<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended 9/26/98.
-------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to ______.
Commission file number 0-4538
CYBEX INTERNATIONAL, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1731581
------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Trotter Drive, Medway, Massachusetts 02053
- --------------------------------------- -------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (508) 533-4300
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On October 31, 1998, the Registrant had outstanding 8,665,298 shares of Common
Stock, par value $0.10 per share, which is the registrant's only class of common
stock.
<PAGE>
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(unaudited) -- Three and nine months ended
September 26, 1998 and September 27, 1997 3
Condensed Consolidated Balance Sheets --
September 26, 1998 (unaudited) and
December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
(unaudited) -- Nine months ended September 26, 1998
and September 27, 1997 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- -----------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998(1) 1997(2) 1998(1) 1997(2)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 32,089 $ 26,480 $ 88,594 $ 57,373
Cost of sales 20,122 14,879 54,706(a) 35,594(c)
-------------- -------------- -------------- --------------
Gross profit 11,967 11,601 33,888 21,779
Selling, general and
administrative expenses 10,715 10,947 29,943 25,702(d)
Nonrecurring charges -- -- 2,898(b) 5,234(e)
-------------- -------------- -------------- --------------
Operating income (loss) 1,252 654 1,047 (9,157)
Interest income 125 137 482 278
Interest (expense) (812) (313) (1,607) (830)
-------------- -------------- -------------- --------------
Income (loss) before
income taxes 565 478 (78) (9,709)
Income tax provision (benefit) 237 186 (32) (2,716)
-------------- -------------- -------------- --------------
Net income (loss) $ 328 $ 292 $ (46) $ (6,993)
============== ============== ============== ==============
Basic and diluted net income
(loss) per share $ .04 $ .03 $ (.01) $ (1.10)
============== ============== ============== ==============
</TABLE>
(1) 1998 results include the results of Tectrix from the May 21, 1998
acquisition date. (see Note 2)
(2) 1997 results are that of Trotter plus the results of Cybex from the
May 23, 1997 Merger date. (see Note 2)
(a) Includes $300 of costs considered unusual related to the Cybex bike and
$372 of costs related to the elimination of the Reactor product line.
(b) Includes $1,435 of costs related to the Cybex bike, $952 of costs related
to the elimination of the Reactor product line and $511 of other
non-recurring costs considered unusual or a direct result of the
Tectrix acquisition.
(c) Includes $2,375 of costs considered unusual, or a direct result of the
Cybex / Trotter Merger.
(d) Includes $4,599 of costs considered unusual, or a direct result of the
Cybex / Trotter Merger.
(e) Includes $2,734 of costs related to the Sharpsville plant closure and a
$2,500 charge for acquired research and development related to the
Cybex / Trotter Merger.
See notes to the condensed consolidated financial statements.
3
<PAGE>
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in thousands, except share information)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,749 $ 6,689
Accounts receivable, net of allowance of $3,653 and $2,615 23,278 21,906
Lease receivables 2,146 1,200
Inventories 10,286 6,980
Recoverable income taxes 1,100 1,100
Deferred income taxes 7,132 6,913
Other current assets 1,836 2,117
------------- ------------
Total current assets 51,527 46,905
Property, plant and equipment, net 16,639 13,103
Lease receivables 1,162 999
Goodwill, net 31,269 10,785
Deferred income taxes 5,960 5,960
Other assets 1,375 973
------------- ------------
$107,932 $78,725
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 2,492 $ 2,954
Accounts payable 8,282 5,192
Income taxes payable 1,297 1,441
Other current liabilities 15,783 18,305
------------- ------------
Total current liabilities 27,854 27,892
Long-term debt 39,987 10,685
Accrued warranty obligation 1,266 1,240
------------- ------------
Total liabilities 69,107 39,817
------------- ------------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Common Stock, $0.10 par value, 20,000,000
shares authorized, 8,886,356 and 8,853,756 shares issued 888 885
Additional paid-in capital 44,491 44,189
