports medicine clinics, medical research
laboratories and individuals.
International markets are served by an in-house staff of 11 people who
coordinate the efforts of 60 worldwide distributors. To coordinate, expand and
improve its sales and servicing efforts in Europe, including Russia, Africa and
the Middle East, the Company entered into a joint venture agreement to form a
new company, CYBEX Forza International, Ltd. The joint venture is 50% owned by
the Company and 50% owned by The Forza Group Ltd. ('Forza'), the Company's
distributor in the United Kingdom. Under the terms of the agreement the Company
sells its products to the joint venture on a cost-plus basis while Forza will
manage the sales, marketing and administrative efforts of the joint venture. The
new venture will also pursue selective European based manufacturing
opportunities. In addition to the Company's products, the joint venture will
distribute other notable fitness products including, but not limited to, Cross
Conditioning, The Step Company, Quinton, Tectrix and Reebok fitness products
(U.K.). Both Forza and the Company will share equally in the net profits of the
joint venture. The Company, Trotter and Forza have entered into a term sheet
which provides that, as of the consummation of the Merger, the existing joint
venture arrangement will be terminated and replaced by a new agreement with
Forza with different transfer pricing, terms and geography. Currently, it is
unclear whether definitive agreements incorporating the understandings set forth
in the term sheet will be entered into by the parties. In the event that
definitive documentation is not entered into by the parties, Trotter has advised
the Company that Trotter intends to take all actions available to it to enforce
the term sheet or otherwise limit the joint venture arrangement.
Early in 1993 the Company formed a subsidiary, Cybex Fitness Gerate
Vertrieb GmbH, to exclusively handle the German fitness market, and also opened
an office in Japan to address the growing needs of the Asia-Pacific markets.
The Company contracts with independent licensed physical therapists who
provide on-site training to customers on equipment use and clinical
applications. They also assist with marketing efforts and provide design and
operational feedback to management as to the actual field performance of new
products and accessories.
Through a third party service provider, the Company offers customer
installations, emergency service, preventative maintenance and extended warranty
contracts throughout the United States.
The Company's products have frequently been used by university and medical
research facilities for testing and measurement of protocols. Published results
of accredited research, now totaling over 1,000 independent articles, are made
available to customers, attesting to the accuracy, effectiveness, validity and
reproducibility of the results of the Company's products.
The Company's product lines are advertised in trade and professional
journals and are supported by extensive literature, public service booklets and
audio-visual presentations, which are developed and prepared by the Company's
marketing and support staff. Cybex products are also shown at numerous trade
shows, exhibits and seminars.
The Company offers lease financing for its products to its customers
through CFC, its wholly-owned finance subsidiary. The Company periodically
enters into agreements to sell lease receivables to financial institutions to
provide continuous funding for its leasing programs.
Export sales for the three years ended December 31, 1994, 1995 and 1996,
were approximately $16,880,000, $21,585,000, and $26,017,000, respectively. No
single geographic area outside of the United States was material
47
<PAGE>
relative to consolidated sales, operating profits or identifiable assets. Export
sales of the Company are subject to normal risks, such as protective tariffs and
export/import controls. However, since the majority of these sales are to
countries with stable political environments and payments are made in U.S.
dollars, the Company believes such political and foreign exchange risks are
minimal.
MANUFACTURING AND SOURCES OF SUPPLY
The Company's manufacturing techniques make use of metal fabrication,
electronic processes, hardware and software integration. Raw materials and
purchased components are comprised primarily of aluminum and steel tubing,
hydraulic and electronic components, precision parts, milled products and
upholstery. These materials are machined, welded, finished, upholstered and
assembled to create finished products. Circuit boards for computerized controls
are also assembled in-house.
The Company purchases its raw materials from numerous suppliers and has not
had any difficulties in obtaining any components or raw materials. Management
believes alternative sources of supply are readily available for almost all
necessary raw materials. Therefore, the Company has not historically entered
into any long-term contracts with suppliers. While the Company does enter into
volume-based contract arrangements for the supply of certain hardware and
software used in its principal products, management believes alternative sources
could be found for these materials, if necessary.
Generally, the Company does not consider its backlog to be a significant
factor in its operations.
PATENTS AND LICENSES
The Company continuously focuses its efforts towards improving existing
products and developing new designs and technology. As these improvements and
designs are developed, the Company regularly files for exclusive patent
applications both domestically and internationally. When necessary, the Company
will protect its patents and patent rights through legal recourse. Nevertheless,
the Company does not believe that patent protection or the expiration of a
patent will have a significant impact on its operations. The Company believes
that its position in the exercise equipment industry depends on its expertise in
designing, engineering, production and marketing skills achieved through 26
years of experience.
COMPETITION
The Company's Strength Systems product line has extensive competition from
other companies selling commercial weight training and exercise equipment.
However, the Company continues to be a leading manufacturer of strength systems
and has the resources to continue increasing market share through its emphasis
on product development and marketing.
Cybex Cardiovascular Systems have extensive competition from other
companies who have much larger market share positions than Cybex in this product
category and who sell into both commercial fitness and rehabilitation markets.
The Company believes its leadership positions and future growth is largely
dependent upon new product innovation, product quality, diversity of features,
customer service and pricing. No single customer accounted for more than 10% of
net sales in 1994, 1995 or 1996.
GOVERNMENTAL REGULATION
The 'Good Manufacturing Practices for Medical Devices' of the Food and Drug
Administration (the 'FDA') sets forth standards for the Company's manufacturing
processes, which require the maintenance of certain records and provide for
unscheduled inspections of the Company's facilities. In addition, the Company
has instituted systems and procedures relative to the Medical Device Reporting
(MDR) rule implemented by the FDA in December 1984. This rule requires a device
manufacturer to report to the FDA when it becomes aware that one of its devices
may have caused or contributed to a death or serious injury. State, local and
foreign governments have also adopted regulations relating to the manufacture
and marketing of medical health care products. The Company believes that it is
presently in material compliance with all applicable regulations.
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The Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act and regulations issued or proposed thereunder, provide for
regulation by the FDA of the manufacture of medical devices, including most of
the Company's products. These regulations include requirements that owners and
operators of establishments engaged in the manufacture of medical devices must
register with the FDA and furnish lists, updated periodically, of devices
manufactured by them. There are also certain requirements of state, local and
foreign governments which must be complied with in the manufacture and marketing
of the Company's products. To date, the Company has not experienced any
significant difficulty in complying with the requirements imposed upon it by the
FDA or other government agencies.
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 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. There can be no assurance that the
Company will not incur significant costs in the future for environmental
compliance.
ASSOCIATES
The Company employed 573 associates as of December 31, 1996, of whom 437
are engaged in various manufacturing, quality control, engineering, research and
development, shipping and warehousing operations. There are 136 associates
engaged in administration, marketing and sales. Approximately 47 of the
associates who are directly engaged in manufacturing and other production at the
Company's Ronkonkoma facility are covered by a collective bargaining agreement
which expires in 1999.
RECENT DEVELOPMENTS
Sale of Ronkonkoma, New York Facility
The Company has signed an agreement to sell its manufacturing, warehouse
and office facility located in Ronkonkoma, New York for $4.5 million. The
facility is subject to an industrial revenue bond with an outstanding principal
balance of $615,000. The sale of this facility is expected to be finalized in
the second quarter of 1997 and result in a gain for financial statement
purposes. The Company plans on moving its Ronkonkoma operations, including
manufacturing, to a smaller leased facility in the same geographic area.
Isokinetic Rehabilitation Product Line
As part of its strategic planning process, the Company is evaluating its
isokinetic rehabilitation product line. Potential alternatives including
relocating and continuing operations, downsizing, selling or merging this
product line. The Company's isokinetic products, sold principally to private
practice physical therapists, sports medicine facilities and hospitals, have
come under severe pressure in recent years primarily due to changes in the U.S.
healthcare reimbursement system.
European Joint Venture
In 1996, the Company entered into a joint venture agreement to form a new
company, CYBEX Forza International, Ltd., to coordinate, expand and improve its
sales and servicing efforts in Europe, as well as Russia, Africa and the Middle
East. The joint venture is equally owned by the Company and the Forza Group Ltd.
('Forza'), the Company's distributor in the United Kingdom. Under the terms of
the agreement, the Company sells its products to the joint venture on a
cost-plus basis while Forza will manage the sales, marketing and administrative
efforts of the joint venture. The new venture will also pursue selective
European based manufacturing opportunities. In addition to the Company's
products, the joint venture will distribute other notable fitness products,
including but not limited to CrossConditioning, The Step Company, Quinton,
Tectrix and Reebok fitness products (U.K.). Both Forza and the Company will
share in the net profits of the joint venture. The Company, Trotter and Forza
have entered into a term sheet which provides that, as of the consummation of
the Merger, the existing joint venture arrangement will be terminated and
replaced by a new agreement with Forza with different transfer pricing, terms
and geography. Currently, it is unclear whether definitive agreements
49
<PAGE>
incorporating the understandings set forth in the term sheet will be entered
into by the parties. In the event that definitive documentation is not entered
into by the parties, Trotter has advised the Company that Trotter intends to
take all actions available to it to enforce the term sheet or otherwise limit
the joint venture arrangement.
PROPERTIES
The following table describes the Company's major facilities:
<TABLE>
<CAPTION>
APPROXIMATE
AREA
LOCATION (SQ. FT) USE
- ----------------------------------- ----------- -------------------------------------------------------
<S> <C> <C>
Owned Facilities:
Ronkonkoma, New York............. 110,000 Executive offices, manufacturing and warehouse facility
Owatonna, Minnesota.............. 210,000 Offices, manufacturing and warehouse facility
Leased Facilities:
Woodinville, Washington.......... 30,270 Offices, manufacturing and warehouse facility
Colorado Springs, Colorado....... 27,000 Executive, sales and administrative offices
Colorado Springs, Colorado....... 3,700 Research and development
Limburgerhof, Germany............ 6,100 Sales and administration
</TABLE>
The Company has agreed to sell its Ronkonkoma, New York facility. See
'--Recent Developments' for additional information.
The Company closed its Woodinville, Washington facility in the first
quarter of 1997, transferring its treadmill manufacturing operations to another
facility. See Note C to the Company's consolidated financial statements for
additional information.
All 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 E to the Company's consolidated financial
statements.
LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings which in its
opinion are material to its financial condition.
As a manufacturer of fitness and rehabilitation 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.
The Company and Fuqua have disagreed with respect to certain proposed
adjustments to the purchase price in connection with the sale of the Lumex
Division and have determined to proceed to arbitration to resolve parts of this
dispute. An initial submission to the arbitrator was made by Fuqua in March
1997. The Company has applied to the New York County Supreme Court for a
determination of the scope of the arbitration clause contained in the purchase
price provision of the asset sale agreement. On April 18, 1997, the court issued
an interim stay of the arbitration proceedings pending a hearing of the
Company's application. The Company intends to make its initial submission to the
arbitrator after a decision by the court. Fuqua has also notified the Company of
claims for breaches of certain of the Company's representations and warranties
in the asset sale agreement involving substantially the same matters submitted
to the arbitrator. See '--Restructuring Plan.'
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MANAGEMENT OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
Board of Directors. The following table lists the name, age, principal
occupation and certain business experience of each of the current directors of
the Company, the year in which each director's term of office will expire and
the year in which each director was first elected as a director of the Company.
<TABLE>
<CAPTION>
AGE AT PRINCIPAL OCCUPATION YEAR FIRST
JANUARY 20, AND CERTAIN YEAR TERM BECAME
NAME 1997 BUSINESS EXPERIENCE WILL EXPIRE DIRECTOR
- ------------------------ ----------- ------------------------------------------------------------ ----------- ----------
<S> <C> <C> <C> <C>
Kay Knight Clarke....... 58 President, Templeton, Ltd., a management consulting company, 1997 1996
since July 1995. President, Micromarketing Division of
Advo, Inc., a direct marketing company, from December 1991
to July 1995. Senior Vice President of Business
Development, Advo, Inc., from October 1990 to December
1991. Director, Guardian Life Insurance Corporation of
America (a mutual insurance company) and The Providence
Journal Co.
J. Raymond Elliott...... 47 President and Chief Executive Officer of the Company since 1999 1995
September 1, 1995. Chairman and Chief Executive Officer,
Cablecom, a cable wire and communications company, from
January 1995 to September 1995. President and Chief
Executive Officer, J.R. Elliott Associates, a turnaround
and mergers and acquisitions consulting company, from
January 1994 to January 1995. President and Chief
Operating Officer, Southam Newspaper Group, a newspaper
publishing company, from November 1992 to January 1994.
Chairman and Chief Executive Officer, Southam/Dittler
Group, a consumer games and lottery company, from July
1992 to November 1992. Group President, Southam Graphics,
a graphics and publishing company, from January 1990 to
July 1992.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
AGE AT PRINCIPAL OCCUPATION YEAR FIRST
JANUARY 20, AND CERTAIN YEAR TERM BECAME
NAME 1997 BUSINESS EXPERIENCE WILL EXPIRE DIRECTOR
- ------------------------ ----------- ------------------------------------------------------------ ----------- ----------
<S> <C> <C> <C> <C>
Thomas W. Kahle......... 45 Partner, Graydon Head & Ritchey since 1980. Lead Director of 1999 1991
the Company from August 1994 to August 1995.
Robert R. McMillan...... 64 Partner, McMillan, Rather, Bennett & Rigano, P.C. since 1999 1987
January 1991. Previously counsel to Rivkin, Radler, Bayh,
Hart & Kremer from March 1990 to January 1991. Prior
thereto, partner, Rivkin, Radler, Dunne & Bayh from
January 1986 to September 1989. Director, Empire Blue
Cross Blue Shield.
Alan H. Weingarten...... 56 Alan H. Weingarten & Associates, Inc., consultant in general 1997 1987
management, marketing and product planning, since
September 1986. Director, Boca Raton Capital Corporation.
Carol G. Nelson......... 64 Chairman and Chief Executive Officer of Security Archives 1998 1983
Corporation, a business records storage and management
company, since September 1986.
John C. Spratt.......... 44 Chairman and Chief Executive Officer of Orthopaedic Health 1998 1990
Services, Inc., a health care management company
specializing in rehabilitation and occupational medicine
services, since May 1988. Partner in SCS Business
Development, a business development company, since May
1994. From 1985 to May 1988, President of Lumex Health
Services, Inc., formerly a subsidiary of the Company.
Chairman of the Board of the Company since August 1995.
</TABLE>
The Board of Directors currently has two vacancies. At the Effective Time,
J. Raymond Elliott, Carol G. Nelson and John C. Spratt will resign from the
Board of Directors of the Company and, concurrently therewith, John Aglialoro,
James Carll, Joan Carter, Arthur W. Hicks, Jr. and Jerry Lee will be appointed
to the Board of Directors of the Company. In addition, at the Effective Time,
Robert R. McMillan, a continuing director of the Company whose term expires in
1999, will transfer to the class of directors whose terms expire in 1998. See
'The Merger--Management of the Company After the Merger.'
52
<PAGE>
Executive Officers. The following table lists the name, age, present
position with the Company and certain business experience with respect to the
executive officers of the Company, other than Mr. Elliott who is listed in the
table above.
<TABLE>
<CAPTION>
AGE AT
JANUARY 20, PRESENT POSITION WITH THE COMPANY
NAME 1997 AND CERTAIN BUSINESS EXPERIENCE
- ------------------ ----------- ---------------------------------
<S> <C> <C>
Robert McNally.... 50 Senior Vice President--Finance
since June 1994. Vice President--
Finance from 1981 to June 1994.
Chief Financial Officer and
Secretary since 1981.
</TABLE>
At the Effective Time, Mr. Elliott shall resign as an executive officer of
the Company. See 'The Merger--Management of the Company After the Merger.'
Messrs. Elliott and McNally will also resign as Chairman and Director,
respectively, of Cybex Forza International (U.K.).
DIRECTOR COMPENSATION
The Company's compensation program for nonemployee directors during 1996
provided that each nonemployee director receive an annual retainer of $18,000 in
quarterly installments, seventy percent of which was paid in shares of Company
Common Stock (using the price per share on January 1 of such year) pursuant to
the Company's 1995 Stock Retainer Plan for Nonemployee Directors (the 'Retainer
Plan'). Directors also receive $1,000 per day for each Board meeting attended or
$500 for each telephone meeting. Directors who acted as a chairperson of a
committee generally received an annual fee of $3,200 while those who were
members of a committee (including the chairperson) generally received a fee of
$500 for each meeting of such committee attended in conjunction with a Board
meeting and a fee of $1,000 of each special meeting of such committee attended
not in conjunction with a Board meeting. During 1996 pursuant to the Retainer
Plan, all non-employee directors each received 1,344 shares of Company Common
Stock, which represented the stock component of their annual retainer. In
addition, in 1996, John C. Spratt, for serving as the Chairman of the Board
received 5,000 shares of Company Common Stock payable in four quarterly
installments, which were reissued out of treasury and not from the Retainer
Plan.
John C. Spratt received a payment of $250,000 in January 1997 for acting as
Chairman of the Board of Directors (such payments being for extraordinary
efforts in 1995 and 1996) and will receive a consulting fee of $20,000 per month
from January 1, 1997 through the Effective Time. Alan H. Weingarten and Thomas
W. Kahle received payments in January 1997 of $50,000 and $25,000, respectively.
Such payments were intended by the Board of Directors to recognize extraordinary
efforts on behalf of the Company during 1996.
Kay Knight Clarke received $3,438 as payment for acting as a marketing
consultant to the Company during 1996.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company held 15 meetings during 1996 and also
acted by unanimous written consent throughout the year.
In 1996, all of the incumbent directors attended 75% or more of their
respective Board and Committee meetings.
The Company has standing Audit, Compensation, and Director Affairs
Committees of the Board of Directors.
At the end of 1996, the Audit Committee consisted of Robert R. McMillan,
Carol G. Nelson and Alan H. Weingarten (Chairperson). The functions of the
Committee are to recommend to the Board of Directors the engagement and
discharge of the independent auditors for the Company, analyze the report of
such auditors, and make such recommendations to the Board with respect thereto
as such committee may deep advisable. The Committee held five meetings in 1996.
At the end of 1996, the Compensation Committee consisted of Thomas W.
Kahle, Alan H. Weingarten and Kay Knight Clarke (Chairperson). The function of
the Committee is to make recommendations to the Board of
53
<PAGE>
Directors concerning executive compensation and benefits policies for the
Company. The Committee also administers the Company's 1995 Omnibus Incentive
Plan and the Company's Amended and Restated 1987 Stock Option Plan. The
Committee held eight meetings during 1995.
At the end of 1996, the Director Affairs Committee consisted of Robert R.
McMillan, Carol G. Nelson (Chairperson), and Alan H. Weingarten. The Committee
investigates and reviews the qualifications of candidates to serve on the Board
of Directors and recommends nominees to the Board of Directors. During 1996, the
Director Affairs Committee held four meetings. In addition to its nominating
function, the Director Affairs Committee also evaluates the performance of the
Company's Chief Executive Officer, recommends committee selections to the Board
of Directors and evaluates and makes recommendations regarding the
administration of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thomas W. Kahle, a director of the Company, is a partner in the Cincinnati
law firm of Graydon Head & Ritchey, which is general counsel to Surgical
Appliance Industries, Inc., a 12.1% shareholder in the Company. See 'Ownership
of Company Common Stock by Certain Beneficial Owners and Management.' Mr. Kahle
disclaims any beneficial interest in the shares of the Company owned by Surgical
Appliance Industries, Inc.
Robert R. McMillan, a director of the Company, is a partner in the law firm
of McMillan, Rather, Bennett & Rigano, P.C., which was paid approximately
$110,000 by the Company for providing legal services during 1996.
54
<PAGE>
OWNERSHIP OF COMPANY COMMON STOCK BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
As of the close of business on the Record Date, the Company had outstanding
4,381,555 shares of Company Common Stock. At all meetings of shareholders,
holders of shares of Company Common Stock are entitled to one vote, exercisable
in person or by proxy, for each share held.
The following table sets forth information regarding the beneficial
ownership of Company Common Stock as of the Record Date by persons who
beneficially own 5% or more of the outstanding shares of Company Common Stock,
by each director and named executive officer and by all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
NAME OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OF CLASS
- ----------------------------------------- -------------------- --------
<S> <C> <C>
Surgical Appliance Industries, Inc. .... 529,600(2)(3) 12.1%
3960 Roslyn Drive
Cincinnati, Ohio 45209
Dimensional Fund Advisors Inc. ......... 281,400(2)(4) 6.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Kay Knight Clarke........................ 1,344(6) (5)
J. Raymond Elliott....................... 39,887(6)(8) (5)
Thomas W. Kahle.......................... 8,333(6) (5)
Robert R. McMillan....................... 4,532(6) (5)
Robert McNally........................... 55,150(6)(7)(8) 1.3%
Carol G. Nelson.......................... 39,332(6) (5)
John C. Spratt........................... 19,432(6)(9) (5)
Alan H. Weingarten....................... 6,332(6) (5)
All directors and executive officers as a
group (consisting of 8 persons).......... 174,342(6)(7)(8)(9) 3.9%
</TABLE>
- ------------------
(1) Unless otherwise indicated, beneficial owner's address is the Company's
address at 2100 Smithtown Avenue, Ronkonkoma, New York 11779.
(2) The information concerning Surgical Appliance Industries, Inc. and
Dimensional Fund Advisors Inc. was derived from public filings by those
companies with the Commission. The Company assumes no responsibility for the
accuracy of such information.
(3) The natural person exercising voting and investment power over such shares
is Thomas Applegate, President of Surgical Appliance Industries, Inc.
(4) Dimensional Fund Advisors Inc. ('Dimensional'), a registered investment
advisor, is deemed to have beneficial ownership of 281,400 shares of Company
Common Stock as of December 31, 1996, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and the DFA Participation
Group Trust, investment vehicles for qualified employee benefit plans, all
of which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares. Dimensional
has sole voting power for 163,300 shares of Company Common Stock and sole
investment power for 281,400 shares of Company Common Stock. The natural
person
(Footnotes continued on next page)
55
<PAGE>
(Footnotes continued from previous page)
exercising voting and investment power over such shares is Robert Deere,
Portfolio Manager of Dimensional.
(5) Constitutes less than one percent.
(6) Includes shares which the following persons have the right to acquire within
60 days through the exercise of stock options: Mr. Elliott, 6,250 shares;
Mr. Kahle, 2,000 shares; Mr. McMillan, 2,000 shares; Mr. McNally, 28,750
shares; Mr. Nelson, 2,000 shares; Mr. Spratt, 2,000 shares; Mr. Weingarten,
2,000 shares. The number of shares that all directors and executive officers
as a group have the right to acquire within 60 days is 45,000 shares of
Company Common Stock. In each case the percent of class is calculated on the
basis that such shares are deemed outstanding. No voting or investment power
exists with respect to such shares prior to acquisition.
(7) Includes shares which the following persons have allocated to them under the
CYBEX International, Inc. Employee Stock Ownership Plan: Mr. McNally, 1,237
shares; and all directors, nominees and executive officers as a group, 1,237
shares.
(8) Includes shares of restricted stock over which the following persons have
voting power but not investment power until such shares vest: Mr. Elliott,
20,000 shares and Mr. McNally, 3,031 shares.
(9) Includes 7,100 shares owned by Orthopaedic Health Services, Inc.
('Orthopaedic') and 200 shares owned by Orthopaedic's pension plan. Mr.
Spratt is the sole owner of Orthopaedic.
56
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors consists entirely of
non-management directors, and its primary function is to make recommendations to
the Board of Directors concerning executive compensation and benefits policies
for the Company. The Compensation Committee also administers the Company's
Amended and Restated 1987 Stock Option Plan and 1995 Omnibus Incentive Plan.
The Compensation Committee believes that the most effective compensation
program is one that provides executives with incentives to achieve both current
and long-term strategic business goals of the Company, with the ultimate
objective of enhancing shareholder value. Accordingly, the Company's executive
compensation programs are designed to:
o Motivate and challenge executive officers to achieve both annual and
long-term strategic business goals
o Align the interests of executive officers with the long-term interests of
shareholders
o Support an environment that rewards executive officers based on corporate
and individual performance
o Attract and retain executive officers critical to the long-term success
of the Company
The Company's compensation package for officers during 1996 consisted of
five basic elements: (1) base salary; (2) annual incentive compensation pursuant
to the Company's bonus incentive compensation program (the 'Bonus Program'); (3)
long-term incentives in the form of stock options granted pursuant to either the
Company's Amended and Restated 1987 Stock Option Plan (the '1987 Plan') and/or
the Company's 1995 Omnibus Incentive Plan (the 'Omnibus Plan'); (4) long term
incentives in the form of restricted stock grants pursuant to the Omnibus Plan;
and (5) retirement benefits pursuant to the Company's Savings and Investment
Plan and the Company's Employee Stock Ownership Plan, all of which are available
to all non-union employees of the Company. Other elements of compensation
include potential benefits under employment and severance agreements.
The Compensation Committee believes that linking a significant portion of
an executive's current and potential future net worth to the Company's success,
as reflected in the stock price, gives the executive a stake parallel to that of
the Company's other owners and results in long-term management for the benefit
of those owners. Consistent with this philosophy, the Company established in
1995 a Stock Ownership Requirements Policy (the 'Policy') for the Company's
executive officers and other key employees. The Policy establishes minimum
levels of stock ownership by the end of 1997 for the Company's executive
officers as follows: the Chief Executive Officer--stock having a value equal to
150% of base salary; and the Chief Financial Officer--75% of base salary. These
minimum levels double at the end of 1999. In keeping with this philosophy, it is
anticipated that a portion of the payment of incentive compensation will be made
in stock of the Company. The value of shares owned by an executive officer
(including shares of restricted stock granted under the Omnibus Plan, whether
vested or unvested) will be included in determining an officer's stock ownership
for purposes of the Policy, but the value of any shares subject to unexercised
stock options will not be counted. Executive officers and other employees
covered by the Policy who do not make a bona fide effort to comply with the
Policy may have future grants of stock options and restricted stock reduced or
eliminated.
Base salary compensation for executive officers was at above-average
industry levels in 1995, based on information regarding executive salary levels
for comparable companies available through various sources, including the Health
Industry Manufacturers Association. No adjustment in base salary has been made
since September 1995 for the executive officers, including Mr. Elliott, the
Chief Executive Officer.
Pursuant to the Bonus Program, officers and key employees may receive cash
bonuses based on the annual financial performance of the Company or on the
Company's overall performance. No executive officer received any compensation
under the Bonus Program for 1996, except Mr. Elliott who received a guaranteed
bonus of $70,000 pursuant to his employment agreement with the Company.
The Compensation Committee grants stock options to officers and other key
employees of the Company pursuant to either the 1987 Plan or the Omnibus Plan as
a means of confirming the identity of interests shared by the Company's
management and its other shareholders by compensating such key personnel based
on the
57
<PAGE>
appreciation of the Company's Common Stock over a period of time. During 1996,
no options were awarded to executive officers, including Mr. Elliott.
In 1995 the Company established the Omnibus Plan. The Compensation
Committee believes that the Omnibus Plan will assist in aligning the interests
of the Company's officers to those of its shareholders and in tying executive
compensation to increases in shareholder value. During 1996, no awards of stock
were made to any executive officer pursuant to the Omnibus Plan, including Mr.
Elliott.
In September 1995, the Company retained the services of Mr. Elliott, who
joined the Company as its President and Chief Executive Officer. The terms of
the Company's employment agreement with Mr. Elliott were negotiated by the
Compensation Committee. Mr. Elliott's base salary, annual incentive and
long-term incentive compensation are paid in accordance with this agreement. The
material terms of the employment agreement are summarized on pages 61 and 62.
See 'Executive Compensation--Employment and Severance Agreements'.
In 1995, in order to retain the continued services of Mr. McNally, a senior
vice president and the CFO of the Company, the Compensation Committee negotiated
an employment agreement with him. The terms of this employment agreement are
summarized in greater detail on page 62. See 'Executive Compensation--
Employment and Severance Agreements'. Mr. McNally's compensation pursuant to his
employment agreement includes: base salary and participation in the Bonus
Program. In June 1996, in connection with Mr. Mr. McNally's termination pursuant
to his employment agreement, the Company entered into a severance agreement with
him, which is summarized in greater detail on page 62. See 'Executive
Compensation--Employment and Severance Agreements'. Pursuant to the severance
agreement, the Company agreed to employ Mr. McNally under the same terms and
conditions as his current employment until March 31, 1997 (the 'Transitional
Period'). Following the Transitional Period, the Company agreed to pay him
severance for a period of 28 months. In addition, at the end of the Transitional
Period, the Company agreed to pay to him a supplemental severance bonus. In the
event of a 'change of control' (as defined in the severance agreement), all
payments under the severance agreement are accelerated. In return, Mr. McNally
agreed, among other things, to be available on a consulting basis, without
additional compensation, to assist in the Company's 1996 year-end audit of its
financial statements. In negotiating and reviewing the severance agreement, the
Committee considered various factors, including Mr. McNally's past contributions
to the Company and the Company's desire to retain the services of Mr. McNally as
the Company implements a strategic restructuring of its business.
The membership of the Compensation Committee changed during 1996, and,
therefore, not every person who served on the Committee during the year
participated in each of the matters described above.
Members of the Compensation Committee
(Serving at any time during 1996):
Kay Knight Clarke
Thomas W. Kahle
Carol G. Nelson
Alan H. Weingarten
58
<PAGE>
PERFORMANCE GRAPH OF THE COMPANY
The following graph compares the five-year cumulative total return (change
in stock price plus reinvested dividends) on the Common Stock with the total
returns of the American Stock Exchange Market Value Index, a broad market index
covering stocks listed on the American Stock Exchange, the Media General ('MG')
Medical Instruments and Supplies Group, a group encompassing approximately 327
companies and the companies in the Sporting and Athletic Goods industry (SIC
Code 3949), a group encompassing approximately 31 companies (the 'SIC Index').
The Company has selected the SIC Index this year in order to reflect the change
in its line of business following the sale of the Lumex Division in April 1996.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN OF
CYBEX INTERNATIONAL, INC., AMEX MARKET VALUE INDEX,
MG MEDICAL INSTRUMENTS AND SUPPLIES GROUP, AND THE SIC INDEX
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cybex International, Inc....... $100 $ 87.60 $ 62.02 $ 79.07 $ 58.14 $ 60.85
Amex Mkt. Value Index.......... 100 101.37 120.44 106.39 137.13 144.70
MG Med. Instr. & Supp. Group... 100 89.15 75.46 82.95 133.85 140.44
SIC Index...................... 100 91.28 136.05 141.07 126.98 124.29
</TABLE>
Assumes $100 invested on December 31, 1991 and dividends are reinvested.
Source: Media General Financial Services.
59
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information in respect of the compensation
for 1996, 1995, and 1994 of the persons who were, during 1996, the Chief
Executive Officer, and at the end of 1996, all other executive officers of the
Company (sometimes collectively referred to as the 'Named Executive Officers')
for services in all capacities to the Company and its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -----------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPEN- AWARD(S) OPTIONS COMPEN-
POSITION(S) YEAR SALARY BONUS(1) SATION ($)(2) (#) SATION(3)
- ------------------------------- ---- -------- -------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Raymond Elliott............. 1996 $300,000 $70,000 $130,630(7) $ 0 0 $ 6,402
President and Chief 1995 100,000 29,859(5) 472,500 25,000 0
Executive Officer (4)
Robert McNally................. 1996 189,000 0 0 0 0 7,787
Chief Financial Officer, Senior 1995 185,175 10,000 37,280 12,500 7,278
Vice President--Finance and 1994 175,000 12,442 12,500 7,688
Secretary (6)
</TABLE>
- ------------------------
(1) Annual bonus incentive compensation is based on performance in the year
shown but determined and paid in the following year.
(2) At December 31, 1996, Mr. Elliott and Mr. McNally held 20,000 and 3,031
shares of restricted stock having a value of $196,250 and $29,742,
respectively, based upon a closing price of $9 13/16 per share of Company
Common Stock on December 31, 1996 (the last day of trading in 1996). If cash
dividends are paid by the Company, holders of restricted stock are entitled
to receive such dividends whether or not the shares have vested. Included in
the awards to Mr. McNally is a restricted stock grant on August 8, 1995 of
2,000 shares, which vests in annual increments of 20% beginning one year
after date of grant. For a description of certain awards of restricted stock
made to Mr. Elliott, see 'Employment and Severance Agreements' below.
(3) 'All Other Compensation' for 1996 includes the following: (a) contributions
for Mr. McNally ($3,000) made by the Company under the Company's Savings and
Investment Plan, a defined contribution plan meeting the requirements of
Section 401(k) of the Internal Revenue Code of 1986, as amended (the
'Savings Plan'), to match 1996 pre-tax elective deferral contributions
(included under Salary) made to such plan; (b) contributions for Mr. Elliott
($2,880) and Mr. McNally ($2,961) made by the Company under the Savings
Plan's retirement feature whereby the Company contributes from its current
or accumulated earnings 2% (or such additional amount as the Company may
determine) of the eligible employees' aggregate annual compensation, which
amount is then allocated to eligible employees based on their proportionate
compensation for the plan year and their full years of service with the
Company; (c) the value of shares of Company Common Stock allocated in 1996
under the Company's Employee Stock Ownership Plan to Mr. McNally ($1,826);
and (d) for Mr. Elliott, automobile lease payments from August through
December 1996 ($3,522).
(4) Mr. Elliott joined the Company on September 1, 1995. His annual base salary
in 1995 was $300,000. Mr. Elliott has an employment agreement with the
Company (see 'Employment and Severance Agreements' below).
(5) Includes $25,459 for commuting and living expenses between Canada and New
York.
(6) Mr. McNally has an employment agreement and a severance agreement with the
Company (see 'Employment and Severance Agreements' below).
(7) Includes $69,915 for commuting and living expenses between Canada and New
York, and $45,926 for moving expenses from Canada to Colorado.
60
<PAGE>
AGGREGATED OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
Mr. McNally is the only Named Executive Officer who exercised options in
1996. The following table provides information as to the shares acquired on
exercise and the value realized by Mr. McNally and the value of options held by
the Named Executive Officers at year-end measured in terms of the closing price
of a share of Company Common Stock on December 31, 1996 ($9 13/16 per share).
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT DEC. 31,
DEC. 31, 1996(#) 1996($)(2)
SHARES VALUE ---------------- -------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE
- --------------------- ----------- -------- ---------------- -------------------
<S> <C> <C> <C> <C>
J. Raymond Elliott... 0 $ 0 6,250/18,750 $ 0/0
Robert McNally....... 12,500 54,688 28,750/0 1,953/0
6,250 16,406
</TABLE>
- ------------------------
(1) Value realized is the difference between the market price of a share of
Company Common Stock on the date of exercise and the exercise price of the
option, multiplied by the number of shares of Company Common Stock
underlying the option.
(2) Value of unexercised 'in-the-money' options is the difference between the
market price of a share of Company Common Stock on December 31, 1996 and the
exercise price of the option, multiplied by the number of shares of Company
Common Stock underlying the option.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company and J. Raymond Elliott are parties to an employment agreement
pursuant to which Mr. Elliott is employed as the Company's President and Chief
Executive Officer from September 1, 1995 through August 31, 1998, unless sooner
terminated in accordance with the terms of the agreement. Pursuant to the
agreement, Mr. Elliott receives a base salary of $300,000 per annum. Mr. Elliott
is eligible to participate in the Company's Bonus Incentive Compensation Plan
(the 'BIC Plan') and is guaranteed a minimum bonus of $70,000 for 1996. He may
also receive, at his election, between 10% and 40% of amounts payable to him
under the BIC Plan in the form of shares of Company Common Stock, converted at a
value equal to 85% of its market value. Upon joining the Company on September 1,
1995, Mr. Elliott was granted pursuant to the employment agreement and the
Omnibus Plan: (i) 25,000 shares of restricted common stock, vesting in annual
increments of 20% beginning on the first anniversary of his commencement of
employment; (ii) 20,000 shares of restricted stock, all of which vested on
February 8, 1996; and (iii) a non-qualified stock option to purchase 25,000
shares of Company Common Stock at an exercise price of $10.00 per share (the
closing price on August 2, 1995), vesting in annual increments of 25% beginning
on the first anniversary of his commencement of employment; provided, however,
the stock option will vest fully upon either a 'change of control' or 'partial
sale' (each as defined in the employment agreement), and the restricted stock
grant of 25,000 shares of Company Common Stock will vest fully upon a change of
control. Mr. Elliott is also entitled to various employee benefits pursuant to
the agreement. If the Company terminates the agreement other than 'for cause'
(as defined in the employment agreement), Mr. Elliott is entitled to receive his
base salary for the longer of one year or the remainder of the term of the
agreement plus any bonus he has earned under the BIC Plan as of the date of
termination. Mr. Elliott has the right to terminate employment upon a change of
control, in which case he is entitled to receive an amount equal to 2.99
multiplied by his base salary, of which 50% is payable in equal installments
over the 12 months following termination and the balance is payable in equal
installments over the next 24 months. If the Company does not extend or renew
the employment agreement at the end of its term, the Company is required to pay
Mr. Elliott his base salary over the next 12 months. The consummation of the
Merger will result in a change of control pursuant to Mr. Elliott's employment
agreement and accordingly his stock options and restricted stock grants will
fully vest. Upon consummation of the Merger, Mr. Elliott will terminate his
employment pursuant to the terms of his agreement. The Board of Directors of the
Company has resolved that the Company secure by irrevocable letter of
61
<PAGE>
credit or otherwise the balance of the payments due to Mr. Elliott under his
employment agreement at the Effective Time.
The Company and Robert McNally are parties to an employment agreement
pursuant to which Mr. McNally is employed as the Company's Chief Financial
Officer and as a Senior Vice President from September 1, 1995 through August 31,
1998, unless sooner terminated in accordance with the terms of the agreement.
Pursuant to the agreement, the Company will pay Mr. McNally a base salary of
$189,000 per annum.
In connection with Mr. McNally's termination pursuant to his employment
agreement in June 1996, he entered into a severance agreement and general
release with the Company. Pursuant to the severance agreement, the Company
agreed to employ Mr. McNally under the same terms and conditions as his current
employment until March 31, 1997 (the 'Transitional Period'). Following the
Transitional Period, the Company agreed to pay him severance at the rate of
$15,750 per month for a period of 28 months (the 'Severance Period'). In
addition, at the end of the Transitional Period, the Company agreed to pay to
him a supplemental severance bonus in the amount of $47,250. In the event of a
'change of control' (as defined in the severance agreement), all payments under
the severance agreement are accelerated. In return, Mr. McNally agrees, among
other things, to be available on a consulting basis, without additional
compensation, to assist in the Company's 1996 year-end audit of its financial
statements and to waive any claims he may have against the Company.
At the Effective Time, Mr. Elliott will resign as executive officer of the
Company and as Chairman and Director of Cybex Forza International (U.K.).
EMPLOYEE BENEFIT PLANS
Omnibus Incentive Plan. In June 1995, shareholders of the Company approved
the Omnibus Plan, designed to provide incentives which will attract and retain
individuals key to the success of the Company through direct or indirect
ownership of Company Common Stock. Benefits under the Omnibus Plan may be
granted in any one or a combination of stock options, stock appreciation rights,
stock awards, performance awards and bonus stock purchase awards. The Omnibus
Plan has 250,000 shares of Company Common Stock reserved for issuance and
provides that the terms and conditions of each award are to be determined by a
committee of the Board of Directors of the Company charged with administering
the Omnibus Plan. Under the Omnibus Plan, the committee may grant either
incentive 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 Company Common Stock on the date of grant). The
committee may also grant stock appreciation rights either in tandem with, or
independently of, an award of stock options. Under the Omnibus Plan, the
committee is authorized to permit key employees selected by the committee to
elect to convert up to a maximum percentage, as determined by the committee, of
their annual cash bonus incentive into Company Common Stock at a price per share
fixed by the committee, which will not be less than 85% of the fair market value
of Company Common Stock on the regular bonus payment date. No benefits were
granted during 1996 under the Omnibus Plan. See 'Other Matters--Proposal No.
3--Amendment to the 1995 Omnibus Incentive Plan.'
1987 Stock Option Plan. The Company also has shares available for the
granting of options under the 1987 Plan. Under this plan, a committee of the
Board of Directors of the Company charged with administering the plan may grant
either incentive or nonqualified stock options with a term not to exceed ten
years from the grant date, 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 Company Common Stock on the date of grant), and
with such other conditions as the committee determines. The committee may also
grant stock appreciation rights either in tandem with, or independently of, an
award of stock options under the plan. An aggregate of 16,000 options were
granted under this plan during 1996 at fair market value on the date of grant;
none of these grants were made to executive officers of the Company. Pursuant to
its terms, no further grants may be made under the 1987 Plan after August 13,
1997.
Stock Retainer Plan for Nonemployee Directors. In June 1995, the
shareholders approved the Stock Retainer Plan for Nonemployee Directors
('Retainer Plan'), which provides that each nonemployee director will receive
70% of his annual retainer or, in the case of the Chairman of the Board of
Directors, shall receive 50% of his annual retainer, in shares of Common Stock
of the Company. The number of shares to be issued will be
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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 35,000 shares of Company Common Stock may be issued pursuant to the
Retainer Plan. At December 31, 1996, the Company had issued 8,064 shares under
the Retainer Plan representing $75,600 for director fees paid in 1996.
Leveraged Employee Stock Ownership Plan. The Company maintains a leveraged
Employee Stock Ownership Plan (ESOP) which 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 Company Common Stock ownership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the end of 1996, the Compensation Committee of the Board of Directors of
the company consisted of Kay Knight Clarke (Chairperson), Thomas W. Kahle and
Alan H. Weingarten. The function of the committee is to make recommendations to
the Board of Directors of the Company concerning executive compensation and
benefits policies for the Corporation. The Committee also administers the
Long-Term Incentive Plan, Omnibus Plan and 1987 Plan, awarding benefits to key
employees of the Company and determining the terms and conditions on which such
benefits are granted. The Committee held eight meetings during 1996.
The members of the Compensation Committee serving at any time during 1996
were: Kay Knight Clarke, Thomas W. Kahle, Carol G. Nelson, and Alan H.
Weingarten.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and any persons who own more than ten percent of Company
Common Stock to file reports of initial ownership of the Company Common Stock
and subsequent changes in that ownership with the Securities and Exchange
Commission and the American Stock Exchange, Inc. Officers, directors and greater
than ten-percent beneficial owners are also required to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon a review of the
copies of the forms furnished to the Company, or written representations from
certain reporting persons that no Forms 5 were required, the Company believes
that during the 1996 fiscal year all Section 16(a) filing requirements were
complied with, except that one report for one transaction was filed late by
Robert McNally and two reports for one transaction each were filed late by John
C. Spratt.
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INFORMATION CONCERNING TROTTER
Trotter designs, manufactures and distributes, under its own brand name,
professional quality, premium-priced exercise equipment for the home and
commercial markets. Its targeted customers are affluent individuals interested
in home fitness programs and commercial customers such as health clubs,
corporate fitness centers, hotels and educational and governmental institutions.
Trotter's revenues and total assets as of or for the year ended December 31,
1996 represents 37% and 24% of the combined revenues and assets, respectively.
For the year ended December 31, 1996, Trotter had net income of $1,968,000 as
compared to the combined pro forma net income of $2,264,000.
Trotter commenced operations in 1973 as one of the pioneers in the design
and manufacture of treadmills specifically intended for use by individuals in
their homes as part of a home fitness program. Today, Trotter's cardiovascular
products include exercise treadmills and a stair climber; its strength training
equipment includes selectorized single station products, free-weight equipment
and multi-station gyms.
Trotter's products are distributed through independent authorized dealers,
Trotter's direct sales force and international distributors. The authorized
dealers operate independent stores specializing in fitness-related products.
Sales of Trotter products for home use are made at these stores, and sales to
commercial customers are made both by the authorized dealers and by Trotter's
direct sales force. Trotter's sales have been divided about equally between the
home and commercial markets for 1996.
PRODUCTS
Trotter's cardiovascular exercise equipment is designed to provide aerobic
conditioning by elevating the heart rate, increasing lung capacity, endurance
and circulation, and burning body fat. Trotter's cardiovascular products include
five treadmill models and a stair climber. All of Trotter's cardiovascular
products are motorized and incorporate computerized electronics which control
the unit and provide feedback to the user.
Strength training equipment provides a physical workout by exercising the
muscular system. Trotter's strength training equipment uses weights for
resistance. This product line includes selectorized single station equipment,
multi-station gyms and free-weight equipment. Trotter commenced the sale of
strength training equipment during 1993 and introduced its Galileo line in the
fourth quarter of 1995.
While about one-half of Trotter's sales are to individuals for home fitness
programs, all of its products are of 'professional quality'; that is, the
products feature high performance and durability comparable to that utilized in
health clubs or by professional athletes. Accordingly, all of Trotter's products
are premium-priced.
The contribution to net sales of Trotter's two product lines over the past
three years is as follows (dollars in millions):
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ---------------- ----------------
NET NET NET
SALES PERCENT SALES PERCENT SALES PERCENT
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Cardiovascular Products...... $33.4 81% $34.6 79% $35.3 74%
Strength Training Products... 8.0 19 9.1 21 12.3 26
----- ----- -----
Total Sales.................. $41.4 $43.7 $47.6
----- ----- -----
----- ----- -----
</TABLE>
Cardiovascular Products
Exercise Treadmills. Trotter has designed, manufactured and sold exercise
treadmills for over twenty years, which constitute its largest single product
category. Trotter presently sells five exercise treadmill models, with list
prices ranging from $3,595 to $7,995.
Each treadmill model is motorized and incorporates computerized electronics
controlling speed, incline, and both preset and customized programs. The
electronics also provide readout displays to indicate program profiles, calories
burned, calories per hour, speed, incline, distance, elapsed time and pace, and
certain of Trotter's newer models include heart-rate read-outs. In addition,
diagnostic information can be accessed through the computer system which is
useful in the maintenance of the product.
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Stair Climber. Trotter introduced a stair climber in 1994. Like Trotter's
treadmill products, the stair climber incorporates computerized electronics
which control the unit and provide feedback to the user. The digital displays
for the treadmills and stair climber are virtually identical, making it easier
for a user to move from one machine to the other. The stair climber has a list
price of $3,495.
Strength Training Products
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 single muscle group. Trotter sells 30
selectorized equipment products with list prices between $2,295 and $5,395.
In the fourth quarter of 1995, Trotter introduced its present generation of
strength equipment called Galileo. Trotter believes that the Galileo product
line affords commercial fitness facilities the opportunity to accommodate a
greater number of users in their existing space due to the compact footprint and
minimum adjustments required to operate the Galileo products.
Multi-Station Gyms. Trotter offers five conventional multi-gyms, with
suggested retail prices ranging from $5,195 to $10,995. Trotter also offers its
MG 2000 series of multi-gyms, which permit an individual to enjoy a workout in
the home similar to that available in fitness centers.
Since the multi-station gym offers a variety of exercise stations in one
device, and accordingly uses considerably less space than selectorized single
station equipment, it is more likely to be purchased for home use than
selectorized equipment, which is popular in the commercial environment. However,
both selectorized equipment and multi-gyms are sold to commercial customers and
to individuals who exercise in the home.
Free-Weight Equipment. Trotter also sells free-weight equipment, including
benches, racks and specialty apparatus such as Smith machines and squat racks.
Trotter offers approximately 47 items of free weight equipment with list prices
ranging from $195 to $2,895.
CUSTOMERS AND DISTRIBUTION
Trotter markets its products to affluent individuals and to commercial
customers. Since its products are premium-priced, sales to individuals tend to
be made to persons interested in a comprehensive home fitness program. A
commercial customer is 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, military installations and
community centers. Trotter's sales are derived about equally between the
commercial and home markets. One customer, Cutler Owens, accounted for
approximately 10% and 11% of Trotter's net sales for 1995 and 1996,
respectively.
Trotter distributes its products through independent authorized dealers,
its own direct sales force and international distributors. Most of Trotter's
sales are made through its independent authorized dealers, which operate
independent stores specializing in fitness-related products and promote both
home and commercial sales of Trotter products. The operations of the independent
dealers are primarily local or regional in nature.
In North America, Trotter enters into performance standards agreements with
its dealers which are designed to assure that the Trotter brand is properly
positioned in the marketplace. The dealers must, in order to qualify as an
authorized dealer, maintain a retail showroom, market to commercial customers,
have warehousing capabilities, achieve minimum revenue goals, and have personnel
trained to install and service Trotter products. Today, Trotter has
approximately 130 active dealers in North America, with approximately 250 retail
locations. Trotter believes that its current dealer network is adequate to
service its targeted markets.
Trotter also markets its products directly to national commercial accounts
(such as health club chains) through its regional sales force. Trotter involves
its dealers in some direct sales by utilizing the dealer in the delivery and
installation of the product, and in follow-up sales and service.
Outside North America, Trotter has three employees responsible for
international sales, who manage 36 independent distributors which sell and
service Trotter products in over 40 countries. Trotter enters into
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international distributor agreements with these distributors which define
territories, performance standards and volume requirements. International sales
accounted for 12% and 14% of Trotter's net sales for 1995 and 1996.
MARKETING
Trotter markets its products by advertising in publications, such as The
Wall Street Journal, which appeal to individuals within its targeted demographic
profiles. Trotter's authorized dealers are provided cooperative allowances,
pursuant to which the dealer advertises its store and Trotter's products on a
shared cost basis. In addition, Trotter advertises in trade publications such as
Club Industry Magazine, Club Business International and Fitness Management
Magazine and participates in industry trade shows.
Trotter's marketing efforts also include targeted mail advertising to
existing users of Trotter products. The direct mail effort focuses on selling
new Trotter products to existing customers and to new customer leads generated
from its advertising programs.
WARRANTIES
Trotter promotes its warranty as a statement of the quality of its
products, and believes that its warranty helps differentiate Trotter's products
from those of its competitors. The cardiovascular products have a three year
repair or replacement warranty. The various components for strength products are
warranted for various periods of time, up to a lifetime warranty with respect to
the structural frame. Warranty expense for 1995 and 1996 was $1.6 million and
$2.0 million, respectively.
COMPETITION
The market in which Trotter operates is highly competitive. Numerous
companies manufacture, sell or distribute exercise equipment. Trotter competes
primarily in the premium-priced, professional quality equipment segment of the
market, which is a small segment 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 Trotter.
Important competitive factors include price, product quality and
performance, diversity of features, warranties and customer service. Trotter
consistently follows a policy of premium quality, responsive customer service
and a comprehensive warranty program, with the result that its products in most
cases have suggested retail prices at or above those of its competitors. Trotter
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. Trotter
believes that its reputation for producing products of high quality and
dependability, accompanied by strong warranties and customer service,
constitutes a competitive advantage.
PRODUCT DEVELOPMENT
Trotter's research and development expenditures were $1.4 million, $1.5
million and $1.2 million in 1994, 1995 and 1996, respectively. Trotter dedicated
eight employees at December 31, 1996 in connection with its on-going research
and development programs. Trotter's development efforts focus on improving
existing products and developing new products, with the goal of producing
user-friendly, bio-mechanically correct, durable exercise equipment.
MANUFACTURING AND SUPPLY
Trotter maintains integrated manufacturing facilities which are fully
equipped to perform all fabrication, welding, grinding, assembly and finishing
of its products, unlike many of its competitors which either acquire products
through original equipment manufacturers or assemble components manufactured by
third party sources. Trotter believes that this vertical integration provides
Trotter with greater control over product quality and cost and shortens delivery
time.
Trotter manufactures its products in two facilities located in Medway,
Massachusetts and Sharpsville, Pennsylvania. 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
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upholstery. These materials are fabricated, machined, welded, assembled,
finished and upholstered to create finished products. The electronics are
specifically designed by Trotter employees for use in Trotter's products and all
electrical motors are made to Trotter's specifications.
Trotter single sources certain of its 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, reliability of the vendor or cost. It attempts to reduce the
risk of sole source suppliers by maintaining varying levels of parts inventory.
There is no assurance that the loss of a significant supplier, or delays or
disruptions in the delivery of components or materials, or increases in material
costs, would not have a material adverse effect on Trotter's operations.
Trotter manufacturers its strength-training equipment other than the MG
2000 gyms on a 'build-to-order' system which responds to specific sales orders.
It manufactures its other products based upon projected sales.
BACKLOG
Backlog historically has not been a significant factor in Trotter's
business.
PATENTS AND TRADEMARKS
Trotter owns, licenses or has applied for several patents with respect to
its products and has also registered or applied for over ten trademarks. While
these patents and trademarks are of value, Trotter does not believe that it is
dependent to any material extent upon patent or trademark protection.
INSURANCE
Trotter's product liability insurance is written on a claims-made basis and
provides an aggregate of $1,000,000 of coverage, with a deductible of up to
$25,000 per claim with an aggregate deductible of $125,000. Trotter believes
that this level of coverage is adequate.
LITIGATION
There is no material litigation pending with respect to Trotter.
Trotter is party to various product liability lawsuits relating to its
products. Historically, product liability awards have not exceeded Trotter's
insurance coverage. While there can be no assurance that Trotter's future
product liability experience will be consistent with its past experience,
Trotter believes that none of the pending claims or lawsuits will have a
material adverse effect on it.
EMPLOYEES
On December 31, 1996, Trotter employed 176 persons on a full-time basis.
None of Trotter's employees are represented by a union. Trotter considers its
relations with its employees to be good.
PROPERTIES
Trotter occupies approximately 100,000 square feet of space in Medway,
Massachusetts for administrative offices, manufacturing and warehousing and
63,000 square feet of space in Sharpsville, Pennsylvania for manufacturing. The
Medway facility is owned by Trotter. The Sharpsville facility is leased. The
base rent for the lease year from February 1997 through January 1998 is
approximately $126,000, exclusive of operating costs borne by the tenant which
are estimated at $53,000 for the current lease year. Trotter intends to close
the Sharpsville facility during 1997, transferring the manufacturing operations
to another facility.
Trotter's manufacturing facilities are fully equipped to perform all
fabrication, machining, welding, grinding, assembly and finishing of its
products. Trotter believes that its manufacturing and storage facilities provide
adequate capacity for its operations for the foreseeable future.
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MANAGEMENT OF TROTTER
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Trotter are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE TERM EXPIRES IN POSITION
- ------------------------ --- --------------- ------------------------------------------
<S> <C> <C> <C>
Peter C. Haines......... 46 -- President and Chief Executive Officer
John Aglialoro.......... 53 1998 Chairman, Director
Joan Carter............. 53 1998 Vice Chairman, Secretary, Director
William S. Hurley....... 52 -- Vice President and Chief Financial Officer
William F. Curran....... 54 -- Vice President--Manufacturing
Raymond Giannelli....... 43 -- Vice President--Research and Development
Arthur W. Hicks, Jr..... 38 1997 Treasurer, Director
Jerry Lee............... 60 1997 Director
</TABLE>
Mr. Haines has been employed by Trotter since 1980. He has served as the
President of Trotter since 1983, and acted as its Sales and Marketing Manager
from 1980 to 1983. Prior thereto, he served as Import/Export Manager for Donley
Manufacturing for three years.
Mr. Aglialoro is a founder, director and the Chairman and Chief Executive
Officer of UM, which is the indirect sole stockholder of Trotter. He has served
on Trotter's Board of Directors since 1983.
Ms. Carter is a founder, director and the President and Chief Operating
Officer of UM, which is the indirect sole stockholder of Trotter. She has served
as a director of Trotter since 1983. She is also a member of the Board of
Directors of the Federal Reserve Bank of Philadelphia.
Mr. Hurley joined Trotter in August of 1996. Prior to joining Trotter, Mr.
Hurley was Vice President and Controller of BBN Company of Cambridge,
Massachusetts, a diversified high technology company. For nineteen years prior
to that, he was employed in various management positions, most recently Vice
President and Controller, at Wyman Gordon Company (NASDAQ), a North Grafton,
Massachusetts manufacturer of forgings, investment castings and advanced
composite structures. Mr. Hurley is also a member of the Board of Directors of
L.S. Starrett Company (NYSE) of Athol, Massachusetts.
Mr. Curran serves as Trotter's Vice President-Manufacturing. He joined
Trotter in May 1991 with more than 25 years of experience in manufacturing and
materials management. He served as the Director of Materials and Manufacturing
at Charles River Data from 1984 to 1991.
Mr. Giannelli has served as Trotter's Vice President of Research and
Development since May 1991. Prior to such time, he was employed by the Company
for more than 15 years in a variety of capacities, including most recently Vice
President of Engineering.
Mr. Hicks has been employed by UM in a variety of capacities since 1983,
including most recently Vice President and Chief Financial Officer since 1988.
He was elected to Trotter's Board of Directors in 1994, and also serves as
Trotter's Treasurer.
Mr. Lee has served on Trotter's Board of Directors since 1996. Mr. Lee was
a partner in the accounting firm of Ernst & Young LLP from 1969 until his
retirement in 1995. He was managing partner of the Philadelphia office from 1979
to 1989 and a member of the firm's world-wide multi-national partner group from
1989 to 1995.
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Mr. Aglialoro and Ms. Carter are married. There are no other family
relationships among the directors and executive officers.
Members of the Board of Directors of Trotter have two year terms with
staggered expiration dates. Officers are elected by the Board of Directors and
serve at the pleasure of the Board.
DIRECTOR COMPENSATION
Directors who are not employees of Trotter receive a meeting fee of $1,000
for each directors meeting attended and $500 for committee meetings attended.
Each director is reimbursed for out-of-pocket expenses incurred in connection
with meetings and other services as a director. At the time of his election to
the Board, Mr. Lee was granted an option to acquire 3,800 shares of Trotter
Common Stock.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid by Trotter for the year ended December 31, 1996 to Trotter's
Chief Executive Officer and to each of Trotter's other executive officers whose
salary and bonus exceeded $100,000 in such year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION(1) COMPENSATION
------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS COMPENSATION(3)
- ---------------------------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Peter C. Haines
President and Chief Executive Officer....... 1996 $300,000 -- -- $ 4,500
Raymond Giannelli
Vice President--Research and Development.... 1996 123,000 -- -- 3,805
William F. Curran
Vice President--Manufacturing............... 1996 123,300 -- -- 3,698
</TABLE>
- ------------------
(1) In accordance with the rules of the Commission, other compensation in the
form of perquisites and other personal benefits has been omitted in those
instances where the aggregate amount of such perquisites and other personal
benefits constituted less than the lesser of $50,000 or 10% of the total of
annual salary and bonuses for the officer for such year.
(2) Trotter did not pay any bonuses to the named individuals for 1996.
(3) Represents Trotter's 401(k) plan contributions.
STOCK OPTION GRANTS
The following table contains information concerning the number and value of
options held at December 31, 1996 by each of Trotter's executive officers named
in the Summary Compensation Table, under Trotter's 1993 Non-Qualified Stock
Option Plan (the '1993 Plan'). None of these options are presently exercisable.
No options were granted under the 1993 Plan in 1996, and no options under the
1993 Plan have ever been exercised. Trotter has been privately-held and there
has been no public market for its securities. The options were granted at prices
in excess of the then fair market value of the stock, as determined by Trotter's
Board of Directors.
FISCAL 1996 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR END (#) AT DECEMBER 31, 1996
- -------------------- ------------------------------ ---------------------
<S> <C> <C>
Peter C. Haines..... 190,000 $ 913,572
Ray Giannelli (1)... 9,500 45,678
William F. Curran... 38,000 182,714
</TABLE>
- ------------------
(1) Does not include options for 9,500 shares to be granted on the later of the
Effective Time and March 31, 1997 with an exercise price equal to the then
fair market value of the stock.
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EMPLOYMENT AGREEMENTS
Trotter has entered into employment agreements with each of the executive
officers named in the Summary Compensation Table. Under these agreements, the
employment may be terminated with or without cause at any time. In the event
that Trotter terminates the officer's employment other than 'for cause', Trotter
is obligated to continue normal salary payments for up to four months (one year,
in the case of Mr. Haines). Pursuant to the agreement, each officer has agreed
not to compete with Trotter during his employment and for a period of two years
thereafter.
STOCK OPTION PLANS
1993 Non-Qualified Stock Option Plan. Trotter's 1993 Non-Qualified Stock
Option Plan (the '1993 Plan') authorizes the grant of options to acquire up to
388,550 shares of Trotter Common Stock. The purpose of the 1993 Plan was to
provide an incentive for key employees to advance the success of Trotter. The
1993 Plan is administered by a committee of not less than two directors, the
members of which are ineligible to participate in the Plan. The Committee, in
its discretion, determines who shall receive options under the 1993 Plan and
further construes and interprets the 1993 Plan.
The 1993 Plan provides for the grant of non-qualified options to acquire
Trotter Common Stock. The option price for each option which has been granted to
date under the 1993 Plan is $6.58 per share. Each option granted under the 1993
Plan will become exercisable in full on the first to occur of the 90th day
following the initial public offering ('IPO') of Trotter Common Stock or July 1,
2003, and will expire on the fifth anniversary of the IPO.
Options covering 327,750 shares of Trotter Common Stock are outstanding
under the 1993 Plan as of the date of this Proxy Statement. In addition, Trotter
has committed to granting options for 57,000 shares on the later of the
Effective Time and March 31, 1996, at an exercise price equal to the stock's
fair market value on such date.
Upon the consummation of the Merger, all options outstanding under the 1993
Plan will be exchanged for options representing an equivalent number of shares
of Company Common Stock, at an equivalent purchase price based upon the Merger
Consideration, which options will be exercisable for the five year period
following the consummation of the Merger. Upon the consummation of the Merger,
the 1993 Plan will terminate.
1994 Stock Option Plan. Trotter's 1994 Stock Option Plan (the '1994 Plan')
authorizes the grant of options to acquire up to 500,000 shares of Trotter
Common Stock. Such options may be incentive stock options ('ISOs') within the
meaning of the Code, as amended, or options that do not qualify as ISOs
('Non-Qualified Options'). No options have ever been granted under the 1994
Plan, which will terminate upon consummation of the Merger.
EXECUTIVE INCENTIVE COMPENSATION PLAN
Senior executives of Trotter, other than its Chief Executive Officer, are
eligible to participate in Trotter's Executive Incentive Compensation Plan,
pursuant to which participants can earn annual cash bonuses based upon the
performance of Trotter as measured by several prescribed financial tests. The
Plan is in its initial year of operation and accordingly no bonuses have to date
been earned or paid pursuant to this Plan.
401(K) PLAN
Trotter has participated in a deferred savings program, sponsored by UM,
for its employees pursuant to Section 401(k) of the Code, for which Trotter is
charged for the profit sharing plan contributions made with respect to its
employees. Under the 401(k) program, full-time employees of Trotter who have
completed at least one year of employment may elect to defer receipt of a
specified portion of their compensation, with Trotter providing limited matching
contributions. Subject to certain limitations relating to non-discrimination, a
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participant is permitted to contribute between 2% and 10% of his or her
compensation to the program. Trotter makes matching contributions, up to 6% of
compensation, equal to 25% to 100% of the employee's contribution, based upon
years of service. The amount which may be contributed by a participant in any
year may not exceed an amount specified by law, which for 1996 was $9,500.
Vesting of Trotter's contributions commences upon the completion of two years of
service and then increases until full vesting occurs upon completion of five
years of service. An employee's contributions are fully vested immediately.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Trotter's Compensation and Personnel Committee is currently composed of
Joan Carter and Arthur Hicks. Prior to the formation of the Compensation and
Personnel Committee, decisions with respect to executive compensation were
determined by the Board which, at the time of such determinations, was composed
of John Aglialoro and Joan Carter. Mr. Aglialoro and Ms. Carter are the Chairman
of the Board and Vice Chairman and Secretary of Trotter, respectively. They also
are executive officers and directors of UM and effectively own 100% of the stock
of UM. Mr. Hicks is a non-employee officer of Trotter, serving as its Treasurer.
He is also the Chief Financial Officer of UM. See '--Certain Relationships and
Related Transactions.'
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Trotter and its predecessors have been a direct or indirect wholly-owned
subsidiary or division of UM since 1983. John Aglialoro and Joan Carter, who are
married, are executive officers and directors of UM and effectively own 100% of
the stock of UM; Mr. Aglialoro is the Chairman and Ms. Carter is a director of
Trotter.
UM has provided various administrative services to Trotter, including
accounting, human resources and computer services, for which it was charged
$63,000 for 1995 and $10,000 for 1996. Trotter expects to perform these services
during 1997. Trotter also has participated in UM's deferred savings program for
employees pursuant to Section 401(k) of the Code. Trotter was charged $87,000
and $97,000 for 1995 and 1996, respectively, for profit sharing plan
contributions made pursuant to this program on behalf of its employees. Until
May 1996, Trotter participated in UM's centralized cash management program.
Pursuant to this program, Trotter's cash receipts were remitted to, and cash
disbursements were funded by, UM, with UM retaining any excess cash. In 1996, UM
paid $890,000 to Trotter in reconciliation of accounts upon termination of the
program.
Trotter is, and until the consummation of the Merger will continue to be,
included in the consolidated income tax filings of UM. Trotter, UM and other
subsidiaries of UM have entered into a tax sharing agreement pursuant to which
Trotter will pay to UM amounts equal to the income taxes which Trotter would
otherwise have paid had it filed separate income tax returns. The sum of
$745,000 was due to UM at December 31, 1996 under this tax sharing agreement. UM
has agreed to indemnify Trotter from any liability pertaining to an adjustment
or proposed adjustment of the UM consolidated tax returns, to the extent
pertaining to UM or its subsidiaries other than Trotter and its subsidiaries;
likewise, Trotter has agreed to indemnify UM from any liability relating to any
adjustment or proposed adjustment to the consolidated tax returns of UM to the
extent pertaining to Trotter or any of its subsidiaries.
UM has loaned to Peter Haines, the President of Trotter, the sum of
$500,000. This loan is evidenced by an interest-bearing promissory note payable
March 31, 1999 and is secured by a security interest in Mr. Haines' rights to
options granted under Trotter's 1993 Plan and any option received in replacement
thereof.
71
<PAGE>
OWNERSHIP OF TROTTER COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Trotter Common Stock as of April 14, 1997 by persons who
beneficially own 5% or more of the outstanding shares of Trotter Common Stock,
by each director and named executive officer and by all directors and executive
officers of Trotter as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
------------------
NAME OF BENEFICIAL OWNER NO. PERCENT
- ------------------------------------------------------- --------- ------
<S> <C> <C>
UM Holdings, Ltd.(1)................................... 3,800,000 100%
Peter C. Haines(2)..................................... 190,000 4.8%
William S. Hurley(2)................................... 38,000 *
William F. Curran(2)................................... 38,000 *
Raymond Giannelli(2)................................... 19,000 *
John Aglialoro(3)...................................... 3,800,000 100%
Joan Carter(3)......................................... 3,800,000 100%
Arthur W. Hicks, Jr.(2)................................ 38,000 *
Jerry Lee(4)........................................... 3,800 *
All directors and executive officers as a group (8
persons)............................................. 4,126,800 100%
</TABLE>
- ------------------
* Less than 1.0%
(1) Represents shares owned by its wholly-owned subsidiary, UM Equity Corp. UM's
address is 56 Haddon Avenue, Haddonfield, NJ 08033.
(2) Represents shares issuable with respect to options granted pursuant to
Trotter's 1993 Non-Qualified Stock Option Plan, which are not currently
exercisable. Mr. Giannelli's shares also include an option for 9,500 shares
and Mr. Hurley's shares include an option for 38,000 shares, both of which
options will be granted on the later of the Effective Time and March 31,
1997 with an exercise price equal to the then market value of the stock.
(3) Represents shares owned by UM, of which Mr. Aglialoro and Ms. Carter act as
executive officers and directors. Mr. Aglialoro and Ms. Carter effectively
own 100% of the stock of UM. Mr. Aglialoro and Ms. Carter's address is 56
Haddon Avenue, Haddonfield, NJ 08033.
(4) Represents shares issuable upon exercise of a stock option which is not
presently exercisable.
72
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR TROTTER
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales................................ 60.0 63.7 62.1
----- ----- -----
Gross profit................................. 40.0 36.3 37.9
Selling, general and administrative
expenses................................... 29.7 29.2 28.9
----- ----- -----
Operating income............................. 10.3 7.1 9.0
Interest expense, net........................ .5 .6 2.0
----- ----- -----
Income before taxes.......................... 9.8 6.5 7.0
Income taxes................................. 4.1 2.7 2.9
----- ----- -----
Net income................................... 5.7% 3.8% 4.1%
----- ----- -----
----- ----- -----
</TABLE>
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net sales increased 8.9% to $47.6 million for 1996, compared to $43.7
million for the comparable period of 1995. The increase resulted primarily from
a $3.2 million increase in the net sales of strength training equipment,
primarily due to higher volumes, and a $.7 million increase in the net sales of
cardiovascular products.
Gross profit increased 13.8% to $18.1 million for 1996 from $15.9 million
for the comparable period of 1995. As a percentage of net sales, gross profit
increased from 36.3% in 1995 to 37.9% in 1996. This improvement was primarily
due to a more favorable product mix as well as certain productivity
improvements.
Selling, general and administrative expenses increased 7.8% to $13.8
million for 1996 from $12.8 million in 1995. As a percentage of net sales,
selling, general and administrative expenses decreased from 29.2% in 1995 to
28.9% in 1996. The increase in dollar expenditures was primarily a result of
increased sales and marketing costs.
Interest expense increased to $1 million for the year ended December 31,
1996, from $.3 million for the same period in 1995. The increase is due to a
higher level of outstanding indebtedness in 1996 as a result of the loan
agreement entered into in December, 1995. See 'Liquidity and Capital Resources.'
Trotter's effective income tax rate was 40.6% for the year ended December
31, 1996, compared to 41.2% for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Net sales increased 5.6% to $43.7 million for the year ended December 31,
1995, compared to $41.4 million for the comparable period of 1994. The increase
resulted from a $1.1 million increase in the net sales of strength training
equipment, primarily due to higher volumes, and a $1.2 million increase in the
net sales of cardiovascular products, primarily due to a more favorable product
mix and increased prices.
Gross profit decreased 3.6% to $15.9 million for the year ended December
31, 1995 from $16.5 million for the comparable period of 1994. As a percentage
of net sales, gross profit decreased from 40.0% in 1994 to 36.3% in 1995. This
decrease was primarily due to increased steel prices in 1995, product mix and
lower initial gross margins on new products.
Selling, general and administrative expenses increased 4.1% to $12.8
million for the year ended December 31, 1995, from $12.3 million for the same
period of 1994. As a percentage of net sales, selling, general and
administrative expenses decreased from 29.7% in 1994 to 29.2% in 1995. The
dollar increase resulted primarily from general salary increases.
73
<PAGE>
Interest expense increased to $.3 million for the year ended December 31,
1995, from $.2 million for the same period in 1994. The increase is due to the
loan agreement entered into in December 1995. See 'Liquidity and Capital
Resources.'
Trotter's effective income tax rate was 41.2% for the year ended December
31, 1995 compared to 41.4% for the year ended December 31, 1994.
SEASONALITY
Trotter's business is seasonal due to industry purchasing patterns which
typically result in higher net sales and net income during the first (January
through March) and fourth (October through December) quarters. The first and
fourth quarters together accounted for 57.6% of Trotter's net sales in 1995 and
84.7% of its net income. For 1996, the first and fourth quarters together
accounted for 57.8% of net sales and 95.4% of net income. This seasonal pattern
is long standing and not likely to change significantly in the future. Trotter
has incurred and in the future may incur losses in the second and third
quarters.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, cash provided by operating activities
was $4.8 million compared to $1.5 million for the same period in 1995. Accounts
receivable decreased by $60,000 in 1996 vs. a $1.8 million increase in 1995, and
accrued current liabilities increased by $.9 million in 1996 vs. a $.7 million
decrease in 1995.
During the years ended December 31, 1994, 1995 and 1996, Trotter's
principal source of funds consisted of cash from operations. Until May 1996,
Trotter participated in UM's centralized cash management program. Pursuant to
this program, Trotter's cash receipts were remitted to, and cash disbursements
were funded by, UM with UM retaining any excess cash. In 1996, UM paid $890,000
to Trotter in reconcilation of accounts upon termination of this program.
Trotter made net distributions to UM, the indirect sole stockholder of Trotter,
of $1.2 million and $6.5 million for 1994 and 1995, respectively. Trotter made
no distributions to UM during 1996 and Trotter will not make further
distributions to UM following the Effective Time. In December of 1995, Trotter
borrowed $11.1 million from a bank which was used primarily to repay an advance
from UM, and to fund a distribution to UM. As of December 31, 1996, Trotter had
cash and cash equivalents of $1.7 million and working capital of $4.2 million.
Trotter's capital expenditures for the years ended December 31, 1994, 1995
and 1996 were $.4 million, $.7 million and $.6 million, respectively.
Repayment of indebtedness totaled $3.5 million in 1996. Trotter has a $3
million revolving loan through December 7, 1998. Borrowings under the revolver
are limited to 85% of eligible accounts receivable, as defined, and bear
interest at Trotter's option of either prime rate or LIBOR plus 2.25% to 2.75%
adjusted up or down based on certain covenant calculations, as defined. The most
restrictive covenants, as of December 31, 1996, include an annual debt-to-cash
flow ratio of no more than 3.0, and a fixed charge coverage ratio of at least
1.2:1, as defined; in addition to certain restrictions on dividends and capital
expenditures. Trotter was in compliance with all covenants as of December 31,
1996. Trotter's debt is collateralized by substantially all of their assets, and
at December 31, 1996, $3 million was available under the revolver.
Trotter expects that existing cash and cash equivalents, cash flow from
operations and borrowings under its existing revolving line of credit will be
sufficient to meet its foreseeable cash needs. Although Trotter presently is not
a party to any acquisition agreements, other than the Merger Agreement, or
similar arrangements, there may be acquisitions or other growth opportunities
that could require additional external financing, and Trotter may from time to
time seek to obtain additional funds from public or private issuance of equity
or debt securities.
Trotter believes that the effects of inflation and changing prices
generally do not have a material adverse effect on its results of operations or
financial condition.
74
<PAGE>
OTHER MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL NO. 2--AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
The Company is currently authorized to issue 15,000,000 shares of Company
Common Stock, $.10 par value, of which 4,381,555 shares were outstanding as of
the Record Date and 500,000 shares of Preferred Stock, $1.00 par value ('Company
Preferred Stock'), none of which is outstanding. If the Merger is consummated,
the Company will issue 4,292,943 additional shares of Company Common Stock. See
'The Merger.'
The Board of Directors of the Company recommends that shareholders vote for
the proposed amendment to increase the authorized shares of capital stock of the
Company from 15,500,000 shares to 20,500,000 shares, of which 20,000,000 shares
will be Company Common Stock and 500,000 shares will be Company Preferred Stock.
It is necessary to increase the number of authorized shares of Company Common
Stock to provide for continued flexibility to declare stock splits or stock
dividends in the future when appropriate or the issuance of additional shares
(in financings or acquisitions) when appropriate. Aside from the issuances of
Company Common Stock pursuant to employee stock options and the Merger, the
Company does not currently have plans for the issuance of additional shares of
Company Common Stock. Holders of Company Common Stock are not entitled to pre-
emptive rights under the NYBCL in connection with the Charter Amendment.
The potential future issuance of shares of Company Common Stock authorized
by the Charter Amendment may adversely affect the rights and interests of the
shareholders of the Company. The shareholders of the Company may experience
substantial voting dilution upon the issuance of shares of Company Common Stock
authorized by the Charter Amendment.
Approval of the proposed amendment (the text of which is attached as Annex
C hereto) requires the affirmative vote of the holders of a majority of the
shares of Company Common Stock issued and outstanding as of the Record Date of
the Meeting. The Merger is not conditioned upon approval of the Charter
Amendment.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE
'FOR' THE PROPOSED AMENDMENT TO INCREASE THE COMPANY'S AUTHORIZED SHARES OF
COMPANY COMMON STOCK FROM 15,000,000 SHARES TO 20,000,000 SHARES.
PROPOSAL NO. 3--AMENDMENT TO THE 1995 OMNIBUS INCENTIVE PLAN
The proposed amendment to the Omnibus Plan would increase the aggregate
number of shares of Company Common Stock that may be subject to Benefits (as
defined in Omnibus Plan) granted under the Omnibus Plan from 250,000 to 750,000
shares (the 'Plan Amendment').