Treasury stock, at cost (221,058 and 189,707 shares) (2,273) (1,890)
Accumulated deficit (4,322) (4,276)
Cumulative translation adjustment 41 --
------------- ------------
Total stockholders' equity 38,825 38,908
------------- ------------
$107,932 $78,725
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (46) $ (6,993)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,433 1,647
Non-cash nonrecurring charges 1,659 4,195
Provision for doubtful accounts 1,814 2,242
Deferred income taxes (219) (2,717)
Net change in operating assets and liabilities (net
of effect of the Merger and Acquisition) (5,287) 2,874
-------------------- --------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 354 (4,500)
-------------------- --------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (5,355) (1,015)
Cash acquired in the Cybex/Trotter Merger, net of transaction
cost of $1,645 -- 705
Cash paid for Tectrix Acquisition, net of cash acquired of $143
and including transaction costs of $414 (21,331) --
-------------------- --------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (26,686) (310)
-------------------- --------------------
FINANCING ACTIVITIES:
Borrowings of term debt 25,000 --
Repayment of term debt (9,400) (1,841)
Net borrowings under the revolving loan 10,400 4,994
Proceeds from the sale of lease receivables -- 2,900
Deferred financing costs (571) --
Purchase of treasury stock (333) --
Exercise of stock options 255 125
-------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,351 6,178
-------------------- --------------------
Effect of foreign exchange rate changes on cash 41 --
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (940) 1,368
CASH AND CASH EQUIVALENTS, beginning of period 6,689 1,656
-------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period $ 5,749 $ 3,024
==================== ====================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and changes in cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three and
nine months ended September 26, 1998, are not necessarily indicative of the
results that may be expected for the entire year.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest Annual Report on Form 10-K for the year ended December 31,
1997, Form 10-Q for the quarter ended June 27, 1998, Form 8-K filed on June 2,
1998, and the Company's Proxy Statement dated April 3, 1998 filed with the
Securities and Exchange Commission.
The accompanying historical financial information for the period ended September
27, 1997, includes the results of Trotter for the nine months ended September
27, 1997 and the results of Cybex for the period from May 23, 1997 through
September 27, 1997. The nine month period ended September 26, 1998 includes the
combined results of Trotter, Cybex and Tectrix Fitness Equipment, Inc. (for the
period of May 21, 1998 through September 26, 1998). (see Note 2)
NOTE 2 -- MERGERS AND ACQUISITIONS
TROTTER INC. MERGER
On May 23, 1997, the merger between a wholly owned subsidiary of Cybex
International, Inc. ("Cybex") and Trotter Inc. ("Trotter") was consummated (the
"Merger") with Trotter surviving the Merger as a subsidiary of Cybex. This
transaction was accounted for as a purchase with Trotter deemed to be the
acquiring company for accounting purposes and, therefore, the surviving company
for financial reporting purposes.
TECTRIX INC. ACQUISITION
On May 21, 1998, Cybex entered into an agreement (the "Agreement") with Tectrix
Fitness Equipment, Inc. ("Tectrix") whereby Cybex acquired all of the
outstanding Common Stock of Tectrix (the "Acquisition"). The purchase price
consisted of cash of $21,060,000, of which $2,670,000 was used to repay Tectrix
debt, and a promissory note in the amount of $2,340,000 which is subject to
adjustment following the audit of Tectrix's closing balance sheet, as defined in
the Agreement. In addition, the selling stockholders have the right to receive
aggregate additional payments of up to $6,600,000 based on Tectrix's post-
closing margin performance during the three-year period following the
Acquisition. The Acquisition has been accounted for using the purchase method
of accounting and the parties have made a Section 338(h)10 election for the
Acquisition to be accounted for as an asset purchase for income tax purposes.
In order to fund the Acquisition, Cybex entered into a credit agreement, which
provides for a term loan of $25,000,000 and revolving loans of up to
$26,700,000.