The purpose of the Omnibus Plan is to provide incentives which will attract
and retain highly competent persons as of officers and key employees of the
Company and its subsidiaries, by providing them opportunities to acquire shares
of Company Common Stock or to receive monetary payments based on the value of
such shares pursuant to the Benefits described therein. The Omnibus Plan
provides for the grant of any or all of the following types of benefits: (1)
stock options including incentive stock options and non-qualified stock options;
(2) stock appreciation rights; (3) stock awards, including restricted stock; (4)
performance awards; and (5) bonus stock purchase awards (collectively,
'Benefits'). All stock options granted pursuant to the Omnibus Plan shall be
granted at an exercise price equal to the fair market value of the Company
Common Stock at the time of such grant.
The Board of Directors has approved the increase of shares subject to
Benefits under the Omnibus Plan to enable the Company to fulfill its obligations
under the Merger Agreement to assume all outstanding Trotter Stock Options under
Trotter Stock Plans. Additionally, in order to continue to obtain the beneficial
effects of the Omnibus Plan, it will be necessary to increase the number of
shares available under the Omnibus Plan to provide for future awards of
Benefits. Aside from the assumption of all outstanding Trotter Stock Options
pursuant to the Merger Agreement, the Company does not currently have plans for
future awards of Benefits.
Approval of the Plan Amendment by the holders of Company Common Stock is
not a condition to consummation of the Merger. Approval of the Merger Agreement
is a condition to the implementation of the
75
<PAGE>
Plan Amendment. The Company believes that shareholders who vote to approve and
adopt the Merger Agreement also will vote to approve the Plan Amendment. In the
unlikely event that the Merger Agreement is approved and adopted by shareholders
of the Company but the Plan Amendment is not so approved, the Company and
Trotter will consider the alternatives available to them, including consummating
the Merger and effecting the transactions contemplated thereby, with such
modifications as they deem appropriate, which may include the assumption by the
Company of the Trotter Stock Plans.
As of December 31, 1996, under the Omnibus Plan, options and restricted
stock (net of cancellations) for an aggregate of 83,021 shares had been granted,
options and restricted stock for an aggregate of 83,021 shares remained
outstanding, and 166,979 shares remained available for future grant. As of
December 31, 1996, under the 1987 Plan, options (net of cancellations) for an
aggregate of 342,825 shares had been granted, options to purchase 224,275 shares
had been exercised, options to purchase 118,550 shares remained outstanding, and
156,400 shares remained available for future grant. Therefore, as of December
31, 1996, only 324,154 shares remain available for future grant under the
Company's stock plans. However, the assumption by the Company of all outstanding
Trotter Stock Options under Trotter Stock Plans pursuant to the Merger Agreement
would require the use of approximately 437,000 shares of Company Common Stock.
GENERAL TERMS OF THE OMNIBUS PLAN
The Omnibus Plan provides for administration by a committee (the
'Committee') appointed by the Board of Directors from among its members (which
may be the Compensation Committee), which shall be comprised of not less than
two non-employee members of the Board. Among the Committee's powers are the
authority to select officers and other key employees of the Company and its
subsidiaries to receive Benefits, and determine the form, amount and other terms
and conditions of Benefits. The Committee also has the power to modify or waive
restrictions on Benefits, to amend Benefits and to grant extensions and
accelerations of Benefits. Shares of Company Common Stock subject to a stock
option which for any reason is cancelled (excluding shares subject to a stock
option cancelled upon the exercise of a related stock appreciation right) or
terminated without having been exercised, or any stock awards or performance
awards which are forfeited, shall again be available for Benefits under the
Omnibus Plan.
The Omnibus Plan provides that Benefits shall not be transferable otherwise
than by will or the laws of descent and distribution. The Committee shall
determine the treatment to be afforded to a participant in the event of
termination of employment for any reason including death, disability or
retirement. Notwithstanding the foregoing, the Committee may permit the
transferability of an award by a participant to members of the participant's
immediate family or trusts or family partnerships for the benefit of such
person.
Upon the grant of any Benefit, the Committee may, by way of an agreement
with the participant, establish such other terms, conditions, restrictions
and/or limitations covering the grant of the Benefit as are not inconsistent
with the Omnibus Plan. No Benefit shall be granted after March 7, 2005. The
Board of Directors reserves the right to amend, suspend or terminate the Omnibus
Plan at any time, subject to the rights of participants with respect to any
outstanding Benefits.
The Omnibus Plan contains provisions for equitable adjustment of Benefits
in the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, reverse stock split, split up, spinoff, combination of
shares, exchange of shares, dividend in kind or other like change in capital
structure or distribution (other than normal cash dividends) to shareholders of
the Company. In addition, if there is a Change in Control (as defined in the
Omnibus Plan) of the Company, all then outstanding Stock Options and Stock
Appreciation Rights immediately become exercisable; however, any spin-off of a
division or subsidiary of the Company to its shareholders shall not constitute a
Change in Control of the Company.
The closing price of a share of Company Common Stock as reported on the
American Stock Exchange for April 14, 1997, was $9 1/2.
Approval of the proposed amendment requires the affirmative vote of the
holders of a majority of the shares of Company Common Stock present at the
Meeting, in person or by proxy, and entitled to vote on the matter.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE
'FOR' THE PLAN AMENDMENT.
76
<PAGE>
PROPOSAL NO. 4--ELECTION OF DIRECTORS
At the Meeting, two Directors are to be elected to serve for a term
expiring at the 2000 Annual Meeting of Shareholders. The persons named below
have been nominated by the Board of Directors for election as Directors. Both of
these nominees are currently serving as Directors of the Company.
Management has made inquiries and believes that each of the nominees will
be willing and able to serve if elected. If any nominee at the time of the
election is unable or unwilling to serve or is otherwise unavailable for
election, discretionary authority is reserved to vote for a substitute chosen by
the Board of Directors of the Company. The proposed nominees are not being
nominated pursuant to any arrangement or understanding with any person.
The Board currently has two vacancies, one in the class whose term expires
in 1998 and one in the class whose term expires in 1999. The Director Affairs
Committee is in the process of identifying qualified candidates to serve on the
remaining Board seats. In accordance with the By-laws of the Company such
vacancies will be filled by a majority vote of the remaining directors then in
office, and such directors so elected shall hold office for a term which shall
expire with the term of the other directors of such class, and until such
directors' respective successors shall have been elected and qualified.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE
'FOR' THE ELECTION OF EACH OF THE FOLLOWING PERSONS AS DIRECTORS OF THE COMPANY:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---------------------- --- -------- --------
<S> <C> <C> <C>
Kay Knight Clarke..... 58 Director 1996
Alan H. Weingarten.... 56 Director 1987
</TABLE>
In connection with the Merger, at the Effective Time, Alan H. Weingarten
will transfer to the class of directors whose terms expire in 1999. Set forth
under 'Management of the Company' is certain biographical information concerning
the nominees and the other continuing directors of the Company.
SHAREHOLDER PROPOSALS
Any Company shareholder who wishes to present a proposal for inclusion in
the Company's proxy materials relating to future Annual Meetings of Shareholders
must comply with the rules and regulations of the Commission then in effect. The
date by which such proposals must be received by the Company for inclusion in
the Company's proxy statement for the 1998 Annual Meeting is January 24, 1998.
The Company's by-laws provide that any shareholder entitled to vote for the
election of directors at a meeting may nominate persons for election as
directors only if written notice of such shareholder's intent to make such
nomination is given, either by personal delivery or by United States mail,
postage pre-paid, to the Secretary of the Company not later than (i) with
respect to an election held at an annual meeting of shareholders, 90 days in
advance of such meeting and (ii) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to shareholders. A copy of the pertinent by-law provision, which
sets forth additional requirements for the form of such notice, is available on
request to Corporate Secretary, CYBEX International, Inc., 2100 Smithtown
Avenue, Ronkonkoma, New York 11779.
INDEPENDENT AUDITORS
The consolidated financial statements of CYBEX International, Inc. at
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, included in the Proxy Statement of CYBEX International, Inc.,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report appearing elsewhere herein.
The consolidated financial statements and five-year selected financial data
of Trotter Inc. included in this Proxy Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto.
It is expected that representatives of Ernst & Young LLP will be present at
the Meeting, to respond to appropriate questions of holders of Company Common
Stock and to make a statement if they desire.
77
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not intend to present, and have not been informed that any other
person intends to present, any matter for action at the Meeting, other than as
specifically discussed herein.
By order of the Board of Directors
John C. Spratt
Chairman of the Board
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE COMPANY--UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Basis of Presentation.................................................... F-2
Unaudited Pro Forma Combined Balance Sheet--December 31, 1996............ F-3
Unaudited Pro Forma Combined Statement of Operations--Year Ended
December 31, 1996..................................................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements............... F-5
CYBEX INTERNATIONAL, INC. (formerly LUMEX, INC.)--HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS:
Report of Independent Auditors--Ernst & Young LLP........................ F-8
Consolidated Balance Sheets.............................................. F-9
Consolidated Statements of Operations.................................... F-10
Consolidated Statements of Stockholders' Equity.......................... F-11
Consolidated Statements of Cash Flows.................................... F-12
Notes to Consolidated Financial Statements............................... F-13
TROTTER INC.--HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants--Arthur Andersen LLP............ F-27
Consolidated Balance Sheets.............................................. F-28
Consolidated Statements of Operations.................................... F-29
Consolidated Statements of Stockholder's Equity.......................... F-30
Consolidated Statements of Cash Flows.................................... F-31
Notes to Consolidated Financial Statements............................... F-32
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited pro forma combined financial statements give
effect to the merger of CYBEX International, Inc. ('CYBEX') and Trotter Inc.
('Trotter') as described in Note 2 of Notes to Unaudited Pro Forma Combined
Financial Statements. The unaudited pro forma combined financial statements have
been prepared assuming the merger transaction had occurred as of December 31,
1996, in the case of the unaudited pro forma combined balance sheet, or as of
January 1, 1996, in the case of the unaudited proforma combined statement of
operations. CYBEX and Trotter, on a combined basis, are referred to herein as
the 'Company.'
The unaudited pro forma combined financial statements have been prepared by
management and should be read in conjunction with the historical financial
statements of CYBEX and Trotter. These statements are based on certain
assumptions and preliminary estimates which are subject to change. They do not
purport to be indicative of the financial positions or results of operations
that might have occurred, and do not purport to be indicative of future results.
Management believes additional synergies and operational improvements, not
reflected in the accompanying unaudited pro forma combined financial statements,
will be realized by the merger. However, such amounts cannot be reasonably
quantified and, therefore, are not reflected in the unaudited pro forma combined
financial statements.
F-2
<PAGE>
THE COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CYBEX TROTTER PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 7,068 $ 1,656 $ -- $ 8,724
Accounts receivable, net........................ 20,364 7,604 -- 27,968
Inventories..................................... 9,934 2,083 (700)(a) 11,317
Lease receivables............................... 2,144 -- -- 2,144
Property held for sale.......................... 3,051 -- -- 3,051
Deferred income taxes........................... -- 665 3,524(b) 7,489
3,300(c)
Refundable income taxes......................... 2,718 -- -- 2,718
Prepaid expenses and other...................... 3,729 410 -- 4,139
---------- ---------- ----------- ---------
Total current assets......................... 49,008 12,418 6,124 67,550
Property and equipment, net....................... 9,658 4,725 (260)(d) 14,123
Goodwill.......................................... -- 2,451 2,476(e) 7,860
(1,486)(f)
4,419(g)
Lease receivables................................. 2,270 -- -- 2,270
Other assets...................................... 2,551 558 (283)(h) 2,826
Deferred income taxes............................. -- 215 -- 215
---------- ---------- ----------- ---------
$ 63,487 $ 20,367 $10,990 $94,844
---------- ---------- ----------- ---------
---------- ---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 3,776 $ 1,409 $ -- $ 5,185
Accounts payable................................ 7,136 2,838 -- 9,974
Accrued expenses and other...................... 13,467 2,658 8,276(i) 24,401
Accrued income taxes............................ -- 1,308 -- 1,308
---------- ---------- ----------- ---------
Total current liabilities.................... 24,379 8,213 8,276 40,868
Long-term debt.................................... 1,986 9,960 -- 11,946
Accrued warranty obligation....................... -- 798 -- 798
Deferred income taxes............................. 1,584 -- -- 1,584
---------- ---------- ----------- ---------
Total liabilities............................ 27,949 18,971 8,276 55,196
---------- ---------- ----------- ---------
Stockholders' equity:
Common stock.................................... 451 38 392(j) 881
Additional paid-in capital...................... 17,591 -- 25,299(j) 42,890
Retained earnings (deficit)..................... 19,252 1,358 (1,705)(k) (2,847)
(2,500)(l)
(19,252)(j)
Treasury stock, at cost......................... (1,531) -- 255(j) (1,276)
Unearned compensation expense................... (225) -- 225(j) --
---------- ---------- ----------- ---------
Total stockholders' equity................... 35,538 1,396 2,714 39,648
---------- ---------- ----------- ---------
$ 63,487 $ 20,367 $10,990 $94,844
---------- ---------- ----------- ---------
---------- ---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CYBEX TROTTER PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 80,711 $ 47,605 $(7,788)(m) $120,528
Cost of sales..................................... 48,405 29,541 (5,885)(n) 72,061
---------- ---------- ----------- ---------
Gross profit.................................... 32,306 18,064 (1,903) 48,467
Selling, general and administrative expenses...... 32,718 13,797 (2,491)(o) 43,184
(1,070)(p)
230(q)
---------- ---------- ----------- ---------
Operating income (loss)......................... (412) 4,267 1,428 5,283
Interest expense, net............................. (232) (955) -- (1,187)
Loss from joint venture........................... (159) -- -- (159)
---------- ---------- ----------- ---------
Income (loss) from continuing operations
before income taxes............................. (803) 3,312 1,428 3,937
Income taxes...................................... 32 1,344 297(r) 1,673
---------- ---------- ----------- ---------
Income (loss) from continuing operations.......... $ (835) $ 1,968 $ 1,131 $ 2,264
---------- ---------- ----------- ---------
---------- ---------- ----------- ---------
Income (loss) from continuing operations
per common share................................ $ (.19) $ .26
---------- ---------
---------- ---------
Shares used in computing income (loss)
per common share................................ 4,392 8,776
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. HISTORICAL
The historical balances represent the financial position and results of
operations for the indicated periods for each company as reported in the
respective consolidated financial statements included elsewhere in this Proxy
Statement.
2. MERGER TRANSACTION
The merger agreement provides for the Trotter common stockholder to
exchange its shares for the number of CYBEX common shares which, upon issuance,
together with shares attributed to holders of options to acquire Trotter common
stock, shall equal 50.001% of all CYBEX common shares issued and outstanding
immediately after the merger, on a fully diluted basis as defined in the merger
agreement; which assumes all common shares subject to dilutive options were
issued immediately prior to the merger and the proceeds received from the
exercise of such options were used to repurchase shares for treasury, and a
price of $9.75 per share. Excluding the impact of dilutive stock options, the
former Trotter stockholder will own 4,292,943 of the total 8,674,498 common
shares of the Company outstanding immediately after the merger.
In addition, Trotter option holders will receive options to purchase the
number of shares of the Company's common stock equal to the number of Trotter
common shares issuable under their Trotter options multiplied by the same
equivalent exchange ratio as the common share exchange discussed above. This
will result in the former Trotter option holders receiving options to purchase
438,953 common shares of the Company immediately after the merger.
The merger will be accounted for as a purchase with Trotter deemed the
acquiring company. The estimated purchase price of CYBEX will be $44,652,000
which consists of the $42,457,000 market value of CYBEX common stock (4,381,555
shares outstanding multiplied by the $9.69 per share five day average share
price ending December 31, 1996) and estimated transaction costs of $2,195,000.
Based on the foregoing estimated purchase price, the estimated amount to be
allocated to research and development of $2,500,000 will be charged to the
statement of operations upon the consummation of the merger. The remaining
amount of purchase price in excess of net assets acquired of $6,895,000 will be
allocated to goodwill. Goodwill will be amortized on a straight line basis over
30 years.
3. FACILITY CLOSURES, DISCONTINUED PRODUCT LINE AND TERMINATION OF EUROPEAN
JOINT VENTURE
In connection with the merger transaction, the Company will discontinue
CYBEX's commercial treadmill product line thereby eliminating a duplicate
product line, close CYBEX's Colorado Springs, Colorado corporate offices, and
plans to terminate CYBEX's European joint venture immediately and close
Trotter's Sharpsville, Pennsylvania facility in the third quarter of 1997. The
costs to exit the Sharpsville facility and the write-off of related intangible
assets will be charged to the statement of operations upon consummation of the
merger. Trotter's Sharpsville facility will be consolidated into CYBEX's
Owatonna facility which has a comparable cost structure. The costs to exit
CYBEX's Colorado Springs facility, to discontinue CYBEX's commercial treadmill
product line and to terminate CYBEX's European joint venture will be included in
the application of purchase accounting by the Company. CYBEX's Colorado Springs
corporate headquarters and its treadmill product line will be consolidated into
Trotter's Medway facility.
The costs and asset write-offs related to the facility closures, the
discontinued product line and the termination of the European joint venture are
a direct result of the Company's plans in contemplation of the merger
transaction. The costs and write-offs are not expected to occur if the merger is
not consummated and, therefore, have not been reflected in the historical
financial statements of CYBEX or Trotter.
Revenues and costs related to CYBEX's commercial treadmill product line
have been eliminated in the unaudited Pro Forma Statement of Operations.
Management believes that the revenue and income from the CYBEX treadmill product
line will be replaced by selling Trotter treadmills in equal or greater amounts
through the combined distribution network. However, this is not factually
supportable for purposes of Article 11 of Regulation S-X and, accordingly, has
not been reflected in the unaudited Pro Forma Combined Statement of Operations.
F-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PRO FORMA BALANCE SHEET ADJUSTMENTS
a) Reflects the estimated net realizable value adjustment to inventory for
the discontinuance of CYBEX's commercial treadmill product line.
b) Reflects the income tax benefit of the pro forma adjustments.
c) Reflects the decrease in the valuation allowance on CYBEX's deferred
tax assets.
d) Reflects decreases to fixed assets, as follows:
Discontinuance of CYBEX's commercial treadmill
product line................................. $ 200,000
Sharpsville closure........................... 60,000
----------
$ 260,000
----------
----------
e) Reflects a net increase in goodwill resulting from the following:
Transaction costs (primarily broker fees) $2,195,000
CYBEX severance and relocation 2,410,000
Termination of CYBEX's European joint
venture...................................... 2,213,000
Discontinuance of CYBEX's commercial treadmill
product line................................. 1,100,000
Colorado Springs exit costs................... 245,000
Tax benefit (2,387,000)
Decrease in deferred tax valuation
allowance.................................... (3,300,000)
----------
$2,476,000
----------
----------
f) Reflects the write-off of historical goodwill in connection with the
Sharpsville plant closure.
g) Reflects a $6,919,000 increase as a result of applying purchase
accounting (the $42,457,000 market value of CYBEX, based on the
five-day average share price ending December 31, 1996, less its
$35,538,000 book value on December 31, 1996) offset by a decrease of
$2,500,000 for the charge related to research and development.
h) Reflects the write-off of other assets as follows:
Sharpsville closure........................... $ 103,000
CYBEX's investment in European joint
venture...................................... 180,000
----------
$ 283,000
----------
----------
i) Reflects liabilities related to the following:
Transaction costs (primarily broker fees)..... $2,195,000
CYBEX severance and relocation................ 2,410,000
Sharpsville exit costs........................ 1,193,000
Colorado Springs exit costs................... 245,000
Termination of CYBEX's European joint
venture...................................... 2,033,000
Discontinuance of CYBEX's commercial treadmill
product line................................. 200,000
----------
$8,276,000
----------
----------
j) Reflects: (i) the issuance of Company shares to the former Trotter
shareholder and the application of purchase accounting (the $42,457,000
market value of CYBEX, based on the five-day average share price ending
December 31, 1996, less its $35,538,000 book value on December 31,
1996) with Trotter deemed the acquirer and (ii) an adjustment to
unearned compensation expense for CYBEX restricted stock that will
fully vest upon consummation of the merger.
k) Reflects the retained earnings effect of the exit costs associated with
the Sharpsville plant closure, including intangible and fixed asset
write-offs, net of tax benefit.
l) Reflects the retained earnings effect for the charge related to
research and development.
F-6
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
m) Reflects a decrease in revenue related to the discontinuance of CYBEX's
commercial treadmill product line.
n) Reflects decreased cost of sales related to the following:
Sharpville facility costs..................... $ 315,000
Sharpville depreciation....................... 141,000
CYBEX's commercial treadmill product line..... 5,429,000
----------
$5,885,000
----------
----------
o) Reflects decreased selling, general and administrative expenses related
to the Sharpsville plant closure and the discontinuance of CYBEX's
commercial treadmill product line, as follows:
Sharpsville amortization expense.............. $ 218,000
Costs related to CYBEX's commercial treadmill
product line................................. 1,782,000
Costs related to Trotter's Sharpsville
facility..................................... 491,000
----------
$2,491,000
----------
----------
p) Reflects the $1,070,000 decrease in CYBEX executive and support
compensation as a result of the merger.
q) Reflects the $230,000 additional amortization expense related to the
goodwill resulting from the merger. Merger goodwill is being amortized
on a straight-line basis over 30 years.
r) To adjust the income tax provision using appropriate rates.
The unaudited pro forma combined statement of operations does not include
one-time, after-tax charges expected to be incurred upon consummation of the
merger, as follows:
Sharpsville closure and asset write-offs...... $1,705,000
Research and development charge............... 2,500,000
----------
$4,205,000
----------
----------
6. PRO FORMA INCOME PER SHARE
The shares used in computing pro forma income per share are (i) CYBEX's
historical weighted average shares outstanding, (ii) Trotter's historical
weighted average shares outstanding, adjusted by the exchange ratio pursuant to
the merger agreement (see Note 2) and (iii) the dilutive effect of common stock
options.
CYBEX weighted average shares outstanding..... 4,392
Trotter weighted average shares outstanding... 4,293
CYBEX dilutive options........................ 1
Trotter dilutive options...................... 90
----------
8,776
----------
----------
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CYBEX International, Inc.
We have audited the accompanying consolidated balance sheets of CYBEX
International, Inc. (formerly Lumex, Inc.), as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CYBEX
International, Inc., at December 31, 1995 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Melville, New York
March 6, 1997
F-8
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,798 $ 7,068
Investments............................................ 2,476 --
Accounts receivable.................................... 22,482 20,364
Inventories............................................ 12,024 9,934
Lease receivables...................................... 574 2,144
Property held for sale................................. -- 3,051
Refundable income taxes................................ 2,782 2,718
Net assets of discontinued operations.................. 37,214 --
Other current assets................................... 2,684 3,729
-------- -------
Total current assets................................ 82,034 49,008
Property, plant and equipment:
Land................................................... 586 253
Buildings and improvements............................. 9,034 4,559
Machinery and equipment................................ 17,481 18,695
-------- -------
27,101 23,507
Less accumulated depreciation....................... (13,810) (13,849)
-------- -------
13,291 9,658
Lease receivables........................................ 1,402 2,270
Intangible assets........................................ 1,687 1,215
Other assets............................................. 504 1,336
-------- -------
$ 98,918 $63,487
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................................. $ 15,250 $ --
Current portion of long-term debt...................... 14,330 3,776
Accounts payable....................................... 10,874 7,136
Accrued liabilities.................................... 13,888 13,467
-------- -------
Total current liabilities........................... 54,342 24,379
Deferred income taxes.................................... 1,227 1,584
Long-term debt........................................... 2,715 1,986
Stockholders' equity:
Common Stock, par value $.10 per share, authorized
15,000,000 shares, issued 4,458,354 shares in 1995
and 4,510,068 shares in 1996........................ 446 451
Capital surplus........................................ 17,128 17,591
Retained earnings...................................... 24,101 19,252
Treasury stock, at cost (54,897 shares in 1995; 131,689
shares in 1996)..................................... (629) (1,531)
Unearned compensation expense.......................... (412) (225)
-------- -------
Total stockholders' equity.......................... 40,634 35,538
-------- -------
$ 98,918 $63,487
-------- -------
-------- -------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $70,420 $ 75,448 $80,711
Cost of sales..................................... 41,757 47,924 48,405
------- -------- -------
Gross profit.................................... 28,663 27,524 32,306
Selling, general and administrative expenses...... 28,440 41,843 32,718
------- -------- -------
Operating income (loss)......................... 223 (14,319) (412)
Interest expense.................................. (1,143) (1,723) (882)
Interest income................................... 2,048 1,582 650
Loss from joint venture........................... -- -- (159)
------- -------- -------
Income (loss) from continuing operations before
income taxes.................................... 1,128 (14,460) (803)
Income taxes...................................... 135 (3,344) 32
------- -------- -------
Income (loss) from continuing operations.......... 993 (11,116) (835)
Discontinued operations:
Income (loss) from discontinued operations net
of income tax provision of $1,437, in 1994
and $792 in 1995............................. 2,489 1,350 --
Loss on disposal, net of income tax benefit of
$199 in 1995................................. -- (3,138) (4,014)
------- -------- -------
Net income (loss)................................. $ 3,482 $(12,904) $(4,849)
------- -------- -------
------- -------- -------
Net income (loss) per share of common stock:
Continuing operations........................... $ .23 $ (2.55) $ (.19)
Discontinued operations......................... .58 (.41) (.91)
------- -------- -------
Net income (loss)............................... $ .81 $ (2.96) $ (1.10)
------- -------- -------
------- -------- -------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED UNEARNED
-------------- CAPITAL RETAINED GAIN/LOSS ON TREASURY COMPENSATION ESOP LOAN
SHARES PAR SURPLUS EARNINGS INVESTMENTS STOCK EXPENSE RECEIVABLE
------ ---- ------- -------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... 4,305 $430 $15,829 $ 33,522 $ (879) $(165)
Net income..................... 3,482
Stock allocated under ESOP..... 310
Loans to repurchase ESOP shares
distributed.................. (60)
Loans to repurchase 6,554
shares from treasury......... 13 72 (85)
Exercise of stock options...... 66 7 325
Purchase of common shares...... (57)
Retirement of common shares.... (10) (1) (120) 119
Unrealized loss on
investments.................. $ (225)
Tax benefit derived from stock
option plan.................. 120
------ ---- ------- -------- ----- -------- ---------
Balance, December 31, 1994....... 4,361 436 16,167 37,004 (225) (745) --
Net loss....................... (12,904)
Stock allocated under ESOP..... 291
Loans to repurchase ESOP shares
distributed.................. (159)
Loans to repurchase shares from
treasury..................... (32) 164 (132)
Exercise of stock options...... 15 2 75
Retirement of common shares.... (2)
Unrealized gain on
investments.................. 225
Restricted stock issued........ 65 6 673 $ (673)
Restricted stock canceled...... (62) 55
Common stock issued to
Directors.................... 6 1 64 14
Common stock issued as
compensation................. 11 1 152
Tax benefit derived from stock
option plan.................. 31
Amortization of unearned
compensation................. 206
Other.......................... 1
------ ---- ------- -------- ----- -------- ----- ---------
Balance, December 31, 1995....... 4,458 446 17,128 24,101 -- (629) (412) --
Net loss....................... (4,849)
Stock allocated under ESOP..... 168
Repurchase of common shares.... (1,016)
Exercise of stock options...... 44 4 307
Restricted stock canceled...... 14 (110) 105
Common stock issued to
Directors.................... 8 1 94 56
Tax benefit derived from stock
option plan.................. 48
Amortization of unearned
compensation................. 82
------ ---- ------- -------- ----- -------- ----- ---------
Balance at December 31, 1996..... 4,510 $451 $17,591 $ 19,252 $ -- $(1,531) $ (225) $ --
------ ---- ------- -------- ----- -------- ----- ---------
------ ---- ------- -------- ----- -------- ----- ---------
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $ 3,482 $(12,904) $ (4,849)
Noncash items included in net income (loss):
Depreciation and amortization.......................... 3,224 5,231 2,940
Contribution of Common Stock to ESOP................... 311 291 --
Deferred income taxes.................................. 648 551 --
Provisions for losses on accounts and lease
receivables.......................................... 11 368 767
Discontinued operations................................ -- 2,690 3,867
Changes in operating assets and liabilities:
Accounts receivable.................................... (8,020) (6,278) 1,897
Inventories............................................ (373) (5,373) 2,090
Refundable income taxes................................ -- (2,782) 64
Other current assets................................... 355 (1,080) (1,720)
Lease receivables...................................... (15,605) (14,527) (9,698)
Accounts payable....................................... 2,793 7,773 (3,738)
Accrued liabilities.................................... 371 7,503 (3,826)
-------- -------- --------
Net cash used in operating activities.................. (12,803) (18,537) (12,206)
-------- -------- --------
Investing activities:
Proceeds from sale of discontinued operations, net of
closing and other costs................................ -- -- 36,800
Purchases of property, plant and equipment................ (3,614) (9,593) (1,061)
Purchases of investments.................................. (1,003) -- --
Proceeds from sales and maturities of investments......... 7,105 2,633 (2,476)
Decrease (increase) in other assets....................... 1,881 (348) (429)
Increase in intangible assets............................. (792) (6,083) (36)
-------- -------- --------
Net cash provided by (used in) investing activities.... 3,577 (13,391) 37,750
-------- -------- --------
Financing activities:
Proceeds from short-term debt............................. -- 15,250 --
Repayment of short-term debt.............................. -- -- (15,250)
Proceeds from sale of leases.............................. 16,803 8,344 6,954
Proceeds from long-term debt.............................. 5,000 4,500 3,517
Principal payments of long-term debt...................... (3,305) (4,030) (14,800)
Common shares reacquired.................................. (57) -- (927)
Other..................................................... 271 (84) 232
-------- -------- --------
Net cash provided by (used in) financing activities.... 18,712 23,980 (20,274)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 9,486 (7,948) 5,270
Cash and cash equivalents--January 1........................ 260 9,746 1,798
-------- -------- --------
Cash and cash equivalents--December 31...................... $ 9,746 $ 1,798 $ 7,068
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of CYBEX
International, Inc., formerly Lumex, Inc., and its subsidiaries (the 'Company')
after elimination of all significant intercompany accounts and transactions. The
Company accounts for its 50% ownership in CYBEX Forza International Ltd. under
the equity method of accounting as the Company does not have a controlling
voting interest.
Prior year financial statements have been restated to reflect the results
of operations of the Lumex Division, which was sold in April 1996, as
discontinued operations--see Note B. All amounts included in these notes to
consolidated financial statements pertain to continuing operations unless
otherwise stated.
Merger Agreement
On December 27, 1996, the Company entered into an Agreement and Plan of
Merger (the 'Merger Agreement') whereby a wholly-owned subsidiary of the Company
would be merged with and into Trotter Inc. ('Trotter'), a manufacturer of
premium quality cardiovascular and strength equipment for the home and
commercial fitness markets. Pursuant to the terms of the Merger Agreement all of
the shares of the common stock, $.01 par value ('Trotter Common Stock'), of
Trotter issued and outstanding at the effective time shall be converted into the
right to receive, and shall be exchanged for, the number of fully-paid and
non-assessable CYBEX Common Shares (rounded upward to the nearest whole share)
which, upon issuance together with the holders of options to purchase Trotter
Common Stock, shall equal 50.001% of all CYBEX Common Shares issued and
outstanding on a fully diluted basis, calculated using the treasury stock method
for outstanding stock options and assuming a price of $9.75 per share for the
CYBEX Common Stock, immediately following the effective time. The Merger is
subject to the satisfaction of certain conditions, including the approval by the
Company's shareholders.
Business
The Company operates in one industry, the exercise equipment industry,
where it designs, manufactures and markets a wide variety of exercise equipment
for the fitness, rehabilitation and sports medicine markets.
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.
Investments
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, Accounting for Certain Debt and Equity Securities ('SFAS 115'). The Company
adopted the provisions of the new standard for investments held as of or
acquired after January 1, 1994. SFAS 115 requires the Company to evaluate its
investment policies and classify individual securities held for investment as
either held to maturity, trading or available-for-sale. Management has
determined that all of the Company's investments (consisting of various debt
securities) are available-for-sale. Available-for-sale securities are stated at
fair value, with unrealized gains and losses, net of income tax, reported as a
separate component of stockholders' equity. In accordance with SFAS 115 prior
period financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of January 1, 1994, of adopting
SFAS 115 was not material to the Company's financial condition or results of
operations.
Inventories
Inventories are stated at the lower of cost or market. Inventory costs have
been determined by the last-in first-out ('LIFO') method for approximately 33%
and 23% of inventories at December 31, 1995 and 1996, respectively. Costs for
the remaining inventories have been determined using the first-in first-out
('FIFO') method.
F-13
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Impairment of long-lived assets
In 1995, The Financial Accounting Standards Board issued Statement No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, ('SFAS 121'), which the Company adopted effective January 1, 1996.
SFAS 121 requires that long-lived assets and certain identifiable intangibles
held and used by a company be reviewed for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS 121 also requires that long-lived assets and certain
identifiable intangibles held for sale be reported at the lower of carrying
amount or fair value less cost to sell. The effect of adoption of SFAS 121 was
not material to the Company's financial statements.
Property, plant and equipment
Property, plant and equipment, including expenditures for renewals and
betterments, are recorded at cost. Depreciation of plant and equipment is
computed using the straight-line method over their related estimated useful
lives (buildings, 40 years; building improvements, 15 years; machinery and
equipment, 3 to 10 years).
Intangibles
Intangibles consist principally of an exclusive license and patent rights
recorded at cost and amortized over their estimated useful lives by the
straight-line method for periods ranging from 3 to 30 years. Accumulated
amortization at December 31, 1995 and 1996, was $756,000 and $1,264,000,
respectively.
Fair value of financial instruments
To meet the reporting requirements of FASB Statement 107, Disclosures about
Fair Value of Financial Instruments, the Company calculates the fair value of
financial instruments and includes this additional information in the notes to
the financial statements when the fair value is different than the carrying
value of those financial instruments. When the fair value is equal to the
carrying value no additional disclosure is made. The Company uses quoted market
prices whenever available to calculate these fair values.
Income taxes
The Company adopted the provisions of the Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes ('SFAS 109') as of January
1, 1993. Under SFAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities using tax rates and laws that will be in effect when the differences
are expected to reverse.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock based compensation
The Company has four stock-based compensation plans which are described in
Note F to the consolidated financial statements. The Company has elected to
continue to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ('APB 25') and related interpretations in accounting
for its stock-based compensation plans rather than the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation ('SFAS 123'). Under APB 25, because
the exercise price of the Company's employee stock options granted equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-14
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Net income (loss) per common share
Net income (loss) per share of Common Stock is computed by dividing net
income (loss) by the weighted average number of common shares and common share
equivalents (dilutive stock options) outstanding during each year (4,315,000 in
1994, 4,351,000 in 1995 and 4,392,000 in 1996).
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform to the current year's presentation.
NOTE B--DISCONTINUED OPERATIONS
On April 3, 1996, the Company completed the sale of substantially all the
assets of its Lumex Division to Fuqua Enterprises, Inc. ('Fuqua') for $40,750.00
in cash. Accordingly, the Company has reclassified its consolidated financial
statements to reflect the net assets as of December 31, 1995, and operating
results for all years presented of the Lumex Division as discontinued
operations. Net sales for the Lumex Division were $60,777,000, $63,295,000 and
$13,444,000 for the years ended December 31, 1994 and 1995 and for the first
quarter of 1996, respectively. The net losses from discontinued operations for
the period between the measurement date (October 1, 1995) and December 31, 1995
of $1,247,000, and for the period from January 1, 1996 to April 3, 1996 of
approximately $984,000, have been included in the loss on disposal of $3,138,000
for the year ended December 31, 1995, as shown in the consolidated statements of
operations.
The net assets of discontinued operations at December 31, 1995, are
summarized as follows (in thousands):
<TABLE>
<S> <C>
Current assets................... $ 20,782
Property, plant and equipment.... 12,758
Lease receivables................ 13,593
Other assets..................... 5,995
Current liabilities.............. (13,224)
Accrued loss on disposal......... (2,690)
--------
Net assets....................... $ 37,214
--------
--------
</TABLE>
The asset sale agreement with Fuqua provides for a post-closing adjustment
to the sales price based on the change in the net assets of the Lumex Division
from December 31, 1995, through the closing date. The Company has received
notice from Fuqua that Fuqua believes the stated amount of the net assets of the
Lumex Division as of the closing date are overstated by $9.3 million. The
Company has determined to proceed to arbitration to resolve this dispute. An
initial submission to the arbitrator was made by Fuqua in March 1997, and the
Company's response is due on or about April 25, 1997. Fuqua has also notified
the Company of claims for breaches of certain of the Company's representations
and warranties in the asset sale agreement involving substantially the same
matters submitted to the arbitrator. The Company recorded a $4.0 million charge
to discontinued operations in 1996 ($3.6 million in the fourth quarter)
representing a change in its estimated loss on the sale of the Lumex Division
including accruals for professional fees and other expenses.
F-15
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--NON-RECURRING AND CERTAIN INFREQUENT CHARGES
In 1995 the Company recorded pre-tax non-recurring charges totaling $10.2
million of which $7.9 million and $2.3 million have been reflected in selling,
general and administrative expense and cost of sales, respectively. Of these
charges, $8.2 million were recorded in the fourth quarter of 1995, including the
estimated costs associated with a restructuring plan. Under the plan, the
Company consolidated its sales forces, phased down the production of
unprofitable product lines and eliminated approximately 75 sales, administrative
and engineering positions. Included in the non-recurring charges are costs
related to, among other things, severance payments and related personnel costs
of $2.3 million, phasing down production of unprofitable or older product lines
of $2.3 million, contractual obligations of $1.3 million, $.7 million for
warranty costs related to certain older product lines and other expenses
totaling $1.6 million related to the restructuring of its CYBEX business, of
which $.9 million was paid or charged against the reserves in 1995. At December
31, 1995, $5.1 million and $2.3 million of these reserves were reflected in
accrued liabilities and inventory reserves, respectively, in the Company's
consolidated balance sheet.
One-time charges incurred earlier in 1995 included a $750,000 settlement to
a contractual dispute, approximately $700,000 in severance and paid recruitment
costs for senior executive management changes, and professional fees for
corporate services provided of$550,000.
During 1996, the Company made payments and incurred charges to the reserves
originally established in the fourth quarter of 1995 for severance and related
costs of $1.1 million, contractual obligations of $491,000, discontinued product
lines of $700,000 and other expenses of $1,110,000. Adjustments were made to
decrease the reserve in 1996 for severance and contractual obligations of
$370,000 and $229,000, respectively. Adjustments were made to increase the
reserve in 1996 for discontinued product lines and other expenses of $856,000
and $60,000, respectively. The remaining balance in the reserves for
nonrecurring charges at December 31, 1996, was $4.2 million and was comprised of
$800,000 for severance, $3.1 million for discontinued product lines and $300,000
for other expenses. The non-cash portion of the balance of nonrecurring charges
is approximately $3.1 million and the cash portion is approximately $1.1
million.
In 1996, the Company recorded pre-tax nonrecurring and certain infrequent
charges of $2.2 million which have been reflected in selling, general and
administrative expenses. Included in these charges are costs related to, among
other things, the prospective merger with Trotter Inc. of $540,000 (including
bonuses to Directors of $325,000), closing of the Woodinville manufacturing
facility and phase out of the consumer fitness product line of $900,000,
relocation costs for the Company's head offices of $380,000 and other costs of
$380,000, including consulting fees related to the completion of the first phase
of the Company's overall systems upgrade project. Payments made in 1996 totaled
$900,000, principally related to relocation and systems upgrade, leaving a
balance remaining at December 31, 1996 of $1.3 million, all of which is expected
to be utilized in 1997.
At December 31, 1996, the outstanding balance of the remaining reserves
were included in the Company's consolidated balance sheet in the following
accounts: $2.5 million in inventory reserves; $.6 million in accounts receivable
reserves; $.3 million in accounts payable and $2.1 million in accrued
liabilities.
NOTE D--INVESTMENTS
The Company has determined that all of its investment securities are
classified as available-for-sale. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. The cost of
securities sold is based on the specific identification method. Interest and
dividends are included in interest income.
Available-for-sale securities held by the Company at December 31, 1995 were
comprised of obligations of states and other political subdivisions. Proceeds
received from sales of securities available-for-sale were $2,633,000 in 1995 and
$2,476,000 in 1996. Gross gains and gross losses on such sales were not
significant.
F-16
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- ------
<S> <C> <C>
Bank term loans........................ $13,525 $2,012
Industrial development revenue bond.... 1,245 615
Industrial development revenue note.... 2,275 2,100
Note payable........................... -- 1,035
------- ------
17,045 5,762
Less current portion................... 14,330 3,776
------- ------
$ 2,715 $1,986
------- ------
------- ------
</TABLE>
In May 1996, the Company borrowed $2,465,000 from a bank pursuant to a five
year, 9.48% fixed rate term loan agreement. The term loan is payable in fifty
seven principal installments plus interest which commenced June 15, 1996. The
term loan is secured by an equivalent amount of specific lease receivables which
are included in lease receivables in the Company's consolidated balance sheet.
The industrial development revenue bond provided the funds to construct and
equip the manufacturing facility in Ronkonkoma, New York. The bond is
collateralized by land, building and equipment with a net book value of
$5,388,000 at December 31, 1996, bears interest at 60% of the bank's prime rate
and has a final payment of $615,000 due on June 30, 1997. The effective interest
rate at December 31, 1996 was 4.95%. Under the terms of the bond agreement, the
Company is subject to certain restrictive covenants including limitations on
additional borrowings, limitation on the payment of cash dividends to 20% of net
income and compliance with certain financial ratios. The Company was not in full
compliance with certain of these financial covenants at December 31, 1996, and
has received the appropriate waivers from the bank.
The industrial development revenue note was used to construct and equip the
manufacturing facility in Owatonna, Minnesota. The note is collateralized by
land, building and equipment with a net book value of $6,757,000 at December 31,
1996, bears interest at 62.5% of the bank's prime rate and requires annual
principal payments of $175,000 on each January 1 through 2003 with a final
payment of $875,000 on January 1, 2004. The effective interest rate at December
31, 1996 was 5.16%. The note agreement requires compliance with certain
financial ratios. The Company's current ratio at December 31, 1996 was not in
compliance with the required ratio of 2.5 to 1.0. The bank has waived this
default and amended the terms of the agreement giving the bank the ability to
call the loan in its entirety during the first 90 days of any calendar year
beginning in 1998. The Company has classified this note as current at December
31, 1996 due to the uncertainty of obtaining the bank's approval for the merger
with Trotter.
The note payable bears interest at a fixed rate of 8.9% and is
collateralized by certain manufacturing equipment with a net book value of
$894,000 at December 31, 1996.
Annual principal payments of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1997.... $3,776
1998.... 979
1999.... 452
2000.... 322
2001.... 233
------
$5,762
------
------
</TABLE>
F-17
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS--(CONTINUED)
The Company has a bank line of credit which provides up to $5 million of
available credit. Any borrowings under this Agreement would bear interest at the
bank prime rate plus 1/4% at the time of borrowing. The credit facility is
principally secured by the Company's trade accounts receivable and inventories.
Selected data on the Company's short-term borrowings are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Balance at December 31........................... $15,250 --
Weighted average interest rate at December 31.... 7.42% --
Maximum amount outstanding
at any month end............................... $15,250 $15,250
Average amount outstanding....................... $ 8,813 1,271
Weighted average interest
rate for the year.............................. 7.50% 7.41%
</TABLE>
Cash paid for interest was $1,103,000, $1,730,000 and $975,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
NOTE F--STOCKHOLDERS' EQUITY
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123 ('SFAS 123'), Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted in 1995 and 1996 under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair values of these options at the date of grant was estimated with
the following weighted-average assumptions for 1995 and 1996: risk-free interest
rate of 5.9%, no dividend yield, volatility factor of the expected market price
of the Company's common stock of 33% and a weighted-average expected life of the
option of five years.
F-18
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--STOCKHOLDERS' EQUITY--(CONTINUED)
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over five years. The Company's proforma
information follows (in thousands except for earnings per share information):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1996
-------- -------
<S> <C> <C>
Proforma loss from continuing operations... $(11,133) $ (889)
Proforma net loss.......................... $(12,921) $(4,903)
Proforma loss per share from continuing
operations............................... $ (2.57) $ (.20)
Proforma net loss per share................ $ (2.98) $ (1.12)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994 and employee stock options granted vest over a four year
period, its proforma effect may not be representative of the effect in future
years when the effect would include the impact of multiple awards.
Omnibus Incentive Plan
In June 1995, shareholders approved the 1995 Omnibus Incentive Plan
('Omnibus Plan'), designed to provide incentives which will attract and retain
individuals key to the success of the Company through direct or indirect
ownership of the Company's Common Stock. Benefits under the Omnibus Plan may be
granted in any one or a combination of stock options, stock appreciation rights,
stock awards, performance awards and bonus stock purchase awards. The Ominibus
Plan has 250,000 shares of Common Stock reserved for issuance and provides that
the terms and conditions of each award are to be determined by a committee of
the Board of Directors charged with administering the Omnibus Plan. Under the
Omnibus Plan, the committee may grant either incentive 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
Common Stock on the date of grant). The committee may also grant stock
appreciation rights either in tandem with, or independently of, an award of
stock options. Under the Omnibus Plan, the committee is authorized to permit key
employees selected by the committee to elect to convert up to a maximum
percentage, as determined by the committee, of their annual cash bonus incentive
into Common Stock of the Company at a price per share fixed by the committee,
which will not be less than 85% of the fair market value of the Common Stock on
the regular bonus payment date. Options granted under the Omnibus Plan become
exercisable over a four year period following the grant date and expire after
ten years.
At December 31, 1996, there were 50,521 shares outstanding under restricted
stock awards granted in 1995. There were no restricted stock awards granted in
1996. Restricted stock awards vest in one to five years from the date of grant.
Upon the issuance of restricted stock, unearned compensation equal to fair
market value at the date of grant is charged to stockholders' equity and
amortized to expense over the period in which the restrictions lapse.
Amortization expense of $206,000 and $82,000 were charged to operations in 1995
and 1996, respectively.
1987 Stock Option Plan
The Company also has shares available for the granting of options under the
1987 Stock Option Plan. Under this plan, a committee of the Board of Directors
charged with administering the plan may grant either incentive or nonqualified
stock options with a term not to exceed ten years from the grant date, 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
Common Stock on the date of grant), and with such other conditions as the
committee determines. The committee may also grant stock appreciation rights
either in tandem with, or independently of, an award of stock options under the
plan. Options granted under this plan become exercisable over a four year period
following the grant date and expire after ten years.
F-19
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--STOCKHOLDERS' EQUITY--(CONTINUED)
The following is a summary of activity in the 1995 Omnibus Incentive Plan
and 1987 Stock Option Plan:
<TABLE>
<CAPTION>
1995 OMNIBUS 1987 STOCK
INCENTIVE PLAN OPTION PLAN
------------------- -------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF OPTION EXERCISE
SHARES PRICE SHARES PRICE PRICE
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at Jan. 1, 1994... 246,950 $ 5-$19
Granted..................... 144,600 $10-$11
Exercised................... (65,900) $ 5
Forfeited................... (48,800) $10-$14
--------
Outstanding at Dec. 31, 1994.. -- 276,850 $ 5-$19
Granted..................... 40,000 $ 10 70,100 $ 11
Exercised................... -- (15,050) $ 5
Forfeited................... -- (70,625) $10-$14
------- --------
Outstanding at Dec. 31, 1995.. 40,000 $ 10 261,275 $ 5-$19 $10.49
Granted..................... -- 16,000 $ 9 $ 9.00
Exercised................... -- (43,650) $ 5-$10 $ 7.34
Forfeited................... (7,500) $ 10 (109,075) $10-$14 $10.74
Expired..................... -- (6,000) $ 14 $14.00
------- --------
Outstanding at Dec. 31, 1996.. 32,500 $ 10 118,550 $ 9-$19 $11.88
------- --------
------- --------
Exercisable at Dec. 31:
1996........................ 13,750 $ 10 70,675 $13.20
1995........................ -- 119,681 $11.48
Shares available for future
issuance at Dec. 31:
1996........................ 166,979 156,400
1995........................ 150,009 57,325
</TABLE>
The weighted average fair value of options granted during 1995 and 1996
were $4.03 per share and $3.70 per share, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ----------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$9.38-$10.70........... 94,050 8.7 years $ 9.98 27,425 $ 10.03
$12.13-$13.88.......... 47,000 4.8 12.94 47,000 12.94
$18.75................. 10,000 .1 18.75 10,000 18.75
----------- -----------
$9.38-$18.75........... 151,050 6.9 years $ 11.48 84,425 $ 12.68
----------- -----------
----------- -----------
</TABLE>
F-20
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--STOCKHOLDERS' EQUITY--(CONTINUED)
Stock Retainer Plan for Nonemployee Directors
In June 1995, the shareholders approved the Stock Retainer Plan for
Nonemployee Directors ('Retainer Plan'), which provides that each nonemployee
director will receive 70% of their annual retainer or, in the case of the
Chairman of the Board of Directors, shall receive 50% of his annual retainer, in
shares of Common Stock of the Company. The number of shares to be issued will be
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 35,000 shares of Common Stock may be issued pursuant to the Retainer
Plan. The issuance of shares in payment of annual retainers will result in
compensation expense based on the fair market value of such shares. The Company
issued 6,223 shares in 1995 and 8,064 shares in 1996 under the Retainer Plan
representing $65,000 and $95,000 for director fees paid in 1995 and 1996,
respectively. The Company also reissued 1,250 shares in 1995 and 5,000 shares in
1996 from Treasury representing $14,000 and $56,000 in director fees in 1995 and
1996, respectively, which were not part of the Retainer Plan.
Leveraged Employee Stock Ownership Plan
The Company maintains a leveraged Employee Stock Ownership Plan ('ESOP')
which 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.
In 1989, the ESOP borrowed $1,297,000 from the Company to acquire 108,100
shares previously held in treasury. Each year the Company contributes amounts to
the ESOP sufficient for the ESOP to reduce its loan balance and release a
portion of its unallocated shares to eligible employees. In addition the ESOP
has made periodic borrowings from the Company to repurchase shares distributed
to former participants. Contributions by the Company to the ESOP are charged to
expense. During 1994, the remaining unallocated shares held by the ESOP were
allocated to eligible employees and the remaining loan balance was eliminated.
During 1995 and 1996, 14,972 and 15,181 shares, respectively, of the Company's
Common Stock were transferred from treasury stock to the ESOP. In 1994, 1995 and
1996, 25,900, 25,900 and 15,181 shares, respectively, were allocated to eligible
employees and $310,000, $291,000 and $168,000, respectively, were charged to
expense by the Company.
For financial statement purposes the Company's loan receivable had been
reflected as a reduction in stockholders' equity.
Shareholders' Rights Plan
In May 1988, as further amended by the Board of Directors in March 1989, a
Shareholders Rights Plan (the 'Rights Plan') was adopted to insure that any
acquisition of the Company would be on terms that are fair to and in the best
interest of all shareholders. Under the Rights Plan, holders of Common Stock are
entitled to receive one right for each share of Common Stock held. Separate
rights certificates would be issued and become exercisable in the event an
acquiring party accumulates 15% or more of the Company's Common Stock or
announces an offer to acquire 30% or more of the Common Stock.
Each right will entitle a holder, except a 15% or more holder, to buy one
one-hundredth share of a newly authorized Series A Preferred Stock at an
exercise price of $60. Each one one-hundredth share of such preferred stock is
essentially equivalent to one share of the Company's Common Stock. However, if
an acquiring party accumulates 15% or more of the Company's Common Stock or
certain other events occur, each right entitles the holder (other than a 15%
holder) to purchase for $60 either $120 worth of Series A Preferred Stock or
$120 worth of common stock in the entity acquiring the Company. The purchase
price per share would be the market price of the Company's Common Stock or the
common stock of such acquiring entity.
F-21
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--STOCKHOLDERS' EQUITY--(CONTINUED)
The rights expire in May 1998 and may be redeemed by the Company at a price
of $.05 per right at any time up to ten days after they become exercisable
(subject to extension in certain circumstances) or in connection with a
transaction approved by Independent Directors (as defined in the Rights Plan).
NOTE G--INCOME TAXES
The provision (benefit) for income taxes on continuing operations included
in the accompanying Consolidated Statements of Operations is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ------- ----
<S> <C> <C> <C>
Current:
Federal.............. $(33) $(2,816) $--
State and local...... 60 23 32
---- ------- ----
27 (2,793) 32
Deferred............... 108 (551) --
---- ------- ----
$135 $(3,344) $32
---- ------- ----
---- ------- ----
</TABLE>
The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------ -------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation............................. $1,022 $ 1,379
Other--net........................................... 205 205
------ -------
Total deferred tax liabilities....................... 1,227 1,584
Deferred tax assets (included in other current assets):
Net operating loss carryforward...................... -- 2,861
Non-recurring charge................................. 1,798 582
Discontinued operations.............................. 772 1,174
Warranty reserves.................................... 816 617
Insurance obligations................................ 276 332
Bad debt reserves.................................... 240 407
LIFO reserves........................................ 82 45
Inventory cost capitalization........................ 87 81
Other--net........................................... 82 4
------ -------
Total deferred tax assets.............................. 4,153 6,103
Valuation allowance.................................... (2,698) (4,291)
------ -------
Net deferred tax asset................................. $ 228 $ 228
------ -------
------ -------
</TABLE>
F-22
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G--INCOME TAXES--(CONTINUED)
The Company has recognized a benefit equal to taxes recoverable from the
utilization of net operating loss carrybacks and has recorded a valuation
allowance of $2,698,000 and $4,291,000 in 1995 and 1996, respectively. No
valuation allowance was recorded at December 31, 1994.
The reconciliation of tax computed on the results from continuing
operations at the federal statutory rate to the provision (benefit) for income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -----
<S> <C> <C> <C>
Tax computed at statutory rate.................... $ 383 $(4,916) $(273)
Tax-free interest earned on investments........... (107) (67) (6)
Foreign Sales Corporation exempt income........... (101) (105) --
State income taxes, net of federal tax benefit.... 40 15 21
Research and development tax credit............... (57) -- --
Valuation allowance............................... -- 1,707 249
Other, net........................................ (23) 22 41
------- ------- -----
$ 135 $(3,344) $ 32
------- ------- -----
------- ------- -----
</TABLE>
The Company received a tax benefit from the exercise of non-qualified stock
options of $31,000 and $48,000 credited directly to capital surplus during the
years ended December 31, 1995 and 1996, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of
$6,705,000 expiring in 2011.
Cash paid for income taxes was, $844,000, $157,000 and $254,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
NOTE H--BENEFIT PLANS
The Company has a noncontributory defined contribution retirement plan
('Retirement Plan') covering substantially all employees. Contributions to the
Retirement Plan are based upon annual compensation for those persons employed
(as defined) at December 31 and are funded annually. Retirement Plan expense was
$267,000, $360,000, and $155,000 in 1994, 1995 and 1996, respectively.
NOTE I--LEASES
As Lessor
The Company offers lease financing of selected products to its customers
under sales-type leases. Leases are generally for 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.
F-23
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--LEASES--(CONTINUED)
Lease receivables were comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Minimum lease payments receivable...................... $ 2,467 $ 5,257
Less--unearned interest income......................... (430) (616)
Less--allowance for uncollectible accounts............. (61) (227)
------- -------
Lease receivables...................................... 1,976 4,414
Less--current portion.................................. (574) (2,144)
------- -------
Noncurrent portion..................................... $ 1,402 $ 2,270
------- -------
------- -------
</TABLE>
Minimum lease payments receivable as of December 31, 1996, were as follows
(in thousands):
<TABLE>
<S> <C>
1997......... $2,828
1998......... 1,721
1999......... 500
2000......... 174
2001......... 34
Thereafter... --
------
$5,257
------
------
</TABLE>
The Company financed $10.8 million and $12.5 million of its equipment sales
for the years ended December 31, 1995 and 1996, respectively. Income from
leasing activities for the years ended December 31, 1994, 1995 and 1996, was
$517,000, $567,000, and $176,000 respectively.
The Company periodically enters into agreements, generally subject to
limited recourse, to sell lease receivables to financial institutions to provide
continuous funding for its leasing programs. The Company sold $8.3 million and
$7.0 million of lease receivables in 1995 and 1996, respectively. Under the
terms of these agreements the Company will continue to bill and collect the
monthly lease payments which are then remitted to respective lenders each month.
The Company is subject to recourse provisions which may require it to repurchase
or replace leases in default. In return, the Company receives the collateralized
lease equipment. 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 stream. At December 31, 1996, the maximum contingent
liability under these recourse provisions was $9.2 million. Estimated credit
losses of $323,000 under the limited recourse provisions have been accrued
consistent with management's expectations based upon historical and industry
experience and are included in accrued liabilities in the accompanying
consolidated balance sheet.
As Lessee
The Company has lease commitments expiring at various dates through 2001,
principally for facilities and data processing equipment under noncancelable
operating leases. Future minimum payments under these leases at December 31,
1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997.... $ 632
1998.... 449
1999.... 340
2000.... 319
2001.... 215
------
$1,955
------
------
</TABLE>
F-24
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--LEASES--(CONTINUED)
Rent expense under operating leases for 1994, 1995 and 1996 was $435,000,
$591,000, and $687,000 respectively.
NOTE J--OTHER INFORMATION
Sale of Ronkonkoma, New York facility
The Company has signed an agreement to sell its manufacturing, warehouse
and office facility located in Ronkonkoma, New York for $4.5 million. The
facility is subject to an industrial revenue bond with an outstanding principal
balance of $615,000. The sale of this facility is expected to be finalized in
the second quarter of 1997 and result in a gain for financial statement
purposes. The Company plans on moving its Ronkonkoma operations, including
manufacturing, to a smaller leased facility in the same geographic area.
Equity investment
In the fourth quarter of 1996, the Company entered into a joint venture
agreement to form a new company, CYBEX Forza International Ltd., to coordinate,
expand and improve its sales and servicing efforts in Europe, as well as Russia,
Africa and the Middle East. The joint venture is equally owned by the Company
and The Forza Group Ltd. ('Forza'), the Company's distributor in the United
Kingdom. In addition to the Company's products, the joint venture will
distribute other fitness products and will also pursue selective European based
manufacturing opportunities. At December 31, 1996, the Company's investment in
and advances to the joint venture totaled $180,000 and is reflected in other
assets in the accompanying consolidated balance sheet. Total revenues and gross
assets of the joint venture were not material to the Company's consolidated
financial statements.
Receivables
Trade accounts receivable are stated net of allowances for doubtful
accounts of $943,000 in 1995 and $1,106,000 in 1996. The provision for bad debts
for the years ended December 31, 1994, 1995 and 1996, was $67,000, $633,000 and
$221,000, respectively.
Inventories
Inventories were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Finished goods..... $ 4,160 $ 3,053
Work in process.... 3,828 3,973
Raw Materials...... 4,036 2,908
------- -------
$12,024 $ 9,934
------- -------
------- -------
</TABLE>
F-25
<PAGE>
CYBEX INTERNATIONAL, INC.
(FORMERLY LUMEX, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--OTHER INFORMATION--(CONTINUED)
Year-end inventories valued under the LIFO method were $2,952,000 in 1995
and $1,544,000 in 1996. The replacement cost of LIFO inventories exceeds stated
LIFO costs by approximately $1,501,000 and $953,000 at December 31, 1995 and
1996, respectively.
Intangible Assets
In February 1995, the Company exercised an option, under an existing
distributorship agreement with Impulse Technologies, Inc. ('Impulse') to acquire
the exclusive license and patent rights to certain products developed by
Impulse, including a functional activity system for testing and exercise
('FASTEX') for $1.5 million plus a royalty of 8% of net sales until expiration
of the patent rights.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Salaries, bonuses and commissions.... $ 1,238 $ 1,104
Accrued vacation..................... 549 588
Customer deposits.................... 1,214 1,158
Warranty reserves.................... 710 782
Self insurance obligations........... 948 977
Non-recurring charges................ 5,125 2,075
Discontinued operations.............. -- 3,453
Other................................ 4,104 3,330
------- -------
$13,888 $13,467
------- -------
------- -------
</TABLE>
Export Sales
Sales to foreign customers for the years ended December 31, 1994, 1995 and
1996 were $16,880,000, $21,585,000 and $26,017,000, respectively. No single
geographic area outside of the United States was material relative to
consolidated sales, operating profits or identifiable assets.
Product Development Expenses
Product development expenses, included in selling, general and
administrative expenses in the consolidated statements of operations, for the
years ended December 31, 1994, 1995 and 1996 were $4,065,000, $5,058,000 and
$3,990,000, respectively.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Trotter Inc.:
We have audited the accompanying consolidated balance sheets of Trotter Inc. (an
indirect wholly owned subsidiary of UM Holdings, Ltd., see Note 1) and
subsidiary as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Trotter Inc. and subsidiary as
of December 31, 1995 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 14, 1997
F-27
<PAGE>
TROTTER INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------------ -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 5 $ 1,656
Accounts receivable, net of allowance of $305 and
$477................................................. 8,231 7,604
Inventories............................................. 2,415 2,083
Deferred income taxes................................... 418 665
Prepaid expenses and other.............................. 663 410
Due from UM Holdings, Ltd............................... 890 --
------------ -------
Total current assets............................... 12,622 12,418
Property and equipment, net............................... 4,964 4,725
Goodwill.................................................. 2,638 2,451
Other assets.............................................. 744 558
Deferred income taxes..................................... 99 215
------------ -------
$ 21,067 $20,367
------------ -------
------------ -------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt....................... $ 1,400 $ 1,409
Accounts payable........................................ 2,951 2,838
Accrued warranty obligation............................. 767 1,042
Other accrued expenses.................................. 1,462 1,616
Income taxes payable.................................... 836 1,308
------------ -------
Total current liabilities 7,416 8,213
Long-term debt............................................ 13,425 9,960
Accrued warranty obligation............................... 798 798
------------ -------
Total liabilities.................................. 21,639 18,971
------------ -------
Commitments and contingencies (Note 8)
Stockholder's equity (deficit):
Common stock, $.01 par value, 4,750,000 shares
authorized, 3,800,000 shares issued and outstanding.. 38 38
Retained earnings (accumulated deficit)................. (610) 1,358
------------ -------
Total stockholder's equity (deficit)............... (572) 1,396
------------ -------
$ 21,067 $20,367
------------ -------
------------ -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
TROTTER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net sales........................................ $41,365 $43,719 $47,605
Cost of sales.................................... 24,836 27,860 29,541
------- ------- -------
Gross profit................................ 16,529 15,859 18,064
Selling, general and administrative expenses..... 12,260 12,762 13,797
------- ------- -------
Operating income............................ 4,269 3,097 4,267
Interest income.................................. -- 4 49
Interest expense................................. (219) (260) (1,004)
------- ------- -------
Income before income taxes....................... 4,050 2,841 3,312
Income taxes..................................... 1,675 1,171 1,344
------- ------- -------
Net income....................................... $ 2,375 $ 1,670 $ 1,968
------- ------- -------
------- ------- -------
Net income per share............................. $ .63 $ .44 $ .52
------- ------- -------
------- ------- -------
Shares used in computing net income per share.... 3,800 3,800 3,800
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
TROTTER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
---------------- PAID-IN DIVISION (ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EQUITY DEFICIT) EQUITY (DEFICIT)
------ ------ ---------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.... 3,800 $ 38 $ -- $ 2,853 $ 156 $ 3,047
Contribution of net assets
by UM Holdings Ltd....... -- -- 2,853 (2,853) -- --
Net income.................. -- -- -- -- 2,375 2,375
Net distributions to
UM Holdings Ltd.......... -- -- -- -- (1,159) (1,159)
------ ------ ---------- -------- ------------ --------
Balance, December 31, 1994.... 3,800 38 2,853 -- 1,372 4,263
Net income.................. -- -- -- -- 1,670 1,670
Net distributions to
UM Holdings Ltd.......... -- -- (2,853) -- (3,652) (6,505)
------ ------ ---------- -------- ------------ --------
Balance, December 31, 1995.... 3,800 38 -- -- (610) (572)
Net income.................. -- -- -- -- 1,968 1,968
------ ------ ---------- -------- ------------ --------
Balance, December 31, 1996.... 3,800 $ 38 $ -- $ -- $ 1,358 $ 1,396
------ ------ ---------- -------- ------------ --------
------ ------ ---------- -------- ------------ --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
TROTTER INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income................................................ $ 2,375 $ 1,670 $ 1,968
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 1,446 1,487 1,269
Provision for losses on accounts receivable.......... 136 264 567
Deferred income taxes................................ (22) 135 (447)
Changes in operating assets and liabilities:
Accounts receivable............................. (1,863) (1,806) 60
Inventories, prepaid expenses and other
assets...................................... (1,235) 406 478
Accounts payable, income taxes payable, accrued
warranty and other accrued expenses......... 946 (665) 927
------- ------- -------
Net cash provided by operating activities............ 1,783 1,491 4,822
------- ------- -------
Investing Activities:
Purchases of property and equipment....................... (424) (716) (605)
------- ------- -------
Financing Activities:
Proceeds from long-term debt.............................. -- 9,000 75
Repayment of long-term debt and capital lease............. (200) (200) (1,406)
Net borrowings (repayments) under revolving loan.......... -- 2,125 (2,125)
Remittances from (repayments to) UM Holdings Ltd.......... -- (5,190) 890
Net distributions to UM Holdings Ltd...................... (1,159) (6,505) --
------- ------- -------
Net cash used in financing activities................ (1,359) (770) (2,566)
------- ------- -------
Net increase in cash and cash equivalents................... -- 5 1,651
Cash and cash equivalents, beginning of year................ -- -- 5
------- ------- -------
Cash and cash equivalents, end of year...................... $ -- $ 5 $ 1,656
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Basis of Presentation
Trotter Inc. ('Trotter'), a Delaware corporation, designs, manufactures and
distributes, under its own brand name, professional quality, premium-priced
cardiovascular and strength exercise equipment for the home and commercial
markets. Trotter is an indirect wholly owned subsidiary of UM Holdings Ltd.
('UM'), and was incorporated in February 1993.
Prior to January 1, 1994, Trotter operated as a division of UM. Effective
January 1, 1994, the net assets of the division were transferred to Trotter by
UM. The transfer was recorded as a capital contribution of the carrying value of
the net assets of the division.
The consolidated financial statements are presented as if Trotter had
existed as an entity separate from UM, and include the historical revenues,
expenses, assets and liabilities that are directly related to Trotter's
operations.
On December 27, 1996, Trotter entered into an agreement and plan of merger
with CYBEX International, Inc. (see Note 10).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trotter Inc. and its subsidiary. All material intercompany balances and
transactions have been eliminated. Certain amounts reported in prior years have
been reclassified to be consistent with the current year's presentation.
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.
Revenue Recognition
Revenue is recorded when products are shipped.
Net Income Per Share
Net income per share for all periods presented is calculated by dividing
net income by the weighted average number of shares outstanding.
Cash and Cash Equivalents
Until 1996, UM maintained a centralized cash management function for its
subsidiaries, including Trotter. Settlement of all cash disbursement and
collection transactions by UM on behalf of Trotter have been recorded through
equity. In 1996, UM decentralized its cash management function for its
subsidiaries and, therefore, Trotter now maintains its own bank accounts. Cash
and cash equivalents include highly liquid investments purchased with an
original maturity of three months or less.
F-32
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are stated at the lower of cost (weighted average) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials..... $1,100,000 $1,108,000
Work-in-process... 823,000 568,000
Finished goods.... 492,000 407,000
---------- ----------
$2,415,000 $2,083,000
---------- ----------
---------- ----------
</TABLE>
Property and Equipment
Property and equipment are recorded at cost. 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 7 years for equipment and furniture.
Goodwill
Goodwill is being amortized over periods ranging from 20 to 40 years. As of
December 31, 1995 and 1996, accumulated amortization was $650,000 and $780,000,
respectively. Amortization expense for the years ended December 31, 1994, 1995,
and 1996, was $92,000, $132,000 and $130,000, respectively.
Subsequent to its acquisitions, Trotter continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life may warrant revision or that the remaining goodwill balance may not
be recoverable. If factors indicate that goodwill should be evaluated for
possible impairment, Trotter would use an estimate of the related undiscounted
operating income over the remaining life in measuring whether goodwill is
recoverable.
Other Assets
Other assets consist principally of covenants not to compete, product
development rights, purchased technology rights and purchased patents, which
relate to 1993 business acquisitions and are being amortized over periods of 5
to 10 years. As of December 31, 1995 and 1996, accumulated amortization was
$835,000 and $1,130,000, respectively. Amortization expense was $295,000, for
each of the years ended December 31, 1994, 1995 and 1996.
Accrued Warranty Obligation
Trotter generally provides a three-year warranty on cardiovascular products
and a warranty on strength products that varies by components. Warranty expense
was $1,193,000, $1,564,000 and $1,968,000 for the years ended December 31, 1994,
1995 and 1996, respectively. The accrued warranty obligation is provided for
future product warranty claims based on management estimates. These estimates
are based on historical information along with certain assumptions about future
events which could change.
Research and Development Costs
All research and development costs are charged to expense as incurred. Such
costs were $1,353,000, $1,544,000 $1,167,000 for the years ended December 31,
1994, 1995 and 1996, respectively. These expenditures are included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations.
F-33
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Advertising Costs
Trotter expenses advertising costs as incurred. For the years ended
December 31, 1994, 1995 and 1996, advertising expense was $1,603,000, $1,455,000
and $1,610,000, 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.
Income Taxes
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes.' Accordingly, deferred tax assets and liabilities are recognized
currently for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Trotter is included in the consolidated federal tax return
of UM and files separate state income tax returns. The accompanying consolidated
financial statements reflect income tax expense calculated on a separate-company
basis.
Concentration of Credit Risk and Export Sales
The majority of Trotter's customers are specialty fitness-related products
retailers and health clubs located in the United States. Financial instruments
that potentially subject Trotter to concentrations of credit risk consist
primarily of trade accounts receivable. For the years ended December 31, 1995
and 1996, one customer, Cutler-Owens, Inc., accounted for 10% and 11% of net
sales, respectively. No single customer accounted for more than 10% of Trotter's
net sales for the year ended December 31, 1994. There is no single geographic
area of significant concentration, and Trotter utilizes third-party insurers for
certain trade accounts receivable. Export sales accounted for approximately 9%,
12%, and 14% of total net sales for the years ended December 31, 1994, 1995 and
1996, respectively.
Fair Value of Financial Instruments
Trotter'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 Trotter's debt instruments
that are outstanding as of December 31, 1996, the carrying values are considered
to approximate their respective fair values. See Note 4 for the terms and
carrying value of Trotter's various debt instruments.
Supplemental Cash Flow Information
For the years ended December 31, 1994, 1995 and 1996, Trotter paid interest
of $219,000, $191,000, and $1,004,000, respectively. In 1994, a $3,900,000
capital lease obligation was converted to long-term debt.
New Accounting Pronouncements
In 1996 Trotter adopted Statement of Financial Accounting Standards No.
121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of' and Statement of Financial Accounting Standards No.
123, 'Accounting for Stock-Based Compensation' (see Note 6). The adoptions did
not have an effect on Trotter's financial condition or results of operations.
2. ACQUISITION
In 1993, Trotter acquired the assets and business of the Fitness Division
of Pyramid Enterprises of Pennsylvania ('Pyramid') and entered into a five-year
noncompete agreement with the owner of Pyramid for
F-34
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION--(CONTINUED)
$3,260,000 plus the assumption of trade payables. The acquisition was accounted
for using the purchase method of accounting with the purchase price exceeding
the fair value of the net assets acquired by $1,824,000, which is included in
goodwill.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- -----------
<S> <C> <C>
Land, building and improvements.... $4,176,000 $ 4,176,000
Equipment and furniture............ 5,702,000 6,195,000
---------- -----------
9,878,000 10,371,000
Accumulated depreciation........... (4,914,000) (5,646,000)
---------- -----------
$4,964,000 $ 4,725,000
---------- -----------
---------- -----------
</TABLE>
Depreciation expense was $1,059,000, $1,060,000, and $844,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Term loan................... $ 9,000,000 $ 7,800,000
Revolving loan.............. 2,125,000 --
Industrial revenue bonds.... 3,700,000 3,500,000
Other....................... -- 69,000
----------- -----------
14,825,000 11,369,000
Less--current portion....... (1,400,000) (1,409,000)
----------- -----------
$13,425,000 $ 9,960,000
----------- -----------
----------- -----------
</TABLE>
On December 7, 1995, Trotter entered into a Loan and Security Agreement
(the 'Agreement') with a bank that consists of a $3 million revolving loan and a
$9 million term loan. The proceeds were used to repay advances from UM and to
fund distributions to UM.
Borrowings under the revolver are limited to 85% of eligible accounts
receivable, as defined, and bear interest at Trotter's option of either the
prime rate or LIBOR plus 2.25% to 2.75% adjusted up or down based on certain
covenant calculations, as defined. Interest is payable monthly, with the
outstanding balance of the revolving loan payable on December 7, 1998. Interest
expense on the revolver was $14,000 and $88,000 for the years ended December 31,
1995 and 1996, respectively, and at December 31, 1996, $3,000,000 was available
under the revolver.
Principal repayments on the term loan are due semi-annually at increasing
amounts through 2000. Interest (8.125% at December 31, 1996) accrues at
Trotter's option at either the prime rate or LIBOR plus 2.25% to 2.75% adjusted
up or down based on certain covenant calculations, as defined. Interest is
payable quarterly except when calculated at the LIBOR rate, in which case
interest is payable over one to three months, as defined. Interest expense under
the term loan was $55,000 and $723,000 for the years ended December 31, 1995 and
1996, respectively.
In January 1996, Trotter entered into an interest rate cap agreement with a
bank for $83,000, which, in effect, fixed the LIBOR rate at 5.625% on the term
loan for a period of three years.
F-35
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT--(CONTINUED)
Prior to December 30, 1994, UM owned Trotter's primary operating facility
and in 1992 indirectly entered into an agreement to lease it to Trotter. The
minimum monthly lease payment was equal to the amount necessary to fund the debt
service on UM's related mortgage debt. In addition, Trotter had guaranteed the
mortgage debt. Therefore, Trotter accounted for the lease as a capital lease in
accordance with Statement of Financial Accounting Standards No. 13.
On December 30, 1994, the ownership of the operating facility was
transferred by UM to Trotter, and certain industrial revenue bonds issued by UM
in connection with their purchase of the facility were assigned by UM to
Trotter. This transaction was recorded by Trotter based upon UM's historical
carrying amounts, which were the same as the amounts recorded by Trotter under
the capital lease.
The bonds bear interest at a rate that resets weekly (5.25% at December 31,
1996) with interest payable monthly and principal payable annually through May
2007. Interest expense on the bonds was $191,000 and $190,000 for the years
ended December 31, 1995 and 1996, respectively. A letter of credit in the amount
of $3,575,000 has been issued on behalf of Trotter for the benefit of the
bondholders to guarantee principal and interest payments.
Trotter's debt is collateralized by substantially all of its assets, and
Trotter is required to maintain certain financial and non-financial covenants,
as defined, including an annual debt-to-cash flow ratio and a fixed charge
coverage ratio (as defined), in addition to restrictions on dividends and
capital expenditures.
At December 31, 1996, long-term debt maturities are as follows:
<TABLE>
<S> <C>
1997.................. $ 1,409,000
1998.................. 1,810,000
1999.................. 2,310,000
2000.................. 3,311,000
2001.................. 311,000
2002 and thereafter... 2,218,000
-----------
11,369,000
Current portion....... (1,409,000)
-----------
$ 9,960,000
-----------
-----------
</TABLE>
5. INCOME TAXES
Trotter is included in the consolidated federal income tax return of UM. UM
and Trotter have entered into a tax-sharing agreement pursuant to which Trotter
will pay to UM amounts equal to the taxes that Trotter would have paid had it
filed a separate federal income tax return. Included in income taxes payable at
December 31, 1996, is $745,000 is due to UM in accordance with the tax-sharing
agreement.
F-36
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES--(CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current provision:
Federal........................ $1,317,000 $ 847,000 $1,423,000
State.......................... 380,000 189,000 368,000
---------- ---------- ----------
1,697,000 1,036,000 1,791,000
---------- ---------- ----------
Deferred provision (benefit):
Federal........................ (17,000) 101,000 (336,000)
State.......................... (5,000) 34,000 (111,000)
---------- ---------- ----------
(22,000) 135,000 (447,000)
---------- ---------- ----------
$1,675,000 $1,171,000 $1,344,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The reconciliation between income taxes at the statutory federal tax rate
and the amount recorded in the accompanying consolidated financial statements is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Tax at statutory federal rate.......... 34.0% 34.0% 34.0%
State taxes, net of federal benefit.... 6.6 5.1 5.1
State tax credits, net................. (.7) (.5) (.4)
Other, net............................. 1.5 2.6 1.9
----- ----- -----
41.4% 41.2% 40.6%
----- ----- -----
----- ----- -----
</TABLE>
The principal components of Trotter's net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Accrued warranty obligation...... $ 550,000 $ 676,000
Accounts receivable allowance.... 107,000 179,000
Intangible amortization.......... (278,000) (160,000)
Other............................ 138,000 185,000
--------- ---------
$ 517,000 $ 880,000
--------- ---------
--------- ---------
</TABLE>
6. STOCK INCENTIVE PLANS
In August 1993, Trotter established a nonqualified stock option plan
covering certain key employees and directors. The options cover the purchase of
common stock of Trotter at exercise prices initially set above current fair
value as determined by the Board of Directors based in part on independent
appraisals. The options are exercisable on July 1, 2003, or earlier if there is
a sale of Trotter or a public offering of Trotter's common stock, as defined.
F-37
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK INCENTIVE PLANS--(CONTINUED)
The following table summarizes Trotter's option activity:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE
SHARES PER SHARE
----------- ------------
<S> <C> <C>
Balance, December 31, 1993.... 275,500 $ 6.58
Granted..................... 83,125 6.58
Canceled.................... -- --
----------- ------
Balance, December 31, 1994.... 358,625 6.58
Granted..................... -- --
Canceled.................... (21,375) 6.58
----------- ------
Balance, December 31, 1995.... 337,250 6.58
Granted..................... 3,800 6.58
Canceled.................... (9,500) 6.58
----------- ------
Balance, December 31, 1996.... 331,550 $ 6.58
----------- ------
----------- ------
</TABLE>
As of December 31, 1996, no options were exercisable.
In December 1994, the Board approved the adoption of the 1994 stock option
plan that permits the grant of both incentive and nonqualified options to
purchase an aggregate of up to 500,000 shares of Trotter's common stock. No
options have been issued under this plan.
In October 1996, the Board of Directors agreed to grant options to purchase
57,000 shares of common stock to certain key employees in 1997, at the fair
market value on the 1997 grant date. After this grant, there are no additional
options available under the 1993 plan.
Trotter applies Accounting Principal Board Opinion No. 25, 'Accounting for
Stock Issued to Employees', and the related interpretations in accounting for
its stock option plans. The disclosure requirements of FASB Statement No. 123,
'Accounting for Stock Based Compensation', ('SFAS No. 123') was adopted by
Trotter in 1996. Had compensation cost for Trotter's common stock option plans
been determined based upon the fair value of the options at the date of grant,
as prescribed under SFAS No. 123, Trotter's net income would have been equal to
the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Net income as reported... $1,670,000 $1,968,000
Pro forma net income..... 1,670,000 1,809,000
</TABLE>
The fair value of the 3,800 options granted in January of 1996 is estimated
as $1.87 per share on the date of grant using the Black-Scholes option pricing
model with the following assumptions: dividend yield--0.0%, volatility--30%,
risk free interest rate--6.3%, and an expected life of three years. The fair
value of the 57,000 options that Trotter committed to grant on the later of
March 31, 1997 or the merger date is estimated as $2.67 per share on the
commitment date based on the following assumptions: dividend yield--0.0%,
volatility--30%, risk free interest rate--6.0%, and an expected life of three
years. No options were granted in 1995.
7. TRANSACTIONS WITH UM
UM provides various administrative services to Trotter including certain
accounting, human resources, and computer services. UM has historically charged
Trotter for these services through corporate allocations based primarily on
actual costs incurred. These expenses were $146,000, $63,000 and $10,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. In 1996, UM
decentralized most of these functions, and now
F-38
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. TRANSACTIONS WITH UM--(CONTINUED)
provides primarily 401(k) administrative services. Trotter is included in UM's
consolidated income tax filings (see Note 5), participates in UM's 401(k) profit
sharing plan and prior to December 30, 1994, leased its primary operating
facility from UM (see Note 4). Trotter was charged $75,000, $87,000 and $97,000
for profit sharing plan contributions for the years ended December 31, 1994,
1995 and 1996, respectively. Trotter believes that all amounts charged by UM
during the periods presented were reasonable.
In connection with 1993 business acquisitions and other working capital
needs, UM advanced $4.3 million to Trotter in 1993. Such advances were
non-interest bearing and due on demand. In December 1995, Trotter repaid the
advance with the proceeds of its bank loans (see Note 4).
Included in net sales for the years ended December 31, 1994, were sales to
UM of $110,000. There were no sales to UM or their affiliates in 1995 or 1996.
In 1995 and 1996, UM loaned Trotter's President a total of $500,000, which
balance remains outstanding at December 31, 1996. The loan bears interest at
5.05% and is due in March 1999.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
Trotter leases its Sharpsville, PA manufacturing facility and certain
equipment under noncancelable operating leases that expire in 1998 with respect
to the Sharpsville facility and through 2002 in connection with equipment
leases. Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$241,000, $214,000 and $291,000, respectively.
Future minimum payments under all noncancelable operating leases at
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997................... $251,000
1998................... 106,000
1999................... 75,000
2000................... 57,000
2001................... 47,000
2002 and thereafter.... 14,000
--------
$550,000
--------
--------
</TABLE>
Product Liability
Due to the nature of its products, Trotter is a defendant in certain
pending product liability lawsuits. Trotter maintains product liability
insurance coverage and provides for the estimated cost of claims based on prior
loss experience. Actual results could differ from management's estimates.
Management believes that the outcome of known product liability claims will not
have a material effect on Trotter's financial position or results of operations.
Commercial Leasing
During 1995, Trotter began a leasing program. Leases are generally for
three to four years, at which time title transfers to the lessee. Trotter sells
the lease receivables to various third parties. Recourse, if any, is limited as
defined in the agreements. Cash received from the sale of lease receivables for
the year ended December 31, 1995, and 1996, was $232,000 and $590,000,
respectively. At December 31, 1996, the maximum recourse liability to the
Company was $214,000.
F-39
<PAGE>
TROTTER INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Litigation
Trotter is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that the outcome of such
litigation and claims will not have a material adverse effect on Trotter's
financial position or results of operations.
Employment Agreements
Trotter has employment contracts with various officers and other key
employees which provide for severance payments for up to six months if the
agreements are terminated without cause.
Trotter entered into an employment agreement, as amended, with its
President in November 1993. Either Trotter or the President may terminate the
agreement at any time with or without cause. However, if Trotter terminates the
agreement without cause, Trotter must continue to pay the President's salary for
a one year period subsequent to the termination. The agreement also includes,
among other things, compensation levels, benefits and a change of control
provision.
9. RECAPITALIZATION
In September 1994, the Board of Directors approved a recapitalization in
which the par value of the Company's authorized common stock was changed from no
par value to $.01 per share, and the number of shares of authorized common stock
was changed from 2,500 to 15,000,000. In December 1994, the Board authorized the
exchange of the 2,000 shares of outstanding common stock for 3,800,000 shares of
newly issued common stock pursuant to a 1,900-for-one stock split effectuated by
means of a stock dividend. In 1995, the Board subsequently changed the number of
authorized shares of common stock to 4,750,000 shares. The change in authorized
shares and the stock split have been retroactively reflected in the accompanying
consolidated financial statements.
10. CYBEX MERGER
On December 27, 1996, Trotter entered into an agreement and plan of merger
with CYBEX International, Inc. ('CYBEX') pursuant to which a newly formed wholly
owned subsidiary of CYBEX will be merged with and into Trotter. Trotter would
survive the merger as a wholly owned subsidiary of CYBEX with UM receiving in
exchange for their shares of Trotter the number of common shares of CYBEX which,
upon issuance, together with shares attributed to holders of options to acquire
Trotter common shares, shall equal 50.001% of all CYBEX common shares issued and
outstanding immediately following the merger, on a fully diluted basis as
defined in the merger agreement; which assumes all common shares subject to
dilutive options will be issued immediately prior to the merger and the proceeds
received from the exercise of such options will be used to repurchase shares for
treasury, and a price of $9.75 per share. In addition, Trotter options will be
exchanged for options to purchase CYBEX common shares at the same equivalent
exchange rate as the common share exchange discussed above. The merger will be
accounted for using the purchase method with Trotter deemed to be the acquirer.
The estimated purchase price will consist of the $42,457,000 market value of
CYBEX, calculated based on the five-day average share price ending December 31,
1996, of $9.69, plus estimated transaction costs of $2,195,000. The merger is
subject to the approval of CYBEX shareholders.
F-40
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER, dated as of December 27, 1996, as amended, by
and among CYBEX International, Inc., a New York corporation ('CYBEX'), Trotter
Inc., a Delaware corporation ('Trotter'), and CAT'S TAIL, INC., a direct
wholly-owned subsidiary of CYBEX and a Delaware corporation (the 'Company').
WHEREAS, CYBEX and Trotter have determined to engage in a business
combination by way of a merger;
WHEREAS, in furtherance thereof, the respective Boards of Directors of
CYBEX, Trotter and the Company have approved this Agreement and the merger of
the Company with and into Trotter (the 'Merger');
WHEREAS, the parties intend that the Merger constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the 'Code');
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 Effects of the Merger. At the Effective Time, (a) the separate
existence of the Company shall cease and the Company shall be merged with and
into Trotter (Trotter and the Company are sometimes referred to herein as the
'Constituent Corporations', and Trotter immediately after the Effective Time is
sometimes referred to herein as the 'Surviving Corporation'), (b) the Surviving
Corporation shall be a Delaware corporation, (c) the certificate of
incorporation of the Company shall be the certificate of incorporation of the
Surviving Corporation until duly amended, (d) the by-laws of the Company shall
be the by-laws of the Surviving Corporation until duly amended, (e) the name of
Trotter shall be the name of the Surviving Corporation, and (f) the Merger shall
have all the effects provided by applicable law.
Section 1.2 Effective Time of the Merger. Subject to the provisions of
this Agreement, on the Closing Date (as defined in Section 3.1), a certificate
of merger (the 'Merger Certificate') shall be executed and filed by Trotter and
the Company with the Secretary of State of the State of Delaware pursuant to the
Delaware General Corporation Law (the 'DGCL'). The Merger shall become effective
at such time as the Merger Certificate has been so filed or at such time
thereafter as is provided in the Merger Certificate (the 'Effective Time').
ARTICLE II
TREATMENT OF SHARES
Section 2.1 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of CYBEX, Trotter, the Company or the Surviving Corporation
or any of the respective stockholders thereof, all of the shares of Trotter
Common Stock issued and outstanding at the Effective Time shall be converted
into the right to receive, and shall be exchanged for, the number of fully-paid
and non-assessable CYBEX Common Shares (rounded upward to the nearest whole
share) which, upon issuance, shall equal 50.001% of all CYBEX Common Shares
issued and outstanding on a fully diluted basis calculated using the treasury
stock method and assuming a price of $9.75 per share for the CYBEX Common Stock
(assuming issuance of all Trotter Common Stock subject to the Trotter Stock
Plans immediately before the Effective Time) immediately following the Effective
Time (the 'Total Merger Consideration'). The amount of CYBEX Common Shares to be
received upon conversion of each share of Trotter Common Stock (the 'Merger
Consideration') shall equal the Total Merger Consideration, divided by the
number of shares of Trotter Common Stock issued and outstanding on a fully
diluted basis (assuming issuance of all Trotter Common Stock subject to the
Trotter Stock Plans immediately before the Effective Time) at the Effective
Time.
(b) Upon conversion of the shares of Trotter Common Stock into the right to
receive the Merger Consideration in the manner described in paragraph 2.1(a),
each record holder of issued and outstanding Trotter
A-1
<PAGE>
Common Stock immediately prior to the Effective Time shall have the right to
receive a certificate representing such whole number of CYBEX Common Shares
equal to the product of (A) the Merger Consideration and (B) the number of
issued and outstanding shares of Trotter Common Stock of which such Person is
the record holder immediately prior to the Effective Time.
Section 2.2 Exchange of Stock Certificates; Record Date. On or after the
Effective Time, each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented issued and outstanding
shares of Trotter Common Stock whose shares were converted into the Merger
Consideration shall surrender such certificates for cancellation to CYBEX,
together with a letter of transmittal, duly executed. In exchange therefor,
CYBEX shall deliver to each such holder the Merger Consideration required under
this Agreement.
Section 2.3 No Further Rights in Trotter Common Stock. As of the Effective
Time, all shares of Trotter Common Stock shall no longer be outstanding and
shall automatically be cancelled and shall cease to exist, and each holder of a
certificate representing shares of Trotter Common Stock as of the Effective Time
shall cease to have any rights with respect thereto, except the right to receive
the Merger Consideration upon surrender of such certificate as provided in
Section 2.2.
Section 2.4 Registration of Merger Shares. As promptly as practicable
after the execution of this Agreement, Trotter and CYBEX shall prepare and CYBEX
shall file with the Securities and Exchange Commission (the 'SEC') a
registration statement on Form S-4 (the 'Registration Statement') to register
under the Securities Act of 1933, as amended (the 'Securities Act') the CYBEX
Common Shares issuable pursuant to the Merger, as provided in Section 7.2.
Section 2.5 Closing of Transfer Books. From and after the Effective Time,
the stock transfer books of Trotter shall be closed and no transfer of any
capital stock of Trotter shall thereafter be made. If, after the Effective Time,
Certificates are presented to Trotter, they shall be cancelled and exchanged for
the Merger Consideration as provided in Section 2.2.
ARTICLE III
THE CLOSING
Section 3.1 Closing. The closing of the Merger (the 'Closing') shall take
place at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York,
New York 10153 at 10:00 A.M., local time, on the second business day immediately
following the date on which the last of the conditions set forth in Article VIII
hereof (other than such conditions which require deliveries at Closing) is
fulfilled or waived, or at such other time, date and place as CYBEX and Trotter
shall mutually agree (the 'Closing Date').
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CYBEX
CYBEX represents and warrants to Trotter as follows:
Section 4.1 Organization and Qualification. Except as set forth in Section
4.1 of the schedule delivered by CYBEX on the date hereof (the 'CYBEX Disclosure
Schedule'), each of CYBEX and each of its Subsidiaries (as defined below) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority, and has been duly authorized by all necessary
approvals and orders to own, lease and operate its assets and properties to the
extent owned, leased and operated and to carry on its business as it is now
being conducted and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary other
than in such jurisdictions where the failure so to qualify would not have a
material adverse effect on CYBEX and its Subsidiaries taken as a whole. As used
in this Agreement, the term 'Subsidiary' of a person shall mean any corporation
or other entity (including partnerships and other business associations) of
which at least a majority of the outstanding capital stock or other voting
securities having voting power under ordinary circumstances to elect
A-2
<PAGE>
directors or similar members of the governing body of such corporation or entity
shall at the time be held, directly or indirectly, by such person.
Section 4.2 Subsidiaries. Section 4.2 of the CYBEX Disclosure Schedule
sets forth a description as of the date hereof, of all subsidiaries and joint
ventures of CYBEX, including the name of each such entity and CYBEX's interest
therein. Except as set forth in Section 4.2 of the CYBEX Disclosure Schedule,
none of CYBEX's Subsidiaries is a 'public utility company,' a 'holding company,'
a 'subsidiary company' or an 'affiliate' of any public utility company within
the meaning of Section 2(a)(5), 2(a)(7), 2(a)(8) or 2(a)(11) of the Public
Utility Holding Company Act of 1935, as amended (the '1935 Act'), respectively.
Except as set forth in Section 4.2 of the CYBEX Disclosure Schedule, all of the
issued and outstanding shares of capital stock of each of CYBEX's Subsidiaries
are validly issued, fully paid, nonassessable and free of preemptive rights, and
are owned, directly or indirectly, by CYBEX free and clear of any liens, claims,
encumbrances, security interests, equities, charges and options of any nature
whatsoever and there are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating any such Subsidiary to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement or commitment.
Section 4.3 Capitalization. As of the date hereof, the authorized capital
stock of CYBEX consists of 15,000,000 common shares, $.10 par value ('CYBEX
Common Shares'), and 500,000 preferred shares, $1.00 par value ('CYBEX Preferred
Shares'). At the close of business on December 20, 1996, (i) 4,362,232 CYBEX
Common Shares were outstanding, not more than 499,213 CYBEX Common Shares were
reserved for issuance pursuant to CYBEX's Amended and Restated 1987 Stock Option
Plan, 1995 Omnibus Incentive Plan and 1995 Stock Retainer Plan for Nonemployee
Directors (such Plans, collectively, the 'CYBEX Stock Plans'), of which 181,571
shares were subject to existing options or rights, (ii) 145,820 CYBEX Common
Shares were held by CYBEX in its treasury, (iii) no CYBEX Common Shares were
held by its Subsidiaries, (iv) no CYBEX Preferred Shares were outstanding and
(v) no bonds, debentures, notes or other indebtedness having the right to vote
(or convertible into securities having the right to vote) on any matters on
which stockholders may vote ('Voting Debt') were issued or outstanding. All
outstanding CYBEX Common Shares are validly issued, fully paid and nonassessable
and are not subject to preemptive rights. Section 4.3 of the CYBEX Disclosure
Schedule includes a list of each outstanding option and right at December 20,
1996 existing under the CYBEX Stock Plans, including the name of the holder of
such option or right, the number of shares subject thereto, the exercise price
of such option, the portion thereof which is vested at December 20, 1996 and, if
the exercisability of such option or right may be accelerated in any way by the
transactions contemplated by this Agreement or for any other reason, an
indication of the extent of such acceleration. As of the date of this Agreement,
except pursuant to this Agreement, the CYBEX Stock Plans and the Rights
Agreement, dated as of May 23, 1988 and amended as of March 15, 1989, between
CYBEX and Registrar and Transfer Company (the 'CYBEX Rights Agreement'), there
are no options, warrants, calls, rights, commitments or agreements of any
character to which CYBEX or any Subsidiary is a party or by which it is bound
obligating CYBEX or any Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or any Voting Debt
securities of CYBEX or any Subsidiary or obligating CYBEX or any Subsidiary to
grant, extend or enter into any such option, warrant, call, right or agreement.
Except for the outstanding options and rights under the CYBEX Stock Plans and
the CYBEX Rights Agreement, as described in the CYBEX Disclosure Schedule, after
the Effective Time, there will be no option, warrant, call, right or agreement
obligating CYBEX or any Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, any shares of capital stock or any Voting Debt of
CYBEX or any Subsidiary, or obligating CYBEX or any Subsidiary to grant, extend
or enter into any such option, warrant, call, right or agreement.
Section 4.4 Authority; Non-Contravention; Statutory Approvals; Compliance.
(a) Authority. CYBEX has all requisite power and authority to enter into
this Agreement, and, subject to the applicable CYBEX Shareholders' Approval (as
defined in Section 4.12) and the applicable CYBEX Required Statutory Approvals
(as defined in Section 4.4(c)), to consummate the transactions contemplated
hereby or thereby. The execution and delivery of this Agreement and the
consummation by CYBEX of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CYBEX, subject
A-3
<PAGE>
to obtaining the applicable CYBEX Shareholders' Approval. This Agreement has
been duly and validly executed and delivered by CYBEX and, assuming the due
authorization, execution and delivery hereof by the other signatories hereto,
constitutes the valid and binding obligation of CYBEX enforceable against it in
accordance with its terms.
(b) Non-Contravention. Except as set forth in Section 4.4(b) of the CYBEX
Disclosure Schedule, the execution and delivery of this Agreement by CYBEX does
not, and the consummation of the transactions contemplated hereby will not, in
any material respect, violate, conflict with or result in a material breach of
any provision of, or constitute a material default (with or without notice or
lapse of time or both) under, or result in the termination or modification of,
or accelerate the performance required by, or result in a right of termination,
cancellation or acceleration of any obligation or the loss of a material benefit
under, or result in the creation of any material lien, security interest, charge
or encumbrance upon any of the properties or assets of CYBEX or any of its
Subsidiaries (any such violation, conflict, breach, default, right of
termination, modification, cancellation or acceleration, loss or creation, a
'Violation' with respect to CYBEX, such term when used in Article V having a
correlative meaning with respect to Trotter) pursuant to any provisions of (i)
the certificate of incorporation, by-laws or similar governing documents of
CYBEX or any of its Subsidiaries, (ii) subject to obtaining the CYBEX Required
Statutory Approvals and the receipt of the CYBEX Shareholders' Approval, any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any Governmental Authority (as defined in Section
4.4(c)) applicable to CYBEX or any of its Subsidiaries or any of their
respective properties or assets, (iii) subject to obtaining the third-party
consents set forth in Section 4.4(b) of the CYBEX Disclosure Schedule (the
'CYBEX Required Consents'), any material note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which CYBEX or any of its
Subsidiaries is a party or by which it or any of its properties or assets may be
bound or affected, or (iv) the CYBEX Rights Agreement, except in the case of
clause (ii) or (iii) for any such violation which would not have a CYBEX
Material Adverse Effect (as defined in Section 4.6).
(c) Consents of Third Parties. No declaration, filing or registration
with, or notice to or authorization, consent or approval of any court, federal,
state, local or foreign governmental or regulatory body (including a stock
exchange or other self-regulatory body) or authority (each, a 'Governmental
Authority') or any individual, corporation, partnership, firm, joint venture,
association, joint stock company, trust, unincorporated organization or other
entity (each a 'Person') is necessary for the execution and delivery of this
Agreement by CYBEX or the consummation by CYBEX of the transactions contemplated
hereby, except as described in Section 4.4(c) of the CYBEX Disclosure Schedule
or the failure of which to obtain would not result in a CYBEX Material Adverse
Effect (the 'CYBEX Required Statutory Approvals').
(d) Compliance. Except as set forth in Section 4.4(d), Section 4.10 or
Section 4.11 of the CYBEX Disclosure Schedule, or as disclosed in the CYBEX SEC
Reports (as defined in Section 4.5) filed prior to the date hereof, neither
CYBEX nor any of its Subsidiaries is in violation of, is under investigation
with respect to any violation of, or has been given notice or been charged with
any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any Governmental Authority, except for possible
violations which individually or in the aggregate would not have a CYBEX
Material Adverse Effect. Except as set forth in Section 4.4(d) of the CYBEX
Disclosure Schedule or in Section 4.11 of the CYBEX Disclosure Schedule, CYBEX
and its Subsidiaries have all permits, licenses, franchises and other
governmental authorizations, consents and approvals necessary to conduct their
businesses as presently conducted which are material to the operation of the
businesses of CYBEX and its Subsidiaries. Except as set forth in Section 4.4(d)
of the CYBEX Disclosure Schedule, CYBEX and each of its Subsidiaries is not in
breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under (i) its certificate of
incorporation or by-laws or (ii) any contract, commitment, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which it is a party or by which it is bound or to which any of its
property is subject, except for possible violations, breaches or defaults which
individually or in the aggregate would not have a CYBEX Material Adverse Effect.
Section 4.5 Reports and Financial Statements. The filings required to be
made by CYBEX and its Subsidiaries since January 1, 1993 under the Securities
Act and the Securities Exchange Act of 1934, as amended (the 'Exchange Act'),
have been filed with the SEC, including all forms, statements, reports,
agreements (oral
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or written) and all documents, exhibits, amendments and supplements appertaining
thereto, and complied, as of their respective dates, and all such reports and
documents filed with the SEC after the date of this Agreement and prior to the
Effective Time will comply as of their respective date, in all material respects
with all applicable requirements of the appropriate statute and the rules and
regulations thereunder, except for such filings the failure of which to have
been made would not result in a CYBEX Material Adverse Effect. CYBEX has made
available, and with respect to filings with the SEC after the date of this
Agreement and prior to the Effective Time, will make available, to Trotter a
true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by CYBEX pursuant to the requirements of the
Securities Act or Exchange Act with the SEC since January 1, 1993 (as such
documents have since the time of their filing been amended, the 'CYBEX SEC
Reports'). As of their respective dates, the CYBEX SEC Reports did not and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of CYBEX included and to be included in the CYBEX SEC Reports
(collectively, the 'CYBEX Financial Statements') are complete and correct in all
material respects and have been prepared and will be prepared in accordance with
generally accepted accounting principles applied on a consistent basis ('GAAP')
(except as may be indicated therein or in the notes thereto and except with
respect to unaudited statements as permitted by Rule 10-01 of Regulation S-X of
the SEC) and in conformity with the practices consistently applied by CYBEX
without modification of the accounting principles used in the preparation
thereof and fairly present the financial position of CYBEX as of the dates
thereof and the results of its operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
(i) normal, recurring audit adjustments, (ii) required footnotes and (iii)
statement of cash flows.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed in
the CYBEX SEC Reports filed prior to the date hereof or as set forth in Section
4.6 of the CYBEX Disclosure Schedule, since October 1, 1996:
(i) CYBEX and each of its Subsidiaries have conducted their business only
in the ordinary course of business consistent with past practice;
(ii) there has not been, and no fact or condition exists which would have
or, insofar as reasonably can be foreseen, could have, a material adverse effect
on the business, assets, financial condition or results of operations of CYBEX
and its Subsidiaries taken as a whole or which could delay or prevent the
transactions contemplated hereby (a 'CYBEX Material Adverse Effect');
(iii) there has not been any damage, destruction or loss, whether or not
covered by insurance, with respect to the property and assets of CYBEX or any
Subsidiary having a replacement cost of more than $50,000 for any single loss or
$100,000 for all such losses;
(iv) there has not been any declaration, setting aside or payment of any
dividend or other distribution in respect of any shares of capital stock of
CYBEX or any repurchase, redemption or other acquisition by CYBEX or any
Subsidiary of any outstanding shares of capital stock or other securities of, or
other ownership interest in, CYBEX or any Subsidiary;
(v) neither CYBEX nor any Subsidiary has awarded or paid any bonuses to
employees of CYBEX or any Subsidiary with respect to the fiscal year ended
December 31, 1995, entered into any employment, deferred compensation, severance
or similar agreement (nor amended any such agreement) or agreed to increase the
compensation payable or to become payable by it to any of CYBEX's or any
Subsidiary's directors, officers, employees, agents or representatives or agreed
to increase the coverage or benefits available under any severance pay,
termination pay, vacation pay, company awards, salary continuation for
disability, sick leave, deferred compensation, bonus or other incentive
compensation, insurance, pension or other employee benefit plan, payment or
arrangement made to, for or with such directors, officers, employees, agents or
representatives (other than normal increases in the ordinary course of business
consistent with past practice and that in the aggregate have not resulted in a
material increase in the benefits or compensation expense of CYBEX and its
Subsidiaries taken as a whole);
(vi) there has not been any material change by CYBEX or any Subsidiary in
accounting or tax reporting principles, methods or policies;
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(vii) neither CYBEX nor any Subsidiary has failed to promptly pay and
discharge current liabilities except where disputed in good faith by appropriate
proceedings;
(viii) neither CYBEX nor any Subsidiary has made any loans, advances or
capital contributions to, or investments in, any Person or paid any fees or
expenses to any affiliate of CYBEX;
(ix) neither CYBEX nor any Subsidiary has mortgaged, pledged or subjected
to any Lien (as defined in Section 4.15) any of its assets, or acquired any
assets or sold, assigned, transferred, conveyed, leased or otherwise disposed of
any assets of CYBEX or any Subsidiary, except for assets acquired or sold,
assigned, transferred, conveyed, leased or otherwise disposed of in the ordinary
course of business consistent with past practice;
(x) neither CYBEX nor any Subsidiary has discharged or satisfied any Lien,
or paid any obligation or liability (fixed or contingent), except in the
ordinary course of business consistent with past practice and which, would not
have a CYBEX Material Adverse Effect;
(xi) neither CYBEX nor any Subsidiary has canceled or compromised any debt
or claim or amended, canceled, terminated, relinquished, waived or released any
contract or right except in the ordinary course of business consistent with past
practice and which would not have a CYBEX Material Adverse Effect;
(xii) neither CYBEX nor any Subsidiary has made or committed to make any
capital expenditures or capital additions or betterments in excess of $100,000
individually or $500,000 in the aggregate;
(xiii) neither CYBEX nor any Subsidiary has instituted or settled any
material legal proceeding;
(xiv) neither CYBEX nor any Subsidiary has issued any capital stock, bonds
or other corporate securities or debt instrument, or granted any options,
warrants or other rights calling for the issuance thereof;
(xv) neither CYBEX nor any Subsidiary has amended its Certificate of
Incorporation or By-Laws except as contemplated by this Agreement;
(xvi) neither CYBEX nor any Subsidiary has incurred any bank indebtedness;
and
(xvii) CYBEX has not agreed to do anything set forth in this Section 4.6.
Section 4.7 Litigation. Except as disclosed in the CYBEX SEC Reports filed
prior to the date hereof or as set forth in Section 4.7, Section 4.9 or Section
4.11 of the CYBEX Disclosure Schedule, (i) there are no claims, suits, actions
or proceedings, pending or, to the knowledge of CYBEX, threatened, nor are
there, to the knowledge of CYBEX, any investigations or reviews pending or
threatened against, relating to or affecting CYBEX or any of its Subsidiaries
which would have a CYBEX Material Adverse Effect, (ii) there have not been any
significant developments since October 1, 1996 with respect to such disclosed
claims, suits, actions, proceedings, investigations or reviews and (iii) there
are no judgments, decrees, injunctions, rules or orders of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator applicable to CYBEX or any of its Subsidiaries, except for such that
would not have a CYBEX Material Adverse Effect.
Section 4.8 Registration Statement; Proxy Statement. Subject to the
accuracy of the representations of Trotter made in Section 5.8, the Registration
Statement shall not, at the time the Registration Statement is filed with the
SEC and at the time it becomes effective under the Securities Act, contain any
untrue statements of a material fact or omit to state any material fact
necessary in order to make the statements included therein not misleading. None
of the information supplied or to be supplied by or on behalf of CYBEX for
inclusion or incorporation by reference in the proxy statement, in definitive
form, relating to the meeting of the CYBEX shareholders to be held in connection
with the issuance of CYBEX Common Shares as provided herein and the amendment of
CYBEX's certificate of incorporation to authorize additional CYBEX Common Shares
(the 'Proxy Statement') will, at the dates mailed to shareholders and at the
times of the meetings of shareholders to be held in connection with the
transactions contemplated by the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
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Section 4.9 Tax Matters. 'Taxes,' as used in this Agreement, means any
federal, state, county, local or foreign taxes, charges, fees, levies or other
assessments, including all net income, gross income, sales and use, ad valorem,
transfer, gains, profits, excise, franchise, real and personal property, gross
receipt, capital stock, production, business and occupation, disability,
employment, payroll, license, estimated, stamp, custom duties, severance or
withholding taxes or charges imposed by any governmental entity, and includes
any interest and penalties (civil or criminal) on or additions to any such
taxes. 'Tax Return,' as used in this Agreement, means a report, return or other
information required to be supplied to a governmental entity with respect to
Taxes including, where permitted or required, combined or consolidated returns
for any group of entities that includes CYBEX or any of its Subsidiaries or
Trotter or any of its Subsidiaries, as the case may be.
Except as set forth in Section 4.9 of the CYBEX Disclosure Schedule:
(a) Filing of Timely Tax Returns. CYBEX and each of its Subsidiaries have
filed (or there has been filed on its behalf) all Tax Returns required to be
filed by each of them under applicable law, except for those the failure of
which to file would not have a CYBEX Material Adverse Effect. All such Tax
Returns were and are in all material respects true, complete and correct and
filed on a timely basis.
(b) Payment of Taxes. To the best knowledge of CYBEX, CYBEX and each of
its Subsidiaries have, within the time and in the manner prescribed by law, paid
all Taxes that are currently due and payable except for those contested in good
faith and for which adequate reserves have been taken.
(c) Tax Reserves. CYBEX and its Subsidiaries have established on their
books and records reserves adequate to pay all Taxes and reserves for deferred
income taxes in accordance with GAAP, which reserves are included in the CYBEX
Balance Sheet.
(d) Tax Liens. There are no Tax liens upon the assets of CYBEX or any of
its Subsidiaries except liens for Taxes not yet due.
(e) Withholding Taxes. CYBEX and each of its Subsidiaries have complied in
all material respects with the provisions of the Code relating to the
withholding of Taxes, as well as similar provisions under any other laws, and
have, within the time and in the manner prescribed by law, withheld from
employee wages and paid over to the proper governmental authorities all amounts
required.
(f) Extensions of Time for Filing Tax Returns. Neither CYBEX nor any of
its Subsidiaries has requested any extension of time within which to file any
Tax Return, which Tax Return has not since been filed.
(g) Waivers of Statute of Limitations. Neither CYBEX nor any of its
Subsidiaries has executed any outstanding waivers or comparable consents
regarding the application of the statute of limitations with respect to any
Taxes or Tax Returns.
(h) Expiration of Statute of Limitations. The statute of limitations for
the assessment of all Taxes has expired for all applicable Tax Returns of CYBEX
and each of its Subsidiaries or those Tax Returns have been examined by the
appropriate taxing authorities for all periods through the date hereof, and no
deficiency for any Taxes has been proposed, asserted or assessed against CYBEX
or any of its Subsidiaries that has not been resolved and paid in full.
(i) Audit, Administrative and Court Proceedings. No audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of CYBEX or any of its Subsidiaries.
(j) Powers of Attorney. No power of attorney currently in force has been
granted by CYBEX or any of its Subsidiaries concerning any Tax matter.
(k) Tax Rulings. Neither CYBEX nor any of its Subsidiaries has received a
Tax Ruling (as defined below) or entered into a Closing Agreement (as defined
below) with any taxing authority that would have a continuing adverse effect
after the Closing Date. 'Tax Ruling,' as used in this Agreement, shall mean a
written ruling of a taxing authority relating to Taxes. 'Closing Agreement,' as
used in this Agreement, shall mean a written and legally binding agreement with
a taxing authority relating to Taxes.
(l) Availability of Tax Returns. CYBEX has made available to Trotter
complete and accurate copies of (i) all Tax Returns, and any amendments thereto,
filed by CYBEX or any of its Subsidiaries, (ii) all audit reports
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received from any taxing authority relating to any Tax Return filed by CYBEX or
any of its Subsidiaries and (iii) any Closing Agreements entered into by CYBEX
or any of its Subsidiaries with any taxing authority.
(m) Tax Sharing Agreements. Neither CYBEX nor any of its Subsidiaries is a
party to any agreement relating to allocating or sharing of Taxes.
(n) Code Section 280G. Neither CYBEX nor any of its Subsidiaries is a
party to any agreement, contract or arrangement that could result, on account of
the transactions contemplated hereunder, separately or in the aggregate, in the
payment of any 'excess parachute payments' within the meaning of Section 280G of
the Code.
(o) Liability for Others. To the best knowledge of CYBEX, none of CYBEX or
any of its Subsidiaries has any liability for Taxes of any person other than
CYBEX and its Subsidiaries (i) under Treasury Regulations Section 1.1502-6 (or
any similar provision of state, local or foreign law) as a transferee or
successor, (ii) by contract or (iii) otherwise.
Section 4.10 Employee Matters; ERISA. Except as set forth in Section 4.10
of the CYBEX Disclosure Schedule:
(a) Benefit Plans. Section 4.10 (a) of the CYBEX Disclosure Schedule
contains a true and complete list of each employee benefit plan covering
employees, former employees or directors of CYBEX and each of its Subsidiaries
or their beneficiaries, or providing benefits to such persons in respect of
services provided to any such entity, including, but not limited to, any
employee benefit plans within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ('ERISA') and any severance
or change in control agreement (collectively, the 'CYBEX Benefit Plans').
(b) Contributions. All material contributions and other payments required
to be made by CYBEX or any of its Subsidiaries to any CYBEX Benefit Plan (or to
any person pursuant to the terms thereof) have been made or the amount of such
payment or contribution obligation has been reflected in the CYBEX Financial
Statements.
(c) Qualification; Compliance. Each of the CYBEX Benefit Plans intended to
be 'qualified' within the meaning of Section 401(a) of the Code has been
determined by the IRS to be so qualified, and, to the best knowledge of CYBEX,
no circumstances exist that are reasonably expected by CYBEX to result in the
revocation of any such determination. CYBEX is in compliance in all material
respects with, and each of the CYBEX Benefit Plans is and has been operated in
all material respects in compliance with, all applicable laws, rules and
regulations governing such plan, including, without limitation, ERISA and the
Code. Each CYBEX Benefit Plan intended to provide for the deferral of income,
the reduction of salary or other compensation, or to afford other income tax
benefits, complies with the requirements of the applicable provisions of the
Code or other laws, rules and regulations required to provide such income tax
benefits.
(d) Liabilities. With respect to the CYBEX Benefit Plans, individually and
in the aggregate, no event has occurred, and, to the best knowledge of CYBEX,
there does not now exist any condition or set of circumstances, that could
subject CYBEX or any of its Subsidiaries to any material liability arising under
the Code, ERISA or any other applicable law (including, without limitation, any
liability to any such plan or the Pension Benefit Guaranty Corporation (the
'PBGC')), or under any indemnity agreement to which CYBEX is a party, excluding
liability for benefit claims and funding obligations payable in the ordinary
course.
(e) Welfare Plans. None of the CYBEX Benefit Plans that are 'welfare
plans,' within the meaning of Section 3(1) of ERISA, provides for any retiree
benefits, other than continuation coverage required to be provided under Section
4980B of the Code or Part 6 of Title I of ERISA.
(f) Documents Made Available. CYBEX has made available to Trotter a true
and correct copy of each collective bargaining agreement to which CYBEX or any
of its Subsidiaries is a party or under which CYBEX or any of its Subsidiaries
has obligations and, with respect to each CYBEX Benefit Plan, where applicable,
(i) such plan and summary plan description, (ii) the most recent annual report
filed with the IRS, (iii) each related trust agreement, insurance contract,
service provider or investment management agreement (including all amendments to
each such document), (iv) the most recent determination of the IRS with respect
to the qualified status of such CYBEX Benefit Plan and (v) the most recent
actuarial report or valuation.
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(g) Payments Resulting from Merger. (i) Except as set forth in Section
4.10(g) of the CYBEX Disclosure Schedule, the consummation or announcement of
any transaction contemplated by this Agreement will not (either alone or upon
the occurrence of any additional or further acts or events) result in any (A)
payment (whether of severance pay or otherwise) becoming due from CYBEX or any
of its Subsidiaries to any officer, employee, former employee or director
thereof or to the trustee under any 'rabbi trust' or similar arrangement or (B)
benefit under any CYBEX Benefit Plan being established or becoming accelerated,
vested or payable and (ii) neither CYBEX nor any of its Subsidiaries is a party
to (A) any management, employment, deferred compensation, severance (including
any payment, right or benefit resulting from a change in control), bonus or
other contract for personal services with any officer, director or employee, (B)
any consulting contract with any person who prior to entering into such contract
was a director or officer of CYBEX or (C) any plan, agreement, arrangement or
understanding similar to any of the foregoing, which with respect to clause (A),
(B) and (C) provide for payment in excess of $10,000 per annum or $50,000 in the
aggregate.
(h) Labor Agreements. Except as set forth in Section 4.10(h) of the CYBEX
Disclosure Schedule, as of the date hereof, neither CYBEX nor any of its
Subsidiaries is a party to any collective bargaining agreement or other labor
agreement with any union or labor organization. To the best knowledge of CYBEX,
as of the date hereof, there is no current union representation question
involving employees of CYBEX or any of its Subsidiaries, nor does CYBEX know of
any activity or proceeding of any labor organization (or representative thereof)
or employee group to organize any such employees. Except as disclosed in the
CYBEX SEC Reports filed prior to the date hereof or in Section 4.10(h) of the
CYBEX Disclosure Schedule or except to the extent such would not have a CYBEX
Material Adverse Effect, (i) there is no unfair labor practice, employment
discrimination or other material complaint against CYBEX or any of its
Subsidiaries pending, or to the best knowledge of CYBEX, threatened, (ii) there
is no strike, lockout or material dispute, slowdown or work stoppage pending, or
to the best knowledge of CYBEX, threatened against or involving CYBEX and (iii)
there is no proceeding, claim, suit, action or governmental investigation
pending or, to the best knowledge of CYBEX, threatened, in respect of which any
director, officer, employee or agent of CYBEX or any of its Subsidiaries is or
may be entitled to claim indemnification from CYBEX or such Subsidiary pursuant
to their respective certificates of incorporation or by-laws or as provided in
the indemnification agreements listed in Section 4.10(h) of the CYBEX Disclosure
Schedule. Neither CYBEX nor any Subsidiary has ever been a party to a
multi-employer retirement plan.
Section 4.11 Environmental Protection. Except as set forth in Section 4.11
of the CYBEX Disclosure Schedule or in the CYBEX SEC Reports filed prior to the
date hereof:
(a) Compliance. CYBEX and each of its Subsidiaries is in compliance with
all applicable Environmental Laws (as defined in Section 4.11(g)(ii)) except
where the failure to so comply would not have a CYBEX Material Adverse Effect,
and neither CYBEX nor any of its Subsidiaries has received any communication
(written or oral), from any person or Governmental Authority that alleges that
CYBEX or any of its Subsidiaries is not in such compliance with applicable
Environmental Laws.
(b) Environmental Permits. CYBEX and each of its Subsidiaries has obtained
or has applied for all environmental, health and safety permits and governmental
authorizations (collectively, the 'Environmental Permits') necessary for the
construction of their facilities or the conduct of their operations except where
the failure to so obtain would not have a CYBEX Material Adverse Effect, and all
such Environmental Permits are in good standing or, where applicable, a renewal
application has been timely filed and is pending agency approval and CYBEX and
its Subsidiaries are in material compliance with all terms and conditions of the
Environmental Permits.
(c) Environmental Claims. To the best knowledge of CYBEX, there is no
Environmental Claim (as defined in Section 4.11(g)(i)) which would have a CYBEX
Material Adverse Effect pending (i) against CYBEX or any of its Subsidiaries,
(ii) against any person or entity whose liability for any Environmental Claim
CYBEX or any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law or (iii) against any real or personal
property or operations which CYBEX or any of its CYBEX Subsidiaries owns, leases
or manages, in whole or in part.
(d) Releases. CYBEX has no knowledge of any Releases (as defined in
Section 4.11(g)(iv)) of any Hazardous Material (as defined in Section
4.11(g)(iii)) that would be reasonably likely to form the basis of any
Environmental Claim against CYBEX or any of its Subsidiaries, or against any
person or entity whose liability
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for any Environmental Claim CYBEX or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law except for any
Environmental Claim which would not have a CYBEX Material Adverse Effect.
(e) Predecessors. CYBEX has no knowledge, with respect to any predecessor
of CYBEX or any of its Subsidiaries, of any Environmental Claim which would have
a CYBEX Material Adverse Effect pending or threatened, or of any Release of
Hazardous Materials that would be reasonably likely to form the basis of any
Environmental Claim which would have a CYBEX Material Adverse Effect.
(f) Disclosure. To CYBEX's best knowledge, CYBEX has disclosed to Trotter
all facts which CYBEX reasonably believes form the basis of an Environmental
Claim which would have a CYBEX Material Adverse Effect.
(g) Definitions. As used in this Agreement:
(i) 'Environmental Claim' means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, directives, claims,
liens, investigations, proceedings or notices of noncompliance or violation
(written or oral) by any person or entity (including any Governmental
Authority) alleging potential liability (including, without limitation,
potential responsibility for or liability for enforcement, investigatory
costs, cleanup costs, governmental response costs, removal costs, remedial
costs, natural resources damages, property damages, personal injuries or
penalties) arising out of, based on or resulting from (A) the presence,
Release or threatened Release into the environment of any Hazardous
Materials at any location, whether or not owned, operated, leased or
managed by CYBEX or any of its Subsidiaries (for purposes of this Section
4.11) or by Trotter or any of its Subsidiaries (for purposes of Section
5.11); or (B) circumstances forming the basis of any violation or alleged
violation of any Environmental Law or (C) any and all claims by any third
party seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from the presence or Release of
any Hazardous Materials.
(ii) 'Environmental Laws' means all federal, state and local laws,
rules and regulations relating to pollution, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or protection of human health as it relates to the
environment including, without limitation, laws and regulations relating to
Releases or threatened Releases of Hazardous Materials, or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials.
(iii) 'Hazardous Materials' means (a) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation and transformers or other
equipment that contain dielectric fluid containing polychlorinated
biphenyls ('PCBs'); (b) any chemicals, materials or substances which are
now defined as or included in the definition of 'hazardous substances,'
'hazardous wastes,' 'hazardous materials,' 'extremely hazardous wastes,'
'restricted hazardous wastes,' 'toxic substances,' 'toxic pollutants,' or
words of similar import under any Environmental Law and (c) any other
chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a
jurisdiction in which CYBEX or any of its Subsidiaries operates (for
purposes of this Section 4.11) or in which Trotter or any of its
Subsidiaries operates (for purposes of Section 5.11).
(iv) 'Release' means any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
atmosphere, soil, surface water, groundwater or property.
Section 4.12 Vote Required. The approval of (i) the issuance of CYBEX
Common Shares as provided herein and (ii) the amendment to CYBEX's certificate
of incorporation to authorize additional CYBEX Common Shares and (iii) the
amendment to the CYBEX Stock Plans to authorize an increase in the number of
options issuable thereunder, by a majority of the votes entitled to be cast by
all holders of CYBEX Common Shares (the 'CYBEX Shareholders' Approval') is the
only vote of the holders of any class or series of the capital stock of CYBEX or
any of its Subsidiaries required to approve this Agreement, the Merger and the
other transactions contemplated hereby.
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Section 4.13 Corporate Records.
(a) Organizational Documents. CYBEX has delivered to Trotter true, correct
and complete copies of the certificates of incorporation (each certified by the
Secretary of State or other appropriate official of the applicable jurisdiction
of organization) and by-laws (each certified by the secretary, assistant
secretary or other appropriate officer of CYBEX) or comparable organizational
documents of CYBEX and each of its Subsidiaries.
(b) Minute Books. The minute books of CYBEX and each Subsidiary previously
made available to Trotter contain complete and accurate records of all meetings
and accurately reflect all other corporate action of the stockholders and board
of directors (including committees thereof) of CYBEX and its Subsidiaries.
Section 4.14 No Undisclosed Liabilities. Except as otherwise disclosed in
Section 4.6 of the CYBEX Disclosure Schedule, neither CYBEX nor any Subsidiary
has any indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due) that would
have been required to be reflected in, reserved against or otherwise described
in the unaudited balance sheet of CYBEX as of September 30, 1996 (the 'CYBEX
Balance Sheet') or in the notes thereto in accordance with GAAP which was not
fully reflected in, reserved against or otherwise described in the CYBEX Balance
Sheet or the notes thereto or was not incurred in the ordinary course of
business consistent with past practice since the date of the CYBEX Balance
Sheet.
Section 4.15 Real and Personal Property.
(a) Section 4.15 of the CYBEX Disclosure Schedule sets forth a complete
list of (i) all real property and interests in real property owned in fee by
CYBEX and its Subsidiaries (individually, a 'CYBEX Owned Property' and
collectively, the 'CYBEX Owned Properties'), and (ii) all real property and
interests in real property leased by CYBEX and its Subsidiaries (individually, a
'CYBEX Real Property Lease' and the real properties specified in such leases,
together with the CYBEX Owned Properties, being referred to herein individually
as a 'CYBEX Property' and collectively as the 'CYBEX Properties') as lessee or
lessor. CYBEX and its Subsidiaries have good and marketable fee title to all
CYBEX Owned Property, free and clear of any lien, pledge, mortgage, deed of
trust, security interest, claim, lease, charge, option, right of first refusal,
easement, servitude, transfer restriction, encumbrance or any other restriction
or limitation whatsoever (collectively, 'Liens'), except (A) Liens set forth in
Section 4.15 of the CYBEX Disclosure Schedule and (B) Permitted Exceptions (as
defined below). The CYBEX Properties constitute all interests in real property
currently used or currently held for use in connection with the business of
CYBEX and which are necessary for the continued operation of the business of
CYBEX as the business is currently conducted. CYBEX and its Subsidiaries have a
valid and enforceable leasehold interest under each of the CYBEX Real Property
Leases, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and subject,
as to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), and neither CYBEX
nor any Subsidiary has knowledge of any default or event that with notice or
lapse of time, or both, would constitute a default by CYBEX or any Subsidiary
under any of the CYBEX Real Property Leases. All of the CYBEX Properties,
buildings, fixtures and improvements thereon owned or leased by CYBEX and its
Subsidiaries are in good operating condition and repair (subject to normal wear
and tear). CYBEX has delivered or otherwise made available to Trotter true,
correct and complete copies of (i) all deeds, title reports and surveys for the
CYBEX Owned Properties and (ii) the CYBEX Real Property Leases, together with
all amendments, modifications or supplements, if any, thereto. 'Permitted
Exceptions' means (i) all defects, exceptions, restrictions, easements, rights
of way and encumbrances disclosed in policies of title insurance which have been
made available to Trotter (in the case of CYBEX's property) or CYBEX (in the
case of Trotter's property); (ii) statutory liens for current taxes, assessments
or other governmental charges not yet delinquent or the amount or validity of
which is being contested in good faith by appropriate proceedings, provided an
appropriate reserve is established therefor; (iii) mechanics', carriers',
workers', repairers' and similar Liens arising or incurred in the ordinary
course of business that are not material to the business, operations and
financial condition of the property so encumbered or CYBEX or Trotter, as the
case may be; (iv) zoning, entitlement and other land use and environmental
regulations by any Governmental Body, provided that such regulations have not
been violated; and (v) such other imperfections in title, charges, easements,
restrictions and encumbrances which do not materially detract from the value of
or materially interfere with the present use of any property subject thereto or
affected thereby.
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(b) CYBEX and its Subsidiaries have good and marketable title to all of
their respective tangible personal properties and assets, free and clear of all
Liens except Permitted Exceptions. Such properties and assets are in good
operating condition and repair (subject to normal wear and tear).
Section 4.16 Intangible Property.
(a) Section 4.16 of the CYBEX Disclosure Schedule contains a list of each
patent, registered trademark, trade name, registered service mark and registered
copyright owned by or licensed to CYBEX and/or its Subsidiaries and pending
applications therefor, and each license or other agreement relating thereto.
Except as set forth in Section 4.16 of the CYBEX Disclosure Schedule, each of
the foregoing is owned by the party shown on such Schedule as owning the same,
free and clear of all mortgages, claims, liens, security interests, charges and
encumbrances and is in good standing and not the subject of any challenge or,
reexamination, interference or opposition proceeding.
(b) Except as set forth in Section 4.16 of the CYBEX Disclosure Schedule,
to the knowledge of CYBEX, all of the patents, patent applications, trademarks,
service marks, trade names, copyrights, mask work rights, trade secrets,
know-how, proprietary technical information, and computer software (collectively
referred to herein as 'Intellectual Property') owned or used by CYBEX or its
Subsidiaries in their business (referred to herein as the 'CYBEX Intellectual
Property') are owned by or licensed to CYBEX or its Subsidiaries using same free
and clear of all mortgages, claims, liens, security interests, charges and
encumbrances.
(c) Except as set forth in Section 4.16 of the CYBEX Disclosure Schedule,
no licenses of rights have been granted to any person to use, and, to the
knowledge of CYBEX, no person is infringing, any of the CYBEX Intellectual
Property and the business of CYBEX and its Subsidiaries is not operating under
license of any Intellectual Property from, or other obligation to pay royalties
to, any Person. There have been no claims made and neither CYBEX nor any
Subsidiary has received any notice or otherwise knows or has reason to believe
that any of the CYBEX Intellectual Property is invalid or conflicts with the
asserted rights of others, or that the business of CYBEX or its Subsidiaries
conflicts with or infringes the Intellectual Property rights of others. There is
no claim, suit or proceeding pending by or against CYBEX or any of its
Subsidiaries charging the infringement of any Intellectual Property.
Section 4.17 Material Contracts. Section 4.17 of the CYBEX Disclosure
Schedule sets forth all of the following contracts, agreements, indentures,
notes, bonds, loans, instruments, leases, commitments, or other arrangements or
agreements (collectively 'Contracts') to which CYBEX or any of its Subsidiaries
is a party or by which it is bound (collectively, the 'CYBEX Material
Contracts'): (i) Contracts with any current officer or director of CYBEX or any
of its Subsidiaries; (ii) Contracts with any labor union or association
representing any employee of CYBEX or any of its Subsidiaries; (iii) Contracts
pursuant to which any party is required to purchase or sell a stated portion of
its requirements or output from or to another party; (iv) Contracts for the sale
of any of the assets of CYBEX or any of its Subsidiaries other than in the
ordinary course of business or for the grant to any person of any preferential
rights to purchase any of its assets; (v) joint venture agreements (vi) material
Contracts containing covenants of CYBEX or any of its Subsidiaries not to
compete in any line of business or with any person in any geographical area or
covenants of any other person not to compete with CYBEX or any of its
Subsidiaries in any line of business or in any geographical area; (vii)
Contracts relating to the acquisition by CYBEX or any of its Subsidiaries of any
operating business or the capital stock of any other person; (viii) Contracts
relating to the borrowing of money; or (ix) any other Contracts, other than
CYBEX Real Property Leases and ordinary course purchase orders or capital
expenditures, which involve the expenditure of more than $150,000 in the
aggregate or $100,000 annually or require performance by any party more than one
year from the date hereof. There have been made available to Trotter, its
affiliates and their representatives true and complete copies of all of the
CYBEX Material Contracts. Except as set forth in Section 4.17 of the CYBEX
Disclosure Schedule, all of the CYBEX Material Contracts and other agreements
are in full force and effect and are the legal, valid and binding obligation of
CYBEX and/or its Subsidiaries, enforceable against them in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and subject,
as to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity). Except as set forth
in Section 4.17 of the CYBEX Disclosure Schedule, neither CYBEX nor any
Subsidiary is in default in any material
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respect under any CYBEX Material Contract, nor, to the knowledge of CYBEX, is
any other party to any CYBEX Material Contract in default thereunder in any
material respect.
Section 4.18 Related Party Transactions. Except as set forth in Section
4.18 of the CYBEX Disclosure Schedule, neither CYBEX nor any of its affiliates
has borrowed any moneys from or has outstanding any indebtedness or other
similar obligations to CYBEX. Except as set forth in Section 4.18 of the CYBEX
Disclosure Schedule, neither CYBEX, any Subsidiary of CYBEX, any affiliate of
CYBEX nor any officer or employee of any of them (i) owns any direct or indirect
interest of any kind in, or controls or is a director, officer, employee or
partner of, or consultant to, or lender to or borrower from or has the right to
participate in the profits of, any Person which is (A) a competitor, supplier,
customer, landlord, tenant, creditor or debtor of CYBEX or any of its
Subsidiaries, (B) engaged in a business related to the business of CYBEX or any
of its Subsidiaries, or (C) a participant in any transaction to which CYBEX or
any of its Subsidiaries is a party or (ii) is a party to any Contract with CYBEX
or any of its Subsidiaries.
Section 4.19 Opinion of Financial Advisor. The Board of Directors of CYBEX
has received the opinion of Smith Barney Inc. ('Smith Barney'), dated the date
of this Agreement, to the effect that, as of such date, the Total Merger
Consideration is fair from a financial point of view to CYBEX.
Section 4.20 Insurance. Except as set forth in Section 4.20 of the CYBEX
Disclosure Schedule, CYBEX and each of its Subsidiaries is, and has been
continuously since January 1, 1993, insured with financially responsible
insurers in such amounts and against such risks and losses as are customary in
all material respects for companies conducting the business as conducted by
CYBEX and its Subsidiaries during such time period. Except as set forth in
Section 4.20 of the CYBEX Disclosure Schedule, neither CYBEX nor any of its
Subsidiaries has received any notice of cancellation or termination with respect
to any material insurance policy of CYBEX or any of its Subsidiaries. The
insurance policies of CYBEX and each of its Subsidiaries are valid and
enforceable policies in all material respects.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TROTTER
Trotter represents and warrants to CYBEX as follows:
Section 5.1 Organization and Qualification. Except as set forth in Section
5.1 of the schedule delivered by Trotter on the date hereof (the 'Trotter
Disclosure Schedule'), each of Trotter and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority, and has been duly authorized by all necessary
approvals and orders to own, lease and operate its assets and properties to the
extent owned, leased and operated and to carry on its business as it is now
being conducted and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary other
than in such jurisdictions where the failure so to qualify would not have a
material adverse effect on Trotter and its Subsidiaries taken as a whole.
Section 5.2 Subsidiaries. Section 5.2 of the Trotter Disclosure Schedule
sets forth a description as of the date hereof of all Subsidiaries and joint
ventures of Trotter, including the name of each such entity and Trotter's
interest therein. Except as set forth in Section 5.2 of the Trotter Disclosure
Schedule, none of Trotter's Subsidiaries is a 'public utility company,' a
'holding company,' a 'subsidiary company' or an 'affiliate' of any public
utility company within the meaning of Section 2(a)(5), 2(a)(7), 2(a)(8) or
2(a)(11) of the 1935 Act, respectively. Except as set forth in Section 5.2 of
the Trotter Disclosure Schedule, all of the issued and outstanding shares of
capital stock of each of Trotter's Subsidiaries are validly issued, fully paid,
nonassessable and free of preemptive rights, and are owned, directly or
indirectly, by Trotter free and clear of any liens, claims, encumbrances,
security interests, equities, charges and options of any nature whatsoever and
there are no outstanding subscriptions, options, calls, contracts, voting
trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating any
such Subsidiary to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of its capital stock or obligating it to grant, extend
or enter into any such agreement or commitment.
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Section 5.3 Capitalization. As of the date hereof, the authorized capital
stock of Trotter consists of 4,750,000 shares of common stock, $.01 par value
('Trotter Common Stock'), and no preferred stock. At the close of business on
December 26, 1996, (i) 3,800,000 shares of Trotter Common Stock were
outstanding, not more than 1,488,000 shares of Trotter Common Stock were
reserved for issuance pursuant to Trotter's 1993 Non-Qualified Stock Option
Plan, 1994 Stock Option Plan and options for directors (collectively, the
'Trotter Stock Plans'), of which 388,500 shares were subject to existing
options, (ii) no shares of Trotter Common Stock were held by Trotter in its
treasury or by its Subsidiaries, (iii) no shares of Trotter Preferred Stock were
outstanding, and (iv) no Voting Debt is issued or outstanding. All outstanding
shares of Trotter Common Stock are validly issued, fully paid and nonassessable
and are not subject to preemptive rights. Section 5.3 of the Trotter Disclosure
Schedule includes a list of each outstanding option and right at December 26,
1996 existing under the Trotter Stock Plans, including the name of the holder of
such option or right, the number of shares subject thereto, the exercise price
of such option, the portion thereof which is vested at December 26, 1996 and, if
the exercisability of such option or right may be accelerated in any way by the
transactions contemplated by this Agreement or for any other reason, an
indication of the extent of such acceleration. As of the date of this Agreement,
except pursuant to the Trotter Stock Plans, there are no options, warrants,
calls, rights, commitments or agreements of any character to which Trotter or
any Subsidiary is a party or by which it is bound obligating Trotter or any
Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or any Voting Debt securities of Trotter or
any Subsidiary or obligating Trotter or any Subsidiary to grant, extend or enter
into any such option, warrant, call, right or agreement. Except for the
outstanding options under the Trotter Stock Plans as described in the Trotter
Disclosure Schedule, after the Effective Time, there will be no option, warrant,
call, right or agreement obligating Trotter or any Subsidiary to issue, deliver
or sell, or cause to be issued, delivered or sold, any shares of capital stock
or any Voting Debt of Trotter or any Subsidiary, or obligating Trotter or any
Subsidiary to grant, extend or enter into any such option, warrant, call, right
or agreement.
Section 5.4 Authority; Non-Contravention; Statutory Approvals; Compliance.
(a) Authority. Trotter has all requisite power and authority to enter into
this Agreement and, subject to the applicable Trotter Required Statutory
Approvals (as defined in Section 5.4(c)), to consummate the transactions
contemplated hereby or thereby. The execution and delivery of this Agreement and
the consummation by Trotter of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part of
Trotter. This Agreement has been duly and validly executed and delivered by
Trotter and, assuming the due authorization, execution and delivery hereof by
the other signatories hereto, constitutes the valid and binding obligation of
Trotter enforceable against it in accordance with its terms.
(b) Non-Contravention. Except as set forth in Section 5.4(b) of the
Trotter Disclosure Schedule, the execution and delivery of this Agreement by
Trotter does not, and the consummation of the transactions contemplated hereby
will not, result in a material Violation pursuant to any provisions of (i) the
certificate of incorporation, by-laws or similar governing documents of Trotter
or any of the its Subsidiaries, (ii) subject to obtaining the Trotter Required
Statutory Approvals, any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to Trotter or any of its Subsidiaries or any of their respective
properties or assets or (iii) subject to obtaining the third-party consents set
forth in Section 5.4(b) of the Trotter Disclosure Schedule (the 'Trotter
Required Consents'), any material note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which Trotter or any of its
Subsidiaries is a party or by which it or any of its properties or assets may be
bound or affected, except in the case of clause (ii) or (iii) for any such
Violation which would not have a Trotter Material Adverse Effect (as defined in
Section 5.6).
(c) Consents of Third Parties. No declaration, filing or registration
with, or notice to or authorization, consent or approval of, any Person or
Governmental Authority is necessary for the execution and delivery of this
Agreement by Trotter or the consummation by Trotter of the transactions
contemplated hereby, except as described in Section 5.4(c) of the Trotter
Disclosure Schedule or the failure of which to obtain would not result in a
Trotter Material Adverse Effect (the 'Trotter Required Statutory Approvals').
(d) Compliance. Except as set forth in Section 5.4(d), Section 5.10 or
Section 5.11 of the Trotter Disclosure Schedule, neither Trotter nor any of its
Subsidiaries is in violation of, is under investigation with
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respect to any violation of, or has been given notice or been charged with any
violation of, any law, statute, order, rule, regulation, ordinance or judgment
(including, without limitation, any applicable environmental law, ordinance or
regulation) of any Governmental Authority except for possible violations which
individually or in the aggregate would not have a Trotter Material Adverse
Effect. Except as set forth in Section 5.4(d) of the Trotter Disclosure Schedule
or in Section 5.11 of the Trotter Disclosure Schedule, Trotter and its
Subsidiaries have all permits, licenses, franchises and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted which are material to the operation of the businesses of
Trotter and its Subsidiaries. Except as set forth in Section 5.4(d) of the
Trotter Disclosure Schedule, Trotter and each of its Subsidiaries is not in
breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, could result in a default under (i) its certificate of
incorporation or by-laws or (ii) any contract, commitment, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which it is a party or by which it is bound or to which any of its
property is subject except for possible violations, breaches or defaults which
individually or in the aggregate would not have a Trotter Material Adverse
Effect.
Section 5.5 Financial Statements. Trotter has delivered to CYBEX copies of
(i) the audited consolidated balance sheets of Trotter and its Subsidiaries as
at December 31, 1995, 1994 and 1993 and the related audited consolidated
statements of income and of cash flows of Trotter and its Subsidiaries for the
years then ended and (ii) the unaudited consolidated balance sheet of the
Trotter and its Subsidiaries as at September 30, 1996 and the related
consolidated statements of income of Trotter and its Subsidiaries for the nine
month period then ended and Trotter will deliver to CYBEX copies of the audited
consolidated balance sheets of Trotter and its Subsidiaries as at December 31,
1996 and the related audited consolidated statements of income and of cash flows
of Trotter and its Subsidiaries for the year then ended (such audited and
unaudited statements, including the related notes and schedules thereto, are
referred to herein as the 'Trotter Financial Statements'). Each of the Trotter
Financial Statements is complete and correct in all material respects, has been
prepared and will be prepared in accordance with GAAP (subject to normal
year-end adjustments in the case of the unaudited statements) and in conformity
with the practices consistently applied by Trotter without modification of the
accounting principles used in the preparation thereof and fairly present the
financial position, of Trotter and its Subsidiaries as of the dates thereof and
the results of its operations and cash flows for the periods then ended,
subject, in the case of the unaudited interim financial statements, to (i)
normal, recurring, audit adjustments, (ii) required footnotes and (iii)
statement of cash flows.
For the purposes hereof, the unaudited consolidated balance sheet of
Trotter and its Subsidiaries as at September 30, 1996 is referred to as the
'Trotter Balance Sheet' and September 30, 1996 is referred to as the 'Trotter
Balance Sheet Data.'
Section 5.6 Absence of Certain Changes or Events.
Except as set forth in Section 5.6 of the Trotter Disclosure Schedule,
since the Trotter Balance Sheet Date:
(i) Trotter and each of its Subsidiaries have conducted their business only
in the ordinary course of business consistent with past practice;
(ii) there has not been, and no fact or condition exists which would have
or, insofar as reasonably can be foreseen, could have, a material adverse effect
on the business, assets, financial condition, results of operations or prospects
of Trotter and its Subsidiaries taken as a whole or which could delay or prevent
the transactions contemplated hereby (a 'Trotter Material Adverse Effect');
(iii) there has not been any damage, destruction or loss, whether or not
covered by insurance, with respect to the property and assets of Trotter or any
Subsidiary having a replacement cost of more than $50,000 for any single loss or
$100,000 for all such losses;
(iv) there has not been any declaration, setting aside or payment of any
dividend or other distribution in respect of any shares of capital stock of
Trotter or any repurchase, redemption or other acquisition by Trotter or any
Subsidiary of any outstanding shares of capital stock or other securities of, or
other ownership interest in, Trotter or any Subsidiary;
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(v) neither Trotter nor any Subsidiary has awarded or paid any bonuses to
employees of Trotter or any Subsidiary with respect to the fiscal year ended
December 31, 1995, entered into any employment, deferred compensation, severance
or similar agreement (nor amended any such agreement) or agreed to increase the
compensation payable or to become payable by it to any of Trotter's or any
Subsidiary's directors, officers, employees, agents or representatives or agreed
to increase the coverage or benefits available under any severance pay,
termination pay, vacation pay, company awards, salary continuation for
disability, sick leave, deferred compensation, bonus or other incentive
compensation, insurance, pension or other employee benefit plan, payment or
arrangement made to, for or with such directors, officers, employees, agents or
representatives (other than normal increases in the ordinary course of business
consistent with past practice and that in the aggregate have not resulted in a
material increase in the benefits or compensation expense of Trotter and its
Subsidiaries taken as a whole);
(vi) there has not been any material change by Trotter or any Subsidiary in
accounting or tax reporting principles, methods or policies;
(vii) neither Trotter nor any Subsidiary has failed to promptly pay and
discharge current liabilities except where disputed in good faith by appropriate
proceedings;
(viii) neither Trotter nor any Subsidiary has made any loans, advances or
capital contributions to, or investments in, any Person or paid any fees or
expenses to any affiliate of Trotter;
(ix) neither Trotter nor any Subsidiary has mortgaged, pledged or subjected
to any Lien any of its assets, or acquired any assets or sold, assigned,
transferred, conveyed, leased or otherwise disposed of any assets of Trotter or
any Subsidiary, except for assets acquired or sold, assigned, transferred,
conveyed, leased or otherwise disposed of in the ordinary course of business
consistent with past practice;
(x) neither Trotter nor any Subsidiary has discharged or satisfied any
Lien, or paid any obligation or liability (fixed or contingent), except in the
ordinary course of business consistent with past practice and which, would not
have a Trotter Material Adverse Effect;
(xi) neither Trotter nor any Subsidiary has canceled or compromised any
debt or claim or amended, canceled, terminated, relinquished, waived or released
any contract or right except in the ordinary course of business consistent with
past practice and which would not have a Trotter Material Adverse Effect;
(xii) neither Trotter nor any Subsidiary has made or committed to make any
capital expenditures or capital additions or betterments in excess of $100,000
individually or $500,000 in the aggregate;
(xiii) neither Trotter nor any Subsidiary has instituted or settled any
material legal proceeding;
(xiv) neither Trotter nor any Subsidiary has issued any capital stock,
bonds or other corporate securities or debt instrument, or granted any options,
warrants or other rights calling for the issuance thereof;
(xv) neither Trotter nor any Subsidiary has amended its Certificate of
Incorporation or By-Laws;
(xvi) neither Trotter nor any Subsidiary has incurred any bank
indebtedness; and
(xvii) Trotter has not agreed to do anything set forth in this Section 5.6.
Section 5.7 Litigation. Except as set forth in Section 5.7, Section 5.9 or
Section 5.11 of the Trotter Disclosure Schedule, (i) there are no claims, suits,
actions or proceedings, pending or, to the knowledge of Trotter, threatened, nor
are there, to the knowledge of Trotter, any investigations or reviews pending or
threatened against, relating to or affecting Trotter or any of its Subsidiaries
which would have a Trotter Material Adverse Effect, (ii) there have not been any
significant developments since October 1, 1996 with respect to such disclosed
claims, suits, actions, proceedings, investigations or reviews and (iii) there
are no judgments, decrees, injunctions, rules or orders of any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator applicable to Trotter or any of its Subsidiaries except for such that
would not have a Trotter Material Adverse Effect.
Section 5.8 Registration Statement; Proxy Statement. None of the
information supplied or to be supplied by or on behalf of Trotter for inclusion
or incorporation by reference in the Registration Statement or Proxy Statement
will, as to the Registration Statement, at the time if it is filed with the SEC
and at the time it becomes
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effective under the Securities Act, and as to the Proxy Statement, at the dates
mailed to shareholders and at the times of the meetings of shareholders to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
Section 5.9 Tax Matters.
Except as set forth in Section 5.9 of the Trotter Disclosure Schedule:
(a) Filing of Timely Tax Returns. Trotter and each of its Subsidiaries
have filed (or there has been filed on its behalf) all Tax Returns required to
be filed by each of them under applicable law except for those the failure of
which to file would not have a Trotter Material Adverse Effect. All such Tax
Returns were and are in all material respects true, complete and correct and
filed on a timely basis.
(b) Payment of Taxes. To the best knowledge of Trotter, Trotter and each
of its Subsidiaries have, within the time and in the manner prescribed by law,
paid all Taxes that are currently due and payable except for those contested in
good faith and for which adequate reserves have been taken.
(c) Tax Reserves. Trotter and each of its Subsidiaries have established on
their books and records reserves adequate to pay all Taxes and reserves for
deferred income taxes in accordance with GAAP which reserves are included in the
Trotter Balance Sheet.
(d) Tax Liens. There are no Tax liens upon the assets of Trotter or any of
its Subsidiaries except liens for Taxes not yet due.
(e) Withholding Taxes. Trotter and each of its Subsidiaries have complied
in all material respects with the provisions of the Code relating to the
withholding of Taxes, as well as similar provisions under any other laws, and
have, within the time and in the manner prescribed by law, withheld from
employee wages and paid over to the proper governmental authorities all amounts
required.
(f) Extensions of Time for Filing Tax Returns. Neither Trotter nor any of
its Subsidiaries has requested any extension of time within which to file any
Tax Return, which Tax Return has not since been filed.
(g) Waivers of Statute of Limitations. Neither Trotter nor any of its
Subsidiaries has executed any outstanding waivers or comparable consents
regarding the application of the statute of limitations with respect to any
Taxes or Tax Returns.
(h) Expiration of Statute of Limitations. The statute of limitations for
the assessment of all Taxes has expired for all applicable Tax Returns of
Trotter and each of its Subsidiaries or those Tax Returns have been examined by
the appropriate taxing authorities for all periods through the date hereof, and
no deficiency for any Taxes has been proposed, asserted or assessed against
Trotter or any of its Subsidiaries that has not been resolved and paid in full.
(i) Audit, Administrative and Court Proceedings. No audits or other
administrative proceedings or court proceedings are presently pending with
regard to any Taxes or Tax Returns of Trotter or any of its Subsidiaries.
(j) Powers of Attorney. No power of attorney currently in force has been
granted by Trotter or any of its Subsidiaries concerning any Tax matter.
(k) Tax Rulings. Neither Trotter nor any of its Subsidiaries has received
a Tax Ruling or entered into a Closing Agreement with any taxing authority that
would have a continuing adverse effect after the Closing Date.
(l) Availability of Tax Returns. Trotter has made available to CYBEX
complete and accurate copies of (i) all Tax Returns, and any amendments thereto,
filed by Trotter or any of its Subsidiaries, (ii) all audit reports received
from any taxing authority relating to any Tax Return filed by Trotter or any of
its Subsidiaries and (iii) any Closing Agreements entered into by Trotter or any
of its Subsidiaries with any taxing authority.
(m) Tax Sharing Agreements. Except as described in Section 5.9(m) of the
Trotter Disclosure Schedule, neither Trotter nor any of its Subsidiaries is a
party to any agreement relating to allocating or sharing of Taxes. Trotter has
provided CYBEX with true and correct copies of all documents listed in Section
5.9(m) of the Trotter
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Disclosure Schedule and no such documents will be amended without the consent of
the majority of the non-Trotter parties to such agreements.
(n) Code Section 280G. Neither Trotter nor any of its Subsidiaries is a
party to any agreement, contract or arrangement that could result, on account of
the transactions contemplated hereunder, separately or in the aggregate, in the
payment of any 'excess parachute payments' within the meaning of Section 280G of
the Code.
(o) Liability for Others. To the best knowledge of Trotter, none of
Trotter or any of its Subsidiaries has any liability for Taxes of any person
other than Trotter and its Subsidiaries (i) under Treasury Regulations Section
1.1502-6 (or any similar provision of state, local or foreign law) as a
transferee or successor, (ii) by contract, or (iii) otherwise.
(p) Excess Loss Account. On the date hereof there is no, and at the
Effective Time there will not be any, Excess Loss Account (as such term is
defined in Treasury Regulation Section 1.1502-19) with respect to the capital
stock of Trotter or any of its Subsidiaries.
Section 5.10 Employee Matters; ERISA.
Except as set forth in Section 5.10 of the Trotter Disclosure Schedule:
(a) Benefit Plans. Section 5.10(a)of the Trotter Disclosure Schedule
contains a true and complete list of each employee benefit plan covering
employees, former employees or directors of Trotter and each of its Subsidiaries
or their beneficiaries, or providing benefits to such persons in respect of
services provided to any such entity, including, but not limited to, any
employee benefit plans within the meaning of Section 3(3) of ERISA and any
severance or change in control agreement (collectively, the 'Trotter Benefit
Plans').
(b) Contributions. All material contributions and other payments required
to be made by Trotter or any of its Subsidiaries to any Trotter Benefit Plan (or
to any person pursuant to the terms thereof) have been made or the amount of
such payment or contribution obligation has been reflected in the Trotter
Financial Statements.
(c) Qualification; Compliance. Each of the Trotter Benefit Plans intended
to be 'qualified' within the meaning of Section 401(a) of the Code has been
determined by the IRS to be so qualified, and, to the best knowledge of Trotter,
no circumstances exist that are reasonably expected by Trotter to result in the
revocation of any such determination. Trotter is in compliance in all material
respects with, and each of the Trotter Benefit Plans is and has been operated in
all material respects in compliance with, all applicable laws, rules and
regulations governing such plan, including, without limitation, ERISA and the
Code. Each Trotter Benefit Plan intended to provide for the deferral of income,
the reduction of salary or other compensation, or to afford other income tax
benefits, complies with the requirements of the applicable provisions of the
Code or other laws, rules and regulations required to provide such income tax
benefits.
(d) Liabilities. With respect to the Trotter Benefit Plans, individually
and in the aggregate, no event has occurred, and, to the best knowledge of
Trotter, there does not now exist any condition or set of circumstances, that
could subject Trotter or any of its Subsidiaries to any material liability
arising under the Code, ERISA or any other applicable law (including, without
limitation, any liability to any such plan or the PBGC), or under any indemnity
agreement to which Trotter is a party, excluding liability for benefit claims
and funding obligations payable in the ordinary course.
(e) Welfare Plans. None of the Trotter Benefit Plans that are 'welfare
plans,' within the meaning of Section 3(1) of ERISA, provides for any retiree
benefits, other than continuation coverage required to be provided under Section
4980B of the Code or Part 6 of Title I of ERISA.
(f) Documents Made Available. Trotter has made available to CYBEX a true
and correct copy of each collective bargaining agreement to which Trotter or any
of its Subsidiaries is a party or under which Trotter or any of its Subsidiaries
has obligations and, with respect to each Trotter Benefit Plan, where
applicable, (i) such plan and summary plan description, (ii) the most recent
annual report filed with the IRS, (iii) each related trust agreement, insurance
contract, service provider or investment management agreement (including all
amendments to each such document), (iv) the most recent determination of the IRS
with respect to the qualified status of such Trotter Benefit Plan, and (v) the
most recent actuarial report or valuation.
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(g) Payments Resulting from Merger. (i) Except as disclosed in Section
5.10(g) of the Trotter Disclosure Schedule, the consummation or announcement of
any transaction contemplated by this Agreement will not (either alone or upon
the occurrence of any additional or further acts or events) result in any (A)
payment (whether of severance pay or otherwise) becoming due from Trotter or any
of its Subsidiaries to any officer, employee, former employee or director
thereof or to the trustee under any 'rabbi trust' or similar arrangement, or (B)
benefit under any Trotter Benefit Plan being established or becoming
accelerated, vested or payable and (ii) neither Trotter nor any of its
Subsidiaries is a party to (A) any management, employment, deferred
compensation, severance (including any payment, right or benefit resulting from
a change in control), bonus or other contract for personal services with any
officer, director or employee, (B) any consulting contract with any person who
prior to entering into such contract was a director or officer of Trotter, or
(C) any plan, agreement, arrangement or understanding similar to any of the
foregoing, which with respect to clause (A), (B) and (C) provide for payment in
excess of $10,000 per annum or $50,000 in the aggregate.
(h) Labor Agreements. Except as set forth in Section 5.10(h) of the
Trotter Disclosure Schedule, as of the date hereof, neither Trotter nor any of
its Subsidiaries is a party to any collective bargaining agreement or other
labor agreement with any union or labor organization. To the best knowledge of
Trotter, as of the date hereof, there is no current union representation
question involving employees of Trotter or any of its Subsidiaries, nor does
Trotter know of any activity or proceeding of any labor organization (or
representative thereof) or employee group to organize any such employees. Except
as disclosed in Section 5.10(h) of the Trotter Disclosure Schedule or except to
the extent such would not have a Trotter Material Adverse Effect, (i) there is
no unfair labor practice, employment discrimination or other material complaint
against Trotter or any of its Subsidiaries pending, or to the best knowledge of
Trotter, threatened, (ii) there is no strike, lockout or material dispute,
slowdown or work stoppage pending, or to the best knowledge of Trotter,
threatened, against or involving Trotter, and (iii) there is no proceeding,
claim, suit, action or governmental investigation pending or, to the best
knowledge of Trotter, threatened, in respect of which any director, officer,
employee or agent of Trotter or any of its Subsidiaries is or may be entitled to
claim indemnification from Trotter or such Subsidiary pursuant to their
respective certificates of incorporation or by-laws or as provided in the
indemnification agreements listed in Section 5.10(h) of the Trotter Disclosure
Schedule. Neither Trotter nor any Subsidiary has ever been a party to a
multi-employer retirement plan.
Section 5.11 Environmental Protection.
Except as set forth in Section 5.11 of the Trotter Disclosure Schedule:
(a) Compliance. Trotter and each of its Subsidiaries is in compliance with
all applicable Environmental Laws except where the failure to so comply would
not have a Trotter Material Adverse Effect; and neither Trotter nor any of its
Subsidiaries has received any communication (written or oral), from any person
or Governmental Authority that alleges that Trotter or any of its Subsidiaries
is not in such compliance with applicable Environmental Laws.
(b) Environmental Permits. Trotter and each of its Subsidiaries has
obtained or has applied for all the Environmental Permits necessary for the
construction of their facilities or the conduct of their operations except where
the failure to so comply would not have a Trotter Material Adverse Effect, and
all such Environmental Permits are in good standing or, where applicable, a
renewal application has been timely filed and is pending agency approval, and
Trotter and its Subsidiaries are in material compliance with all terms and
conditions of the Environmental Permits.
(c) Environmental Claims. To the best knowledge of Trotter, there is no
Environmental Claim which would have a Trotter Material Adverse Effect pending
(i) against Trotter or any of its Subsidiaries or joint ventures, (ii) against
any person or entity whose liability for any Environmental Claim Trotter or any
of its Subsidiaries has or may have retained or assumed either contractually or
by operation of law, or (iii) against any real or personal property or
operations which Trotter or any of its Subsidiaries owns, leases or manages, in
whole or in part.
(d) Releases. Trotter has no knowledge of any Releases of any Hazardous
Material that would be reasonably likely to form the basis of any Environmental
Claim against Trotter or any of its Subsidiaries, or against any person or
entity whose liability for any Environmental Claim Trotter or any of its
Subsidiaries has or
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may have retained or assumed either contractually or by operation of law except
for any Environmental Claim which would not have a Trotter Material Adverse
Effect.
(e) Predecessors. Trotter has no knowledge, with respect to any
predecessor of Trotter or any of its Subsidiaries, of any Environmental Claim
which would have a Trotter Material Adverse Effect pending or threatened, or of
any Release of Hazardous Materials that would be reasonably likely to form the
basis of any Environmental Claim which would have a Trotter Material Adverse
Effect.
(f) Disclosure. To Trotter's best knowledge, Trotter has disclosed to
CYBEX all facts which Trotter reasonably believes form the basis of an
Environmental Claim which would have a Trotter Material Adverse Effect.
Section 5.12 Corporate Records.
(a) Organizational Documents. Trotter has delivered to CYBEX true, correct
and complete copies of the certificates of incorporation (each certified by the
Secretary of State or other appropriate official of the applicable jurisdiction
of organization) and by-laws (each certified by the secretary, assistant
secretary or other appropriate officer of Trotter) or comparable organizational
documents of Trotter and each of its Subsidiaries.
(b) Minute Books. The minute books of Trotter and each Subsidiary
previously made available to CYBEX contain complete and accurate records of all
meetings and accurately reflect all other corporate action of the stockholders
and board of directors (including committees thereof) of Trotter and its
Subsidiaries.
Section 5.13 No Undisclosed Liabilities. Except as otherwise disclosed in
Section 5.6 of the Trotter Disclosure Schedule, neither Trotter nor any
Subsidiary has any indebtedness, obligations or liabilities of any kind (whether
accrued, absolute, contingent or otherwise, and whether due or to become due)
that would have been required to be reflected in, reserved against or otherwise
described in the Trotter Balance Sheet or in the notes thereto in accordance
with GAAP which was not fully reflected in, reserved against or otherwise
described in the Trotter Balance Sheet or the notes thereto or was not incurred
in the ordinary course of business consistent with past practice since the date
of the Trotter Balance Sheet.
Section 5.14 Real and Personal Property.
(a) Section 5.14 of the Trotter Disclosure Schedule sets forth a complete
list of (i) all real property and interests in real property owned in fee by
Trotter and its Subsidiaries (individually, a 'Trotter Owned Property' and
collectively, the 'Trotter Owned Properties'), and (ii) all real property and
interests in real property leased by Trotter and its Subsidiaries (individually,
a 'Trotter Real Property Lease' and the real properties specified in such
leases, together with the Trotter Owned Properties, being referred to herein
individually as a 'Trotter Property' and collectively as the 'Trotter
Properties') as lessee or lessor. Trotter and its Subsidiaries have good and
marketable fee title to all Trotter Owned Property, free and clear of any Lien
except (A) Liens set forth in Section 5.14 of the Trotter Disclosure Schedule
and (B) Permitted Exceptions. The Trotter Properties constitute all interests in
real property currently used or currently held for use in connection with the
business of Trotter and which are necessary for the continued operation of the
business of Trotter as the business is currently conducted. Trotter and its
Subsidiaries have a valid and enforceable leasehold interest under each of the
Trotter Real Property Leases, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity), and neither Trotter nor any Subsidiary has knowledge of any default or
event that with notice or lapse of time, or both, would constitute a default by
Trotter or any Subsidiary under any of the Trotter Real Property Leases. All of
the Trotter Properties, buildings, fixtures and improvements thereon owned or
leased by Trotter and its Subsidiaries are in good operating condition and
repair (subject to normal wear and tear). Trotter has delivered or otherwise
made available to CYBEX true, correct and complete copies of (i) all deeds,
title reports and surveys for the Trotter Owned Properties and (ii) the Trotter
Real Property Leases, together with all amendments, modifications or
supplements, if any, thereto.
(b) Trotter and its Subsidiaries have good and marketable title to all of
their respective tangible personal properties and assets, free and clear of all
Liens except Permitted Exceptions. Such properties and assets are in good
operating condition and repair (subject to normal wear and tear).
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Section 5.15 Intangible Property.
(a) Section 5.15 of the Trotter Disclosure Schedule contains a list of each
patent, registered trademark, trade name, registered service mark and registered
copyright owned by or licensed to Trotter and/or its Subsidiaries and pending
applications therefor, and each license or other agreement relating thereto.
Except as set forth in Section 5.15 of the Trotter Disclosure Schedule, each of
the foregoing is owned by the party shown on such Schedule as owning the same,
free and clear of all mortgages, claims, liens, security interests, charges and
encumbrances and is in good standing and not the subject of any challenge or
reexamination, interference or opposition proceeding.
(b) Except as set forth in Section 5.15 of the Trotter Disclosure Schedule,
to the knowledge of Trotter, all of Intellectual Property owned or used by
Trotter or its Subsidiaries in their business (referred to herein as the
'Trotter Intellectual Property') is owned by or licensed to Trotter or its
Subsidiaries using same free and clear of all mortgages, claims, liens, security
interests, charges and encumbrances.
(c) Except as set forth in Section 5.15 of the Trotter Disclosure Schedule,
no licenses of rights have been granted to any person to use, and, to the
knowledge of Trotter, no person is infringing, any of the Trotter Intellectual
Property and the business of Trotter and its Subsidiaries is not operating under
license of any Intellectual Property from, or other obligation to pay royalties
to, any Person. There have been no claims made and neither Trotter nor any
Subsidiary has received any notice or otherwise knows or has reason to believe
that any of the Trotter Intellectual Property is invalid or conflicts with the
asserted rights of others, or that the business of Trotter or its Subsidiaries
conflicts with or infringes the Intellectual Property rights of others. There is
no claim, suit or proceeding pending by or against Trotter or any of its
Subsidiaries charging the infringement of any Intellectual Property.
Section 5.16 Material Contracts. Section 5.16 of the Trotter Disclosure
Schedule sets forth all of the following Contracts to which Trotter or any of
its Subsidiaries is a party or by which it is bound (collectively, the 'Trotter
Material Contracts'): (i) Contracts with any current officer or director of
Trotter or any of its Subsidiaries; (ii) Contracts with any labor union or
association representing any employee of Trotter or any of its Subsidiaries;
(iii) Contracts pursuant to which any party is required to purchase or sell a
stated portion of its requirements or output from or to another party; (iv)
Contracts for the sale of any of the assets of Trotter or any of its
Subsidiaries other than in the ordinary course of business or for the grant to
any person of any preferential rights to purchase any of its assets; (v) joint
venture agreements (vi) material Contracts containing covenants of Trotter or
any of its Subsidiaries not to compete in any line of business or with any
person in any geographical area or covenants of any other person not to compete
with Trotter or any of its Subsidiaries in any line of business or in any
geographical area; (vii) Contracts relating to the acquisition by Trotter or any
of its Subsidiaries of any operating business or the capital stock of any other
person; (viii) Contracts relating to the borrowing of money; or (ix) any other
Contracts, other than Trotter Real Property Leases, which involve the
expenditure of more than $150,000 in the aggregate or $25,000 annually or
require performance by any party more than one year from the date hereof. There
have been made available to CYBEX, its affiliates and their representatives true
and complete copies of all of the Trotter Material Contracts. Except as set
forth in Section 5.16 of the Trotter Disclosure Schedule, all of the Trotter
Material Contracts and other agreements are in full force and effect and are the
legal, valid and binding obligation of Trotter and/or its Subsidiaries,
enforceable against them in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity). Except as set forth in Section 5.16 of the
Trotter Disclosure Schedule, neither Trotter nor any Subsidiary is in default in
any material respect under any Trotter Material Contract, nor, to the knowledge
of Trotter, is any other party to any Trotter Material Contract in default
thereunder in any material respect.
Section 5.17 Related Party Transactions. Except as set forth in Section
5.17 of the Trotter Disclosure Schedule, neither Trotter nor any of its
affiliates has borrowed any moneys from or has outstanding any indebtedness or
other similar obligations to Trotter. Except as set forth in Section 5.17 of the
Trotter Disclosure Schedule, neither Trotter, any Subsidiary of Trotter, any
affiliate of Trotter nor any officer or employee of any of them (i) owns any
direct or indirect interest of any kind in, or controls or is a director,
officer, employee or partner of, or consultant to, or lender to or borrower from
or has the right to participate in the profits of, any
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Person which is (A) a competitor, supplier, customer, landlord, tenant, creditor
or debtor of Trotter or any of its Subsidiaries, (B) engaged in a business
related to the business of Trotter or any of its Subsidiaries, or (C) a
participant in any transaction to which Trotter or any of its Subsidiaries is a
party or (ii) is a party to any Contract with Trotter or any of its
Subsidiaries.
Section 5.18 Insurance. Except as set forth in Section 5.18 of the Trotter
Disclosure Schedule, Trotter and each of its Subsidiaries is, and has been
continuously since January 1, 1993, insured with financially responsible
insurers in such amounts and against such risks and losses as are customary in
all material respects for companies conducting the business as conducted by
Trotter and its Subsidiaries during such time period. Except as set forth in
Section 5.18 of the Trotter Disclosure Schedule, neither Trotter nor any of its
Subsidiaries has received any notice of cancellation or termination with respect
to any material insurance policy of Trotter or any of its Subsidiaries. The
insurance policies of Trotter and each of its Subsidiaries are valid and
enforceable policies in all material respects.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Covenants of the Parties.
After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, CYBEX and Trotter each agree as follows, each as
to itself and to each of its Subsidiaries, except as expressly contemplated or
permitted in this Agreement or to the extent the other parties hereto shall
otherwise consent in writing, which consent shall not be unreasonably withheld:
(a) Ordinary Course of Business. Except as set forth in Section 6.1(a) of
the CYBEX Disclosure Schedule, each party hereto shall, and shall cause its
Subsidiaries to, carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and use
all commercially reasonable efforts to preserve intact their present business
organizations and goodwill, preserve the goodwill and relationships with
customers, suppliers and others having business dealings with them and, subject
to prudent management of workforce needs and ongoing programs currently in
force, keep available the services of their present officers and employees and
neither party will intentionally take any action which would cause the
representations set forth in Section 4.6 or 5.6 to be incorrect at the Effective
Time.
(b) Dividends. No party shall, nor shall any party permit any of its
Subsidiaries to, (i) declare or pay any dividends on or make other distributions
in respect of any of their capital stock other than to such party or its wholly
owned subsidiaries; (ii) split, combine or reclassify any of their capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of, or in substitution for, shares of their capital stock; or (iii)
redeem, repurchase or otherwise acquire any shares of their capital stock, other
than for the purpose of funding employee stock ownership plans in accordance
with past practice.
(c) Issuance of Securities. No party shall, nor shall any party permit any
of its Subsidiaries to, issue, agree to issue, deliver, sell, award, pledge,
dispose of or otherwise encumber or authorize or propose the issuance, delivery,
sale, award, pledge, disposal or other encumbrance of, any shares of their
capital stock of any class or any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire, any such shares or
convertible or exchangeable securities, other than intercompany issuances of
capital stock, and other than issuances (1) in the case of CYBEX and its
Subsidiaries, of CYBEX Common Shares pursuant to the exercise of stock options
or rights issued under the CYBEX Stock Plans outstanding as of the date hereof,
and (2) in the case of Trotter, shares of Trotter Common Stock pursuant to the
exercise of stock options issued under the Trotter Stock Plans outstanding as of
the date hereof and the grant of options on the later of the Effective Time and
March 31, 1997, as indicated in Section 5.3 of the Trotter Disclosure Schedule.
(d) Charter Documents. No party shall amend or propose to amend its
respective certificate of incorporation, by-laws or regulations, or similar
organic documents, except as contemplated herein.
(e) No Acquisitions. No party shall, nor shall any party permit any of its
Subsidiaries to, acquire, or publicly propose to acquire, or agree to acquire,
by merger or consolidation with, or by purchase or otherwise, a
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substantial equity interest in or a substantial portion of the assets of, any
Person or division thereof, nor shall any party acquire or agree to acquire a
material amount of assets.
(f) Indebtedness. Except as contemplated by this Agreement, no party
shall, nor shall any party permit any of its Subsidiaries to, incur or guarantee
any indebtedness (including any debt borrowed or guaranteed or otherwise assumed
including, without limitation, the issuance of debt securities or warrants or
rights to acquire debt) or enter into any 'keep well' or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing other than (i)
indebtedness or guarantees in the ordinary course of business consistent with
past practice (such as the issuance of commercial paper, the use of existing
credit facilities or hedging activities); (ii) long-term indebtedness not
aggregating more than $500,000; (iii) arrangements between such party and its
Subsidiaries or among its Subsidiaries; or (iv) in connection with the refunding
of existing indebtedness.
(g) Compensation, Benefits. Except as set forth in Section 6.1(g) of the
CYBEX Disclosure Schedule or the Trotter Disclosure Schedule, as may be required
by applicable law or as contemplated by this Agreement, no party shall, nor
shall any party permit any of its Subsidiaries to, (i) enter into, adopt or
amend or increase the amount or accelerate the payment or vesting of any benefit
or amount payable under, any employee benefit plan or other contract, agreement,
commitment, arrangement, plan or policy maintained by, contributed to or entered
into by such party or any of its Subsidiaries, or increase, or enter into any
contract, agreement, commitment or arrangement to increase in any manner, the
compensation or fringe benefits, or otherwise to extend, expand or enhance the
engagement, employment or any related rights, of any director, officer or other
employee of such party or any of its Subsidiaries, except for normal increases
in the ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to such party or any of its Subsidiaries or (ii) enter into or amend any
employment, severance or special pay arrangement with respect to the termination
of employment or other similar contract, agreement or arrangement with any
director or officer or other employee other than in the ordinary course of
business consistent with past practice.
(h) Cooperation, Notification. Each party shall (i) confer on a regular
and frequent basis with one or more representatives of the other party to
discuss, subject to applicable law, material operational matters and the general
status of its ongoing operations; (ii) promptly notify the other party of any
significant changes in its business, properties, assets, condition (financial or
other), results of operations or prospects; (iii) advise the other party of any
change or event which has had or, insofar as reasonably can be foreseen, is
reasonably likely to result in, in the case of CYBEX, a CYBEX Material Adverse
Effect or, in the case of Trotter, a Trotter Material Adverse Effect; and (iv)
promptly provide the other party with copies of all filings made by such party
or any of its Subsidiaries with any state or federal court, administrative
agency, commission or other Governmental Authority in connection with this
Agreement and the transactions contemplated hereby.
(i) Third-Party Consents. CYBEX shall, and shall cause its Subsidiaries
to, use all commercially reasonable efforts to obtain all CYBEX Required
Consents. CYBEX shall promptly notify Trotter of any failure or prospective
failure to obtain any such consents and, if requested by Trotter, shall provide
copies of all CYBEX Required Consents obtained by CYBEX to Trotter. Trotter
shall, and shall cause its Subsidiaries to, use all commercially reasonable
efforts to obtain all Trotter Required Consents. Trotter shall promptly notify
CYBEX of any failure or prospective failure to obtain any such consents and, if
requested by CYBEX, shall provide copies of all Trotter Required Consents
obtained by Trotter to CYBEX.
(j) No Breach, Etc. No party shall, nor shall any party permit any of its
Subsidiaries to, willfully take any action that would or is reasonably likely to
result in a material breach of any provision of this Agreement, or in any of its
representations and warranties set forth in this Agreement being untrue on and
as of the Closing Date.
(k) Contracts. No party shall, except in the ordinary course of business
consistent with past practice, modify, amend, terminate, renew or fail to use
reasonable business efforts to renew any material contract or agreement to which
such party or any Subsidiary of such party is a party or waive, release or
assign any material rights or claims.
(l) Insurance. Each party shall, and shall cause its Subsidiaries to,
maintain with financially responsible insurance companies insurance in such
amounts and against such risks and losses as are customary for companies
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engaged in the business conducted by CYBEX and its Subsidiaries and Trotter and
its Subsidiaries, as the case may be.
(m) Permits. Each party shall, and shall cause its Subsidiaries to, use
reasonable efforts to maintain in effect all existing governmental permits which
are material to the operations of such party or its Subsidiaries.
(n) Proxy Statement; Registration Statement. If at any time prior to the
Effective Time, either CYBEX, Trotter, the Company or any of their respective
affiliates, officers or directors should discover any information relating to
CYBEX, Trotter or the Company which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, such party shall
promptly inform the other parties.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access to Information. Upon reasonable notice, each party
shall, and shall cause its Subsidiaries to, afford to the officers, directors,
employees, accountants, counsel, investment bankers, financial advisors and
other representatives of the other (collectively, 'Representatives') reasonable
access, during normal business hours throughout the period prior to the
Effective Time, to all of its properties, books, contracts, commitments and
records (including, but not limited to, Tax Returns) and, during such period,
each party shall, and shall cause its Subsidiaries to, furnish promptly to the
other (i) access to each report, schedule and other document filed or received
by it or any of its Subsidiaries pursuant to the requirements of federal or
state securities laws or filed with or sent to the SEC or any other federal or
state regulatory agency or commission, and (ii) access to all information
concerning themselves, their subsidiaries, directors, officers and shareholders
and such other matters as may be reasonably requested by the other party in
connection with any filings, applications or approvals required or contemplated
by this Agreement or for any other reason related to the transactions
contemplated by this Agreement. Each party shall, and shall cause its
Subsidiaries and Representatives to, hold in strict confidence all documents and
information concerning the other furnished to it in connection with the
transactions contemplated by this Agreement in accordance with the
Confidentiality Agreement, dated June 18, 1996, between CYBEX and Trotter, as it
may be amended from time to time (the 'Confidentiality Agreement').
Section 7.2 Proxy Statement; Registration Statement.
(a) Preparation and Filing. CYBEX will prepare and file with the SEC as
soon as reasonably practicable after the date hereof the Proxy Statement and the
Registration Statement. CYBEX will use its best efforts to have the Registration
Statement declared effective as soon thereafter as practicable. The Proxy
Statement shall include the recommendations of the Board of Directors of CYBEX
in favor of the Merger, which shall not be withdrawn, modified or withheld
except in compliance with the fiduciary duties of CYBEX's Board of Directors
under applicable law. Each of the parties hereto shall furnish all information
concerning itself which is required or customary for inclusion in the Proxy
Statement and the Registration Statement. The information provided by any party
hereto for use in the Proxy Statement or the Registration Statement shall be
true and correct in all material respects without omission of any material fact
which is required to make such information not false or misleading. No
representation, covenant or agreement is made by any party hereto with respect
to information supplied by any other party for inclusion in the Proxy Statement.
(b) Fairness Opinion Not Withdrawn. It shall be a condition to the
obligation of CYBEX to hold the CYBEX Special Meeting that the opinion of Smith
Barney, referred to in Section 4.19, shall not have been withdrawn.
Section 7.3 Regulatory Matters.
(a) HSR Filings. Each party hereto as soon as reasonably practicable after
the date hereof shall file or cause to be filed with the Federal Trade
Commission and the Department of Justice any notifications required to be filed
by their respective 'ultimate parent' companies under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the 'HSR Act'), and the rules
and regulations promulgated thereunder with respect to the transactions
contemplated hereby. Such parties will use all commercially reasonable efforts
to make such filings promptly and to respond promptly to any requests for
additional information made by either of such agencies.
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(b) Other Regulatory Approvals. Each party hereto shall cooperate and use
its best efforts to promptly prepare and file all necessary documentation, to
effect all necessary applications, notices, petitions, filings and other
documents, and to use all commercially reasonable efforts to obtain all
necessary permits, consents, approvals and authorizations of all Governmental
Authorities necessary or advisable to obtain the CYBEX Required Statutory
Approvals and the Trotter Required Statutory Approvals.
Section 7.4 Shareholder Approval. Subject to the provisions of Section
7.2(b), CYBEX shall, as soon as reasonably practicable after the date hereof (i)
take all steps necessary to duly call, give notice of, convene and hold a
special meeting of its shareholders (the 'CYBEX Special Meeting') for the
purpose of securing the CYBEX Shareholders' Approval and (ii) distribute to its
shareholders the Proxy Statement in accordance with applicable federal and state
law and with its certificate of incorporation and by-laws.
Section 7.5 Directors' and Officers' Indemnification.
(a) Indemnification. To the extent, if any, not provided by an existing
right of indemnification or other agreement or policy, from and after the
Effective Time, CYBEX shall, to the fullest extent permitted by applicable law,
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the date hereof, or who becomes prior to the Effective Time, an
officer, director or employee of any of the parties hereto or any Subsidiary
(each an 'Indemnified Party' and collectively, the 'Indemnified Parties')
against (i) all losses, expenses (including reasonable attorney's fees and
expenses), claims, damages or liabilities or, subject to the proviso of the next
succeeding sentence, amounts paid in settlement, arising out of actions or
omissions occurring at or prior to the Effective Time (and whether asserted or
claimed prior to, at or after the Effective Time) that are, in whole or in part,
based on or arising out of the fact that such person is or was a director,
officer or employee of such party (the 'Indemnified Liabilities'), and (ii) all
Indemnified Liabilities to the extent they are based on or arise out of or
pertain to the transactions contemplated by this Agreement. In the event of any
such loss, expense, claim, damage or liability (whether or not arising before
the Effective Time), (i) CYBEX shall pay the reasonable fees and expenses of
counsel selected by the Indemnified Parties, which counsel shall be reasonably
satisfactory to CYBEX, promptly after statements therefor are received and
otherwise advance to such Indemnified Party upon request reimbursement of
documented expenses reasonably incurred, in either case to the extent not
prohibited by the New York Business Corporation Law, (ii) CYBEX will cooperate
in the defense of any such matter and (iii) any determination required to be
made with respect to whether an Indemnified Party's conduct complies with the
standards set forth under the New York Business Corporation Law and the
certificate of incorporation or by-laws of CYBEX shall be made by independent
counsel mutually acceptable to CYBEX and the Indemnified Party; provided,
however, that CYBEX shall not be liable for any settlement effected without its
written consent (which consent shall not be unreasonably withheld). The
Indemnified Parties as a group may retain only one law firm with respect to each
related matter except to the extent there is, in the opinion of counsel to an
Indemnified Party, under applicable standards of professional conduct, a
conflict on any significant issue between positions of such Indemnified Party
and any other Indemnified Party or Indemnified Parties.
(b) Insurance. For a period of six years after the Effective Time, CYBEX
shall cause to be maintained in effect policies of directors and officers'
liability insurance maintained by CYBEX and Trotter for the benefit of those
persons who are currently covered by such policies on terms no less favorable
than the terms of such current insurance coverage; provided, however, that CYBEX
shall not be required to expend in any year an amount in excess of 200% of the
annual aggregate premiums currently paid by CYBEX and Trotter for such
insurance; and provided, further, that if the annual premiums of such insurance
coverage exceed such amount, CYBEX shall be obligated to obtain a policy with
the best coverage available, in the reasonable judgment of the Board of
Directors of CYBEX, for a cost not exceeding such amount.
(c) Successors. In the event CYBEX or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in either such case, proper provisions shall be made so that
the successors and assigns of CYBEX shall assume the obligations set forth in
this Section 7.5.
(d) Survival of Indemnification. To the fullest extent permitted by law,
from and after the Effective Time, all rights to indemnification as of the date
hereof in favor of the employees, agents, directors and officers of
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CYBEX, Trotter and their respective Subsidiaries with respect to their
activities as such prior to the Effective Time, as provided in their respective
certificates of incorporation and by-laws in effect on the date thereof, or
otherwise in effect on the date hereof, shall survive the Merger and shall
continue in full force and effect for a period of not less than six years from
the Effective Time.
(e) Benefit. The provisions of this Section 7.5 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her representatives.
Section 7.6 Public Announcements. Subject to each party's disclosure
obligations imposed by law, CYBEX and Trotter will cooperate with each other in
the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public announcement or
statement with respect hereto or thereto without the consent of the other party
(which consent shall not be unreasonably withheld).
Section 7.7 Employee Agreements and Workforce Matters.
Certain Employee Agreements. Subject to Sections 7.8, and 7.9, CYBEX and
its Subsidiaries shall honor, without modification, all contracts, agreements,
collective bargaining agreements and commitments of the parties prior to the
date hereof that apply to any current or former employee or current or former
director of the parties hereto; provided, however, that this undertaking is not
intended to prevent CYBEX from enforcing such contracts, agreements, collective
bargaining agreements and commitments in accordance with their terms, including,
without limitation, any reserved right to amend, modify, suspend, revoke or
terminate any such contract, agreement, collective bargaining agreement or
commitment.
Section 7.8 Employee Benefit Plans. At the Effective Time, the Trotter
Stock Options Plans shall be terminated and prior to the Closing, CYBEX and
Trotter shall cooperate in establishing employee benefit plans for the Surviving
Corporation and for the transition of the existing plans of both CYBEX and
Trotter.
Section 7.9 Stock Option and Other Stock Plans.
(a) At the Effective Time, each outstanding option to purchase shares of
Trotter Common Stock (each a 'Trotter Stock Option') under Trotter Stock Plans,
whether vested or unvested, will be assumed by CYBEX. Each Trotter Stock Option
so assumed by CYBEX shall continue to have, and be subject to, the same terms
and conditions set forth in the applicable Trotter Stock Plan immediately prior
to the Effective Time, except that (i) such Trotter Stock Option shall be
exercisable for that number of whole shares of CYBEX Common Stock equal to the
product of the number of shares of Trotter Common Stock that were issuable upon
exercise of such Trotter Stock Option immediately prior to the Effective Time,
multiplied by the Merger Consideration, rounded up to nearest whole number of
shares of CYBEX Common Stock, (ii) the per share exercise price shall be equal
to the quotient determined by dividing the exercise price per share of Trotter
Common Stock at which such Trotter Stock Option was exercisable immediately
prior to the Effective Time by the Merger Consideration, rounded up to the
nearest whole cent, and (iii) each Trotter Stock Option shall be immediately
exercisable.
(b) At the Effective Time, CYBEX shall issue to each holder of an
outstanding Trotter Stock Option a document evidencing the foregoing assumption
of such Trotter Stock Option by CYBEX.
(c) CYBEX agrees to file a Registration Statement on Form S-8 for the
shares of CYBEX Common Stock issuable with respect to the assumed Trotter Stock
Options, no later than ten (10) days after the Effective Time.
Section 7.10 No Solicitations. From and after the date hereof, CYBEX and
Trotter will not, and will not authorize or permit any of their respective
Representatives to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) or take any other action to
facilitate knowingly any inquiries or the making of any proposal which
constitutes or may reasonably be expected to lead to an Acquisition Proposal (as
defined herein) from any Person, or engage in any discussion or negotiations
relating thereto or accept any Acquisition Proposal; provided, however, that
notwithstanding any other provision hereof, CYBEX may (i) at any time prior to
obtaining the CYBEX Shareholders' approval engage in discussions or negotiations
with a third party who (without any solicitation, initiation, encouragement,
discussion or negotiation, directly or indirectly, by or with CYBEX or its
Representatives after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning CYBEX and
its business, properties and assets if, and only to the extent that, (A) (x) the
third party has first made an Acquisition Proposal that is financially superior
to the
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Merger and not subject to any financing conditions (as determined in good faith
in each case by CYBEX's Board of Directors after consultation with its financial
advisors) and (y) CYBEX's Board of Directors shall conclude in good faith, after
considering applicable provisions of state law, on the basis of written advice
of outside counsel that such action is necessary for the Board of Directors to
act in a manner consistent with its fiduciary duties under applicable law and
(B) prior to furnishing such information to or entering into discussions or
negotiations with such Person, CYBEX (x) provides prompt notice to Trotter to
the effect that it is furnishing information to or entering into discussions or
negotiations with such Person and (y) receives from such Person an executed
confidentiality agreement in reasonably customary form on terms not more
favorable to such Person than the terms contained in the Confidentiality
Agreement; (ii) comply with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender or exchange offer, and/or (iii) accept an Acquisition
Proposal from a third party, provided CYBEX terminates this Agreement pursuant
to Section 9.1(e). Each party shall immediately cease and terminate any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any parties conducted heretofore by the party or its Representatives with
respect to the foregoing. Each party will notify the other of any such
discussions or negotiations, requests for information or the receipt of any
Acquisition Proposal, including the identity of the Person or group involved and
the terms and conditions of any Acquisition Proposal. As used herein,
'Acquisition Proposal' shall mean a proposal or offer (other than by the other
party hereto) for a tender or exchange offer, merger, consolidation or other
business combination involving the party or any material subsidiary of the party
or any proposal to acquire in any manner a substantial equity interest in or a
substantial portion of the assets of the party or any material subsidiary.
Section 7.11 CYBEX Board of Directors. CYBEX's and Trotter's respective
Boards of Directors will take such action as may be necessary to cause the
number of directors comprising the full Board of Directors of CYBEX at the
Effective Time to be 9 persons, 4 of whom shall be designated by CYBEX prior to
the Effective Time and 5 of whom shall be designated by Trotter prior to the
Effective Time. The initial designation of such directors among the three
classes of the Board of Directors of CYBEX shall be agreed to by CYBEX and
Trotter, the designees of each party to be divided equally among such classes;
provided, however, that if, prior to the Effective Time, any of such designees
shall decline or be unable to serve, the party which designated such person
shall designate another person to serve in such person's stead. Promptly
following the Effective Time, Peter Haines shall be appointed the Chief
Executive Officer of CYBEX.
Section 7.12 Tax-Free Reorganization. CYBEX and Trotter shall use all
reasonable efforts to cause the representations set forth in the CYBEX
Certificate and the Trotter Certificate, respectively, to be true in all
material respects as of the Effective Time.
Section 7.13 Listing of Stock. CYBEX agrees to apply for listing on the
American Stock Exchange, the CYBEX Common Shares issuable, and those required to
be reserved for issuance, in connection with the Merger, upon official notice of
issuance.
Section 7.14 Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses, except all out-of-pocket printing and
solicitation costs in connection with the Registration Statement and the Proxy
Statement shall be shared equally by CYBEX and Trotter.
Section 7.15 Further Assurances. Each party will, and will cause its
Subsidiaries to, execute such further documents and instruments and take such
further actions as may reasonably be requested by any other party in order to
consummate the Merger in accordance with the terms hereof.
ARTICLE VIII
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of the following
conditions, except, to the extent permitted by applicable law, that such
conditions may be waived in writing pursuant to Section 9.5 by the joint action
of the parties hereto:
(a) Shareholder Approval. The CYBEX Shareholders' Approval shall have been
obtained.
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(b) No Injunction. No temporary restraining order or preliminary or
permanent injunction or other order by any federal or state court preventing
consummation of the Merger shall have been issued and be continuing in effect,
and the Merger and the other transactions contemplated hereby shall not have
been prohibited under any applicable federal or state law or regulation.
(c) Statutory Approvals. All waiting periods applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated and all approvals of, or filings with, any Governmental Authority
required to consummate the transactions contemplated hereby shall have been
obtained or made, other than immaterial approvals and filings, the failure to
obtain or make which would have no material adverse effect on CYBEX or Trotter
or, following the Effective Time, CYBEX.
(d) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop orders suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued, and no
proceeding for that purpose, and no similar proceeding in respect of the Proxy
Statement, shall have been initiated or threatened in writing by the SEC.
(e) Stock Listing. The CYBEX Common Shares issuable to stockholders of
Trotter pursuant to this Agreement and such other shares required to be reserved
for issuance in connection with the Merger shall have been authorized for
listing on the American Stock Exchange, Inc. upon official notice of issuance.
(f) Fairness Opinion. The opinion of Smith Barney referred to in Section
4.19 shall not have been withdrawn.
Section 8.2 Conditions to Obligation of Trotter to Effect the Merger. The
obligation of Trotter to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by Trotter in writing pursuant to Section 9.5:
(a) Performance of Obligations of CYBEX. CYBEX (and/or its appropriate
Subsidiaries) will have performed in all material respects its agreements and
covenants contained in or contemplated by this Agreement required to be
performed by it at or prior to the Effective Time.
(b) Representations and Warranties. The representations and warranties of
CYBEX set forth in this Agreement shall be true and correct in all material
respects (i) on and as of the date hereof and (ii) on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of the Closing Date (except for representations and warranties that
expressly speak only as of a specific date or time other than the date hereof or
the Closing Date which need only be true and correct as of such date or time).
(c) Closing Certificates. Trotter shall have received a certificate signed
by the chief financial officer of CYBEX, dated the Closing Date, to the effect
that, to the best of such officer's knowledge, the conditions set forth in
Section 8.2(a) and Section 8.2(b) have been satisfied.
(d) CYBEX Certificate. Trotter shall have received a certificate,
substantially in the form of Exhibit 8.2(d) hereof (the 'CYBEX Certificate'),
signed by the Chief Financial Officer of CYBEX.
Section 8.3 Conditions to Obligation of CYBEX to Effect the Merger. The
obligation of CYBEX to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by CYBEX in writing pursuant to Section 9.5:
(a) Performance of Obligations of Trotter. Trotter (and/or its appropriate
Subsidiaries) will have performed in all material respects its agreements and
covenants contained in or contemplated by this Agreement required to be
performed by it at or prior to the Effective Time.
(b) Representations and Warranties. The representations and warranties of
Trotter set forth in this Agreement shall be true and correct in all material
respects (i) on and as of the date hereof and (ii) on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of the Closing Date (except for representations and warranties that
expressly speak only as of a specific date or time other than the date hereof or
the Closing Date which need only be true and correct as of such date or time).
(c) Closing Certificates. CYBEX shall have received a certificate signed
by the chief financial officer of Trotter, dated the Closing Date, to the effect
that, to the best of such officer's knowledge, the conditions set forth in
Section 8.3(a) and Section 8.3(b) have been satisfied.
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(d) Trotter Certificate. CYBEX shall have received a certificate,
substantially in the form of Exhibit 8.3(d) hereof (the 'Trotter Certificate'),
signed by the Chief Financial Officer of Trotter.
(e) Selling Shareholder Certificate. CYBEX shall have received a
certificate, substantially in the form of Exhibit 8.3(e) hereof, signed by the
Chief Financial Officer of UM Equity Corp.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval by the shareholders
of the respective parties hereto contemplated by this Agreement:
(a) by mutual written consent of the Boards of Directors of CYBEX and
Trotter;
(b) by either Trotter or CYBEX (i) if there has been a material breach of
any representation, warranty, covenant or agreement on the part of the other set
forth in this Agreement, which breach has not been cured within 20 business days
following receipt by the breaching party of notice of such breach or adequate
assurance of such cure shall not have been given by or on behalf of the
breaching party within such 20 business-day period, or (ii) if any state or
federal law, order, rule or regulation is adopted or issued, which has the
effect, as supported by the written opinion of outside counsel for such party,
of prohibiting the Merger, or by any party hereto if any court of competent
jurisdiction in the United States or any State shall have issued an order,
judgment or decree permanently restraining, enjoining or otherwise prohibiting
the Merger, and such order, judgment or decree shall have become final and
nonappealable;
(c) by any party hereto, by written notice to the other parties, if the
Effective Time shall not have occurred on or before June 30, 1997 (the 'Initial
Termination Date'); provided, however, that the right to terminate the Agreement
under this Section 9.1(c) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before this date;
(d) by any party hereto, by written notice to the other parties, if the
CYBEX Shareholders' Approval shall not have been obtained at a duly held CYBEX
Special Meeting, including any adjournments thereof; or
(e) by CYBEX, prior to the approval of this Agreement by the shareholders
of CYBEX, upon five days' prior notice to Trotter, if, as a result of an
Acquisition Proposal by a party other than Trotter or any of its affiliates, the
Board of Directors of CYBEX determines in good faith that their fiduciary
obligations under applicable law require that such Acquisition Proposal be
accepted; provided, however, that (i) the Board of Directors of CYBEX shall have
been advised in writing by outside counsel that notwithstanding a binding
commitment to consummate an agreement of the nature of this Agreement entered
into in the proper exercise of their applicable fiduciary duties, such fiduciary
duties would also require the directors to reconsider such commitment as a
result of such Acquisition Proposal; and (ii) prior to any such termination,
CYBEX shall, and shall cause its respective financial and legal advisors to,
negotiate with Trotter to make such adjustments in the terms and conditions of
this Agreement as would enable CYBEX to proceed with the transactions
contemplated herein.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either CYBEX or Trotter pursuant to Section 9.1 there shall be no
liability on the part of either CYBEX or Trotter or their respective officers or
directors hereunder, except as provided in Section 9.3 and except that Section
7.14, the agreement contained in the last sentence of Section 7.1, Section 10.2
and Section 10.8 shall survive the termination.
Section 9.3 Topping Fee. If CYBEX terminates this Agreement pursuant to
Section 9.1(e) and consummates a transaction for the merger, consolidation or
other business combination of CYBEX with an unrelated third party within twelve
months after the date of termination of this Agreement, then, provided that
Trotter shall not have materially breached any of the representations,
warranties, covenants or agreements made on its part such that either of the
conditions set forth in Sections 8.3(a) or (b) will not be satisfied, CYBEX
shall
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pay to Trotter, within five (5) business days following Trotter's written
request therefor, an amount equal to the sum of $2,000,000 plus all actual
out-of-pocket costs and expenses (not to exceed $250,000 in the aggregate)
incurred by Trotter through the date of termination in connection with this
Agreement and the transactions contemplated hereby.
Section 9.4 Amendment. This Agreement may be amended by the Boards of
Directors of the parties hereto, at any time before or after approval hereof by
the shareholders of CYBEX and Trotter and prior to the Effective Time, but after
such approvals, no such amendment shall (i) alter or change the amount or kind
of shares, rights or any of the proceedings of the treatment of shares under
Article II or (ii) alter or change any of the terms and conditions of this
Agreement if any of the alterations or changes, alone or in the aggregate, would
materially adversely affect the rights of holders of CYBEX Common Shares or
Trotter Common Stock, except for alterations or changes that could otherwise be
adopted by the Board of Directors of the Company, without the further approval
of such shareholders, as applicable. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein, to the extent permitted by applicable law. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid if set forth in an instrument in writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival; Effect of Representations and Warranties. All
representations, warranties and agreements in this Agreement shall not survive
the Merger, except as otherwise provided in this Agreement and except for the
agreements contained in this Section 10.1 and in Article II, Section 7.5,
Section 7.14, Section 9.3 and Section 10.8.
Section 10.2 Brokers. CYBEX represents and warrants that, except for Smith
Barney whose fees have been disclosed to Trotter prior to the date hereof, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
CYBEX. Trotter represents and warrants that, except for Howard Lawson & Co.,
whose fees have been disclosed to CYBEX prior to the date hereof, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Trotter.
Section 10.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (i) if delivered personally, (ii) if
sent by reputable overnight courier service, (iii) if telecopied (which is
confirmed), or (iv) five days after being mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to CYBEX, to
CYBEX International, Inc.
2100 Smithtown Avenue
Ronkonkoma, NY 11779
Attn: Chairman of the Board
Chief Executive Officer
Chief Financial Officer
Telecopy: (516) 585-9000
Telephone: (516) 585-1840
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with a copy to
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attn: Jeffrey J. Weinberg
Telecopy: (212) 310-8007
Telephone: (212) 310-8000
and
(b) if to Trotter, to
Trotter Inc.
10 Trotter Drive
Medway, MA 02053
Attn: Chief Executive Officer
Telecopy: (508) 533-5799
Telephone: (508) 533-4300
with a copy to
UM Holdings Ltd.
65 Haddon Avenue
Haddonfield, NJ 08033
Attn: John Aglialoro
Telecopy: (609) 354-2216
Telephone: (609) 354-2200
and a copy to
Archer & Greiner
One Centennial Square
Haddonfield, NJ 08033
Attn: Jim Carll
Telecopy: (609) 795-0574
Telephone: (609) 354-3031
(c) if to the Company, to
c/o Chief Executive Officer of CYBEX at
the address set forth above
and
c/o Chief Executive Officer of Trotter at
the address set forth above.
Section 10.4 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
other than the Confidentiality Agreement; (ii) shall not be assigned by
operation of law or otherwise; and (iii) shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts
executed in and to be fully performed in such State, without giving effect to
its conflicts of law rules or principles and except to the extent the provisions
of this Agreement (including the documents or instruments referred to herein)
are expressly governed by or derive their authority from the DGCL.
Section 10.5 Interpretation. When a reference is made in this Agreement to
Sections or Exhibits, such reference shall be to a Section or Exhibit of this
Agreement, respectively, unless otherwise indicated. The table of
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contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words 'include,' 'includes' or 'including' are used in
this Agreement, they shall be deemed to be followed by the words 'without
limitation.'
Section 10.6 Counterparts; Effect. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.
Section 10.7 Parties' Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except for rights of
Indemnified Parties as set forth in Section 7.5, nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 10.8 Waiver of Jury Trial and Certain Damages. Each party to this
Agreement waives, to the fullest extent permitted by applicable law, (i) any
right it may have to a trial by jury in respect of any action, suit or
proceeding arising out of or relating to this Agreement and (ii) any right it
may have to receive damages from any other party based on any theory of
liability for any special, indirect, consequential (including lost profits) or
punitive damages.
Section 10.9 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of New York or in New York state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of New York or
any New York state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny such personal jurisdiction by motion or other request
for leave from any such court and (c) agrees that it will not bring any action
relating to this Agreement or any of the transactions contemplated by this
Agreement in any court other than a federal or state court sitting in the State
of New York.
A-32
<PAGE>
IN WITNESS WHEREOF, CYBEX, Trotter and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
CYBEX INTERNATIONAL, INC.
By: /s/ JOHN C. SPRATT
Name: John C. Spratt
Title: Chairman of the Board
TROTTER INC.
By: /s/ JOHN AGLIALORO
Name: John Aglialoro
Title: Chairman of the Board
CAT'S TAIL, INC.
By: /s/ JOHN C. SPRATT
Name: John C. Spratt
Title: Chairman of the Board
A-33
<PAGE>
ANNEX B
SMITH BARNEY
- ------------
A Member of TravelersGroup[LOGO]
December 27, 1996
The Board of Directors
CYBEX International, Inc.
2100 Smithtown Avenue
Ronkonkoma, New York 11779
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to CYBEX International, Inc. ("CYBEX") of the consideration to be paid by
CYBEX pursuant to the terms and subject to the conditions set forth in the
Agreement and Plan of Merger, dated as of December 27, 1996 (the "Merger
Agreement"), by and among CYBEX, Trotter Inc. ("Trotter"), a subsidiary of UM
Holdings Ltd. ("UMH"), and CAT'S TAIL, INC., a subsidiary of CYBEX ("Sub"). As
more fully described in the Merger Agreement, (i) Sub will be merged with and
into Trotter (the "Merger"), and (ii) each outstanding share of the common
stock, par value $0.01 per share, of Trotter (the "Trotter Common Stock") will
be converted into the right to receive that number of shares of the common
stock, par value $0.10 per share, of CYBEX (the "CYBEX Common Stock") equal to
50.001% of the outstanding CYBEX Common Stock on a fully diluted basis
immediately following the effective time of the Merger (the "Effective Time"),
calculated using the treasury stock method and assuming a price of $9.75 per
share of CYBEX Common Stock, divided by the number of shares of Trotter Common
Stock outstanding on a fully diluted basis at the Effective Time (the total
number of shares of CYBEX Common Stock into which shares of Trotter Common Stock
will be so converted, the "Merger Consideration").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of CYBEX and with certain senior officers and other representatives
and advisors of UMH and Trotter concerning the business, operations and
prospects of CYBEX and Trotter. We examined certain publicly available business
and financial information relating to CYBEX and certain business and financial
information relating to Trotter as well as certain financial forecasts and other
information and data for CYBEX and Trotter which were provided to or otherwise
discussed with us by the respective managements of CYBEX, UMH and Trotter,
including information relating to certain strategic implications and operational
benefits anticipated to result from the Merger. We reviewed the financial terms
of the Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of CYBEX Common
Stock; historical and projected earnings and other operating data of CYBEX and
Trotter; and the capitalization and financial condition of CYBEX and Trotter. We
also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which we considered
relevant in evaluating the Merger and analyzed certain financial, stock market
and other publicly available information relating to the businesses of other
companies whose operations we considered relevant in evaluating those of CYBEX
and Trotter. We also evaluated the potential pro forma financial impact of the
Merger on CYBEX. In addition to the foregoing, we conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as we deemed appropriate in arriving at our opinion.
B-1
<PAGE>
The Board of Directors
Cybex International, Inc.
December 27, 1996
Page 2
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data furnished to or otherwise reviewed by or discussed with us, we have
been advised by the respective managements of CYBEX, UMH and Trotter that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of CYBEX, UMH and Trotter as to the future financial performance of
CYBEX and Trotter and the potential strategic implications and operational
benefits anticipated to result from the Merger. We have assumed, with your
consent, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes. Our opinion, as set forth herein, relates to the
relative values of CYBEX and Trotter. We are not expressing any opinion as to
what the value of the CYBEX Common Stock actually will be when issued pursuant
to the Merger or the prices at which the CYBEX Common Stock will trade
subsequent to the Merger. We have not made or been provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of CYBEX or Trotter nor have we made any physical inspection of the properties
or assets of CYBEX or Trotter. In connection with our engagement, we were
requested to approach, and held discussions with, certain third parties to
solicit indications of interest in a possible transaction with CYBEX. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to CYBEX in
connection with the Merger and will receive a fee for such services, a
significant portion of which is payable upon consummation of the Merger. We also
will receive a fee upon the delivery of this opinion. In the ordinary course of
business, we and our affiliates may actively trade or hold the securities of
CYBEX for our own account or for the account of our customers and, accordingly,
may at any time hold a long or short position in such securities. We have in the
past provided financial advisory and investment banking services to CYBEX
unrelated to the proposed Merger, for which services we have received
compensation. In addition, we and our affiliates (including Travelers Group Inc.
and its affiliates) may maintain business relationships with CYBEX, UMH and
Trotter.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of CYBEX in evaluating the proposed
Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on any
matter in connection with the proposed Merger. Our opinion may not be published
or otherwise used or referred to, nor shall any public reference to Smith Barney
be made, without our prior written consent; provided, that our opinion may be
included in its entirety as an exhibit to the proxy statement of CYBEX relating
to the proposed Merger.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to CYBEX.
Very truly yours,
SMITH BARNEY INC.
B-2
<PAGE>
ANNEX C
PROPOSED AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION
OF
CYBEX INTERNATIONAL, INC.
The first paragraph of Article THIRD of the Company's Restated Certificate
of Incorporation is proposed to be amended to read in its entirety as follows:
'THIRD: The total number of shares of all classes which the
corporation shall have the authority to issue is twenty million five
hundred thousand (20,500,000) of which five hundred thousand (500,000) are
to be Preferred Shares of the par value of one dollar ($1) per share, and
twenty million (20,000,000) are to be Common Shares of the par value of ten
cents ($.10) per share. The Preferred Shares shall consist of such one or
more series as may be established from time to time by the Board of
Directors of the Corporation pursuant to the authority hereinafter
granted.'
C-1
<PAGE>
CYBEX INTERNATIONAL, INC.
1995 OMNIBUS INCENTIVE PLAN
1. Purpose. The CYBEX International, Inc. 1995 Omnibus Incentive Plan
(the "Plan") is intended to provide incentives which will attract and retain
highly competent persons as officers and key employees of CYBEX International,
Inc. (the "Company") and its subsidiaries, by providing them opportunities to
acquire shares of the common stock, $.10 par value per share, of the Company
("Common Stock") or to receive monetary payments based on the value of such
shares pursuant to the Benefits described herein. Furthermore, the Plan,
together with the Company's Stock Ownership Requirements Policy, is intended to
assist in aligning the interests of the Company's officers and key employees to
those of its shareholders.
2. Administration. (a) The Plan will be administered by a committee
(the "Committee") appointed by the Board of Directors of the Company from among
its members (which may be the Compensation Committee), which shall be comprised
of not less than two non-employee members of the Board; provided, however, that
each member of the Committee must qualify as a "disinterested person" within the
meaning of Rule 16b-3 (or any successor rule) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such action in
connection with the Plan and any Benefits (as defined below) granted hereunder
as it deems necessary or advisable. All determinations and interpretations made
by the Committee shall be binding and conclusive on all participants and their
legal representatives. No member of the Board, no member of the Committee and no
employee of the Company shall be liable for any act or failure to act hereunder,
by any other member or employee or by any agent to whom duties in connection
with the administration of this Plan have been delegated or, except in
circumstances involving his or her bad faith, gross negligence or fraud, for any
act or failure to act by the member or employee.
(b) The Committee may delegate its powers and duties under the Plan to
one or more officers of the Company or to a committee of such officers, subject
to such terms, conditions and limitations as the Committee may establish in its
sole discretion; provided, however, that the Committee shall not delegate its
powers and duties under the Plan with regard to officers and key employees of
the Company who are subject to Section 16 of the Exchange Act.
3. Participants. Participants will consist of such officers and key
employees of the Company and its subsidiaries as the Committee in its sole
discretion determines to be significantly responsible for the success and future
growth and profitability of the Company and whom the Committee may designate
from time to time to receive Benefits under the Plan. Non-employee directors of
the Company shall not be eligible to participate in the Plan. Designation of a
participant in any year shall not require the Committee to designate such person
to receive a Benefit in any other year or, once designated, to receive the same
type or amount of Benefit as granted to the participant in any other year. The
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Committee shall consider such factors as it deems pertinent in selecting
participants and in determining the type and amount of their respective
Benefits.
4. Type of Benefits. Benefits under the Plan may be granted in any one
or a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Awards and (e) Bonus Stock Purchase Awards (each as
described below, and collectively, the "Benefits"). Benefits shall be evidenced
by agreements (which need not be identical) in such forms as the Committee may
from time to time approve.
5. Common Stock Available under the Plan. The aggregate number of
shares of Common Stock that may be subject to Benefits, including Stock Options,
granted under this Plan shall be 750,000 shares of Common Stock, which may be
authorized and unissued or treasury shares, subject to any adjustments made in
accordance with Section 11 hereof. Any shares of Common Stock subject to a Stock
Option which for any reason is cancelled (excluding shares subject to a Stock
Option cancelled upon the exercise of a related Stock Appreciation Right) or
terminated without having been exercised, or any Stock Awards or Performance
Awards which are forfeited, shall again be available for Benefits under the
Plan, to the extent permitted by Rule 16b-3 under the Exchange Act regarding the
availability of such shares.
6. Stock Options. Stock Options will consist of awards from the Company
that will enable the holder to purchase a specific number of shares of Common
Stock, at set terms and at a fixed purchase price. Stock Options may be
"incentive stock options" ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
Stock Options which do not constitute Incentive Stock Options ("Nonqualified
Stock Options"). The Committee will have the authority to grant to any
participant one or more Incentive Stock Options, Nonqualified Stock Options, or
both types of Stock Options (in each case with or without Stock Appreciation
Rights). Each Stock Option shall be subject to such terms and conditions
consistent with the Plan as the Committee may impose from time to time, subject
to the following limitations:
(a) Exercise Price. Each Stock Option granted hereunder shall have
such per-share exercise price as the Committee may determine at the
date of grant; provided, however, that the per-share exercise price for
Incentive Stock Options shall not be less than 100% of the Fair Market
Value (as defined below) of the Common Stock on the date the option is
granted.
(b) Payment of Exercise Price. The option exercise price may be
paid in cash or, in the discretion of the Committee, by the delivery of
shares of Common Stock of the Company then owned by the participant, by
the withholding of shares of Common Stock for which a Stock Option is
exercisable, or by a combination of these methods. In the discretion of
the Committee, payment may also be made by delivering a properly
executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds to pay the exercise price. To
facilitate the foregoing, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms. The Committee
may prescribe any other method of paying the exercise
2
<PAGE>
price that it determines to be consistent with applicable law and the
purpose of the Plan, including, without limitation, in lieu of the
exercise of a Stock Option by delivery of shares of Common Stock of the
Company then owned by a participant, providing the Company with a
notarized statement attesting to the number of shares owned, where upon
verification by the Company, the Company would issue to the participant
only the number of incremental shares to which the participant is
entitled upon exercise of the Stock Option. In determining which
methods a participant may utilize to pay the exercise price, the
Committee may consider such factors as it determines are appropriate,
including, without limitation, compliance of the participant with the
Company's Stock Ownership Requirements Policy.
(c) Exercise Period. Stock Options granted under the Plan shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee; provided, however,
that no Stock Option shall be exercisable later than ten years after
the date it is granted. All Stock Options shall terminate at such
earlier times and upon such conditions or circumstances as the
Committee shall in its discretion set forth in such option at the date
of grant.
(d) Limitations on Incentive Stock Options. Incentive Stock
Options may be granted only to participants who are employees of the
Company or one of its subsidiaries (within the meaning of Section
424(f) of the Code) at the date of grant. The aggregate Fair Market
Value (determined as of the time the option is granted) of the Common
Stock with respect to which Incentive Stock Options are exercisable for
the first time by a participant during any calendar year (under all
option plans of the Company and of any parent corporation or subsidiary
corporation (as defined in Sections 424(e) and (f) of the Code,
respectively) shall not exceed $100,000. For purposes of the preceding
sentence, Incentive Stock Options will be taken into account in the
order in which they are granted. Incentive Stock Options may not be
granted to any participant who, at the time of grant, owns stock
possessing (after the application of the attribution rules of Section
424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or any parent or subsidiary
corporation of the Company, unless the option price is fixed at not
less than 110% of the Fair Market Value of the Common Stock on the date
of grant and the exercise of such option is prohibited by its terms
after the expiration of five years from the date of grant of such
option.
7. Stock Appreciation Rights. The Committee may, in its discretion,
grant Stock Appreciation Rights to the holders of any Stock Options granted
hereunder. In addition, Stock Appreciation Rights may be granted independently
of, and without relation to, options. A Stock Appreciation Right means a right
to receive a payment, in cash or Common Stock, equal to the excess of (x) the
Fair Market Value, or other specified valuation, of a specified number of shares
of Common Stock on the date the right is exercised over (y) the Fair Market
Value, or other specified valuation, of such shares of Common Stock on the date
the right is granted, all as determined by the Committee. Each Stock
Appreciation Right shall be subject to such terms and conditions as the
Committee shall impose from time to time, including, without limitation, rights
conditioned upon the occurrence of certain events, such as a Change in Control
(as defined below) of the Company.
3
<PAGE>
8. Stock Awards. Stock Awards (which includes mandatory stock bonus
incentive compensation) will consist of Common Stock transferred to participants
with or without other payments therefor as additional compensation for services
to the Company. Stock Awards shall be subject to such terms and conditions as
the Committee determines appropriate, including, without limitation,
restrictions on the sale or other disposition of such shares, the right of the
Company to reacquire such shares for no consideration upon termination of the
participant's employment within specified periods, and conditions requiring that
the shares be earned in whole or in part upon the achievement of performance
goals established by the Committee over a designated period of time. The
Committee may require the participant to deliver a duly signed stock power,
endorsed in blank, relating to the Common Stock covered by such an Award. The
Committee may also require that the stock certificates evidencing such shares be
held in custody or bear restrictive legends until the restrictions thereon shall
have lapsed. The Stock Award shall specify whether the participant shall have,
with respect to the shares of Common Stock subject to a Stock Award, all of the
rights of a holder of shares of Common Stock of the Company, including the right
to receive dividends and to vote the shares.
9. Performance Awards.
(a) Performance Awards may be granted to participants at any time and
from time to time, as shall be determined by the Committee. The Committee shall
have complete discretion in determining the number, amount and timing of awards
granted to each participant. Such Performance Awards may take the form of, as
determined by the Committee, including, without limitation, cash, shares of
Common Stock, performance units and performance shares, or any combination
thereof. Performance Awards may be awarded as short-term or long-term
incentives. The Committee shall set performance goals at its discretion which,
depending on the extent to which they are met, will determine the number and/or
value of Performance Awards that will be paid out to the participants, and may
attach to such Performance Awards one or more restrictions. Performance goals
may be based upon, without limitation, Company-wide, divisional, project team,
and/or individual performance.
(b) The Committee shall have the authority at any time to make
adjustments to performance goals for any outstanding Performance Awards which
the Committee deems necessary or desirable unless at the time of establishment
of goals the Committee shall have precluded its authority to make such
adjustments.
(c) Payment of earned Performance Awards shall be made in accordance
with terms and conditions prescribed or authorized by the Committee. The
participant may elect to defer, or the Committee may require the deferral of,
the receipt of Performance Awards upon such terms as the Committee deems
appropriate.
10. Bonus Stock Purchase Awards.
(a) The Committee may by written notice permit a participant selected
by the Committee to elect to purchase shares of Common Stock with up to a
maximum percentage, as determined by the Committee, of funds otherwise payable
to such participant pursuant to the Company's annual bonus
4
<PAGE>
incentive compensation program ("Bonus Stock Purchase Awards"). Only those
participants who make timely Bonus Conversion Elections (as defined below) shall
be eligible to receive a Bonus Stock Purchase Award. The amount purchased in
accordance with a Bonus Conversion Election shall be subject to reduction or to
such other limitations as are from time to time established by the Committee.
(b) Not later than on a participant's annual bonus payment date, each
participant selected by the Committee may make an irrevocable election ("Bonus
Conversion Election") to convert a fixed percentage of his or her annual
incentive bonus for that fiscal year by filing a conversion election form (as
may be prescribed by the Committee) with the Committee; provided, however, that
any participant who is subject to Section 16 of the Exchange Act must elect to
convert his or her annual incentive bonus at least six months prior to the day
the amount of such bonus is determined, or at such other time as the Committee
may establish.
(c) On a participant's annual incentive bonus payment date, an amount
equal to the portion of the participant's bonus that is validly converted shall
be used to purchase a number of shares of Common Stock, at a per-share purchase
price fixed by the Committee; provided, however, that the per-share purchase
price shall not be less than 85% of the Fair Market Value of the Common Stock on
the regular bonus payment date had it been paid in cash. On the same date or as
soon as practicable thereafter, such number of shares of Common Stock shall be
registered in the participant's name, and stock certificates shall be issued
therefor to the participant.
(d) Bonus Stock Purchase Awards shall be subject to such terms and
conditions as the Committee determines appropriate, including, without
limitation, restrictions on the sale or other disposition of such shares. The
Committee may also require that stock certificates evidencing such shares bear
restrictive legends until the restrictions thereon shall have lapsed.
11. Adjustment Provisions; Change in Control.
(a) If there shall be any change in the Common Stock of the Company,
through merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, reverse stock split, split up, spinoff, combination of shares,
exchange of shares, dividend in kind or other like change in capital structure
or distribution (other than normal cash dividends) to shareholders of the
Company, an adjustment shall be made to each outstanding Stock Option and Stock
Appreciation Right such that each such Stock Option and Stock Appreciation Right
shall thereafter be exercisable for such securities, cash and/or other property
as would have been received in respect of the Common Stock subject to such Stock
Option or Stock Appreciation Right had such Stock Option or Stock Appreciation
Right been exercised in full immediately prior to such change, and such an
adjustment shall be made successively each time any such change shall occur. In
addition, in the event of any such change, in order to prevent dilution or
enlargement of participants' rights under the Plan, the Committee will have
authority to adjust, in an equitable manner, the number and kind of shares that
may be issued under the Plan, the number and kind of shares subject to
outstanding Benefits, the exercise price applicable to outstanding Benefits, and
the Fair Market Value of the Common Stock and other value determinations
applicable to outstanding Benefits. Appropriate adjustments may also be made by
the Committee in the terms of any
5
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Benefits under the Plan to reflect such changes and to modify any other terms of
outstanding Benefits on an equitable basis, including modifications of
performance targets and changes in the length of performance periods. In
addition, the Committee is authorized to make adjustments to the terms and
conditions of, and the criteria included in, Benefits in recognition of unusual
or nonrecurring events affecting the Company or the financial statements of the
Company, or in response to changes in applicable laws, regulations, or
accounting principles. Notwithstanding the foregoing, (i) each such adjustment
with respect to an Incentive Stock Option shall comply with the rules of Section
424(a) of the Code, and (ii) in no event shall any adjustment be made which
would render any Incentive Stock Option granted hereunder other than an
incentive stock option for purposes of Section 422 of the Code.
(b) Notwithstanding any other provision of this Plan, if there is a
Change in Control of the Company, all then outstanding Stock Options and Stock
Appreciation Rights shall immediately become exercisable. For purposes of this
Section 11(b), a "Change in Control" of the Company shall be deemed to have
occurred upon any of the following events:
(i) A change in control of the direction and administration of
the Company's business of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act; or
(ii) During any period of two (2) consecutive years, the
individuals who at the beginning of such period constitute the
Company's Board of Directors or any individuals who would be
"Continuing Directors" (as hereinafter defined) cease for any reason to
constitute at least a majority thereof; or
(iii) The Company's Common Stock shall cease to be publicly
traded; or
(iv) The Company's Board of Directors shall approve a sale of
all or substantially all of the assets of the Company, and such
transaction shall have been consummated; or
(v) The Company's Board of Directors shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the occurrence of
any event described in Section 11(b)(ii) or (iii) above, and such
transaction shall have been consummated.
Notwithstanding the foregoing, any spin-off of a division or subsidiary of the
Company to its shareholders shall not constitute a Change in Control of the
Company.
For purposes of this Section 11(b), "Continuing Directors" shall mean
the directors of the Company in office on the Effective Date (as defined below)
and any successor to any such director and any additional director who after the
date of such effectiveness (i) was nominated or selected by a majority of the
Continuing Directors in office at the time of his nomination or selection and
(ii) is not an "affiliate" or "associate" (as defined in Regulation 12B under
the Exchange Act) at the time of his nomination or selection of any person who
is the beneficial owner, directly or indirectly, of securities
6
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representing ten percent (10%) or more of the combined voting power of the
Company's outstanding securities then ordinarily entitled to vote for the
election of directors.
The Committee, in its discretion, may determine that, upon the
occurrence of a Change in Control of the Company, each Stock Option and Stock
Appreciation Right outstanding hereunder shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each share of Common Stock subject to such Stock Option or Stock
Appreciation Right, in an amount equal to the excess of the Fair Market Value of
such shares of Common Stock immediately prior to the occurrence of such Change
in Control over the exercise price per share of such Stock Option or Stock
Appreciation Right; such amount to be payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or in a
combination thereof, as the Committee, in its discretion, shall determine. The
provisions contained in the preceding sentence shall be inapplicable to a Stock
Option or Stock Appreciation Right granted within six (6) months before the
occurrence of a Change in Control if the holder of such Stock Option or Stock
Appreciation Right is subject to the reporting requirements of Section 16(a) of
the Exchange Act.
12. Nontransferability. Each Benefit granted under the Plan to a
participant shall not be transferable otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the participant's
lifetime, only by the participant. In the event of the death of a participant
while the participant is rendering services to the Company, each Stock Option or
Stock Appreciation Right theretofore granted to him shall be exercisable during
such period after his death as the Committee shall in its discretion set forth
in such option or right at the date of grant (but not beyond the stated duration
of the option or right) and then only:
(a) By the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's
rights under the Stock Option or Stock Appreciation Right shall pass by
will or the laws of descent and distribution; and
(b) To the extent that the deceased participant was entitled to do
so at the date of his or her death. Notwithstanding the foregoing, at
the discretion of the Committee, an award of a Benefit other than an
Incentive Stock Option may permit the transferability of a Benefit by a
participant solely to members of the participant's immediate family or
trusts or family partnerships for the benefit of such persons, subject
to any restriction included in the award of the Benefit.
13. Other Provisions. The award of any Benefit under the Plan may also
be subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines appropriate,
including, without limitation, for the installment purchase of Common Stock
under Stock Options, for the installment exercise of Stock Appreciation Rights,
to assist the participant in financing the acquisition of Common Stock, for the
forfeiture of, or restrictions on resale or other disposition of, Common Stock
acquired under any form of Benefit, for the acceleration of exercisability or
vesting of Benefits in the event of a change in control of the Company, for the
payment of the value of Benefits to participants in the event of a change in
control of the Company, or
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to comply with federal and state securities laws, or understandings or
conditions as to the participant's employment in addition to those specifically
provided for under the Plan.
14. Fair Market Value. For purposes of this Plan and any Benefits
awarded hereunder, Fair Market Value shall be the closing price for the
Company's Common Stock on the date of calculation (or on the last preceding
trading date if Common Stock was not traded on such date) if the Company's
Common Stock is readily tradeable on a national securities exchange or other
market system, and if the Company's Common Stock is not readily tradeable, Fair
Market Value shall mean the amount determined in good faith by the Committee as
the fair market value of the Common Stock of the Company.
15. Withholding. All payments or distributions of Benefits made
pursuant to the Plan shall be net of any amounts required to be withheld
pursuant to applicable federal, state and local tax withholding requirements. If
the Company proposes or is required to distribute Common Stock pursuant to the
Plan, it may require the recipient to remit to it or to the corporation that
employs such recipients an amount sufficient to satisfy such tax withholding
requirements prior to the delivery of any certificates for such Common Stock. In
lieu thereof, the Company or the employing corporation shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
such corporation to the recipient as the Committee shall prescribe. The
Committee may, in its discretion and subject to such rules as it may adopt
(including any as may be required to satisfy applicable tax and/or non-tax
regulatory requirements), permit an optionee or award or right holder to pay all
or a portion of the federal, state and local withholding taxes arising in
connection with any Benefit consisting of shares of Common Stock by electing to
have the Company withhold shares of Common Stock having a Fair Market Value
equal to the amount to be withheld.
16. Tenure. A participant's right, if any, to continue to serve the
Company as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the Plan.
17. Unfunded Plan. Participants shall have no right, title, or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations under the Plan. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a trust of any kind, or a fiduciary relationship between the Company and any
participant, beneficiary, legal representative or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be paid
from the general funds of the Company and no special or separate fund shall be
established and no segregation of assets shall be made to assure payment of such
amounts except as expressly set forth in the Plan. The Plan is not intended to
be subject to the Employee Retirement Income Security Act of 1974, as amended.
8
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18. No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan or any Benefit. The Committee shall
determine whether cash, or Benefits, or other property shall be issued or paid
in lieu of fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
19. Duration, Amendment and Termination. No Benefit shall be granted
more than ten years after the Effective Date; provided, however, that the terms
and conditions applicable to any Benefit granted prior to such date may
thereafter be amended or modified by mutual agreement between the Company and
the participant or such other persons as may then have an interest therein.
Also, by mutual agreement between the Company and a participant hereunder, under
this Plan or under any other present or future plan of the Company, Benefits may
be granted to such participant in substitution and exchange for, and in
cancellation of, any Benefits previously granted such participant under this
Plan, or any other present or future plan of the Company. The Board of Directors
may amend the Plan from time to time or suspend or terminate the Plan at any
time. However, no action authorized by this Section 19 shall reduce the amount
of any existing Benefit or change the terms and conditions thereof without the
participant's consent. No amendment of the Plan shall, without approval of the
stockholders of the Company, (i) materially increase the total number of shares
which may be issued under the Plan; (ii) materially increase the amount or type
of Benefits that may be granted under the Plan; or (iii) materially modify the
requirements as to eligibility for Benefits under the Plan.
20. Governing Law. This Plan, Benefits granted hereunder and actions
taken in connection herewith shall be governed and construed in accordance with
the laws of the State of New York (regardless of the law that might otherwise
govern under applicable New York principles of conflict of laws).
21. Compliance with Rule 16b-3. With respect to persons subject to
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 (or its successors)
promulgated under the Exchange Act. To the extent any provision of the Plan or
action by the Committee fails to comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
22. Effective Date. (a) The Plan shall become effective as of March 8,
1995, the date on which the Plan was adopted by the Board of Directors (the
"Effective Date"), provided that the Plan is approved by the shareholders of the
Company at an annual meeting or any special meeting of shareholders of the
Company, and such approval of shareholders shall be a condition to the right of
each participant to receive any Benefits hereunder. Any Benefits granted under
the Plan prior to such approval of shareholders shall be effective for purposes
of Section 16 of the Exchange Act as of the date such shareholder approval is
obtained and for all other purposes as of the date of grant (unless, with
respect to any Benefit, the Committee specifies otherwise at the time of grant),
but no such Benefit may be exercised or settled and no restrictions relating to
any Benefit may lapse prior to such shareholder approval, and if shareholders
fail to approve the Plan as specified hereunder, any such Benefit shall be
cancelled.
9
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(b) This Plan shall terminate on March 7, 2005 (unless sooner
terminated by the Board of Directors).
10
<PAGE>
PROXY
CYBEX INTERNATIONAL, INC.
ANNUAL MEETING OF SHAREHOLDERS--MAY 23, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby nominates and appoints Robert R. McMillan, John C.
Spratt and Alan H. Weingarten, or any one of them, as proxies of the
undersigned, with power of substitution to each, to vote all shares of stock of
CYBEX INTERNATIONAL, INC. (the 'Company') which the undersigned may be entitled
to vote at the Annual Meeting of Shareholders of the Company to be held at the
offices of Weil, Gotshal & Manges LLP, 25th Floor Conference Center, located at
767 Fifth Avenue, New York, New York, on May 23, 1997 at 9:00 A.M. and at any
adjournment or adjournments thereof with authority to vote said stock on the
following matters:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1:
1. Adoption of an Agreement and Plan of Merger, dated as of December 27,
1996, as amended, among the Company, Trotter, Inc. ('Trotter') and Cat's Tail,
Inc., a wholly owned subsidiary of the Company ('Merger Sub'), pursuant to
which, among other things, Merger Sub will be merged with and into Trotter and
Trotter, as the surviving corporation, will become a wholly owned subsidiary of
the Company.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2:
2. Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares.
/ / FOR / / AGAINST / / ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 3:
3. Approval of an amendment to the Company's Omnibus Incentive Plan to
increase the aggregate number of shares of Common Stock that may be subject to
Benefits granted under the plan.
/ / FOR / / AGAINST / / ABSTAIN
(Continued, and to be signed on other side)
<PAGE>
(Continued from other side)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 4:
4. Election of Two Directors. Kay Knight Clarke Alan H. Weingarten
/ / FOR / / WITHHOLD / / FOR ALL EXCEPT
INSTRUCTION: To withhold authority to vote for any individual nominee, mark 'FOR
ALL EXCEPT' and write that nominee's name in the space provided below.
________________________________________________________________________________
5. Upon such other matters as may properly come before the meeting:
UNLESS OTHERWISE SPECIFIED ON THIS PROXY, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED 'FOR' PROPOSALS 1, 2, 3 AND 4. DISCRETION WILL BE USED WITH
RESPECT TO SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT OR ADJUOURNMENTS THEREOF.
NOTE: Please sign and return promptly in the envelope provided. No postage
is required if mailed in the United States.
Date: __________________, 1997
______________________________
(Signature)
______________________________
(Signature)
Please sign exactly as your name appears. When signing as attorney, executor,
administrator, trustee or guardian, please set forth your full title. If signer
is a corporation, please sign the full corporation name by a duly authorized
officer. Joint shareholders should each sign.