6
<PAGE>
In connection with the Acquisition, the Company discontinued Tectrix's Virtual
Reality products and treadmill development program, and is closing Tectrix's
international sales offices and Cambridge, Massachusetts research and
development facility. The costs associated with the discontinuance of the
Virtual Reality and treadmill product lines, as well as the exit costs of the
international sales offices, has been included in the application of purchase
accounting by the Company. The Company also discontinued the manufacture of
Cybex branded bikes in connection with the Acquisition, thereby eliminating a
duplicate product line. The costs to discontinue the Cybex bike have been
charged to the statement of operations in the second quarter of 1998.
NOTE 3 -- UNUSUAL AND NONRECURRING MERGER-RELATED COSTS
The nine months ended September 26, 1998 include unusual and nonrecurring pre-
tax costs of $3,570,000 incurred in the second quarter comprised of $1,735,000
(primarily for fixed assets and inventory write-offs, and warranty provisions
related to the Cybex branded bike in connection with the Tectrix acquisition), a
charge of $1,324,000 (primarily for the write-off of intangible assets and
inventory in connection with the Reactor product line), and a charge of $511,000
(for the write-off of deferred financing and other costs which management
considers unusual or a direct result of the Tectrix acquisition).
NOTE 4 -- CONTINGENCY RELATED TO SALE OF BUSINESS
Prior to the Merger, Fuqua Enterprises, Inc. ("Fuqua"), asserted a claim against
the Company in connection with the sale of substantially all of the assets of
the Lumex Division to Fuqua in 1996.
At the Merger date, the Company provided a reserve for the Fuqua claim based on
the information available at that time in accordance with SFAS No. 38,
"Accounting for Pre-acquisition Contingencies of Purchased Enterprises". A
final decision with respect to the arbitration was received on February 13,
1998, awarding a payment of approximately $2,400,000, including interest, to
Fuqua. The Company recorded a $1,900,000 charge in the fourth quarter of 1997
related to the arbitration and accrued professional fees. While the arbitration
is complete, during 1997 Fuqua notified Cybex of a separate claim for breaches
of certain of Cybex's representations and warranties in the asset sale agreement
involving substantially the same matters submitted to the arbitrator. In
February 1998, Fuqua commenced an action in the State Court of Georgia against
the Company and former executives of the Company, alleging fraud, negligent
misrepresentation, breach of representations and warranties and violation of the
Georgia RICO statute and seeking an unspecified amount of compensatory and
punitive damages, fees and expenses; the claims under the Georgia RICO statute
have since been dismissed. Therefore, additional costs related to this matter
may result in the future. Such costs, if any, to resolve this claim will be
included in operations if the costs become probable and quantifiable.
Professional fees related to this matter are being expensed as incurred.
7
<PAGE>
NOTE 5 -- INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
SEPTEMBER 26, DECEMBER 31,
1998 1997
------------- ------------
Raw materials $ 4,368 $ 4,644
Work in process 1,275 1,137
Finished goods 4,643 1,199
------------- ------------
$10,286 $ 6,980
============= ============
NOTE 6 -- CREDIT AGREEMENT
On May 21, 1998, the Company entered into a Credit Agreement with several banks
that consisted of a $26,700,000 revolving loan and a $25,000,000 term loan,
replacing its existing Loan and Security Agreement. The revolver matures on May
21, 2004 and the term loan matures on December 31, 2003. Borrowings under both
the revolver and term loans bear interest at the Company's option of either Base
Rate (as defined) or LIBOR plus 0.25% to 2.25%, adjusted up or down based on the
Company's level of compliance with certain financial covenants, as defined.
As of September 26, 1998, $10,400,000 and $25,000,000 were outstanding under the
revolver and term loan, respectively. At September 26, 1998, $13,928,000 was
available under the revolver after consideration of $2,372,000 in an outstanding
standby letter of credit.
Borrowings under the credit facility are secured by substantially all of the
assets of the Company with certain exceptions, as defined.
NOTE 7 -- EARNINGS PER SHARE
The table below sets forth a reconciliation of the shares used in the basic and
diluted income (loss) per share computations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares used in computing basic
earnings per share 8,665 8,655 8,666 6,360
Dilutive effect of options 33 90 81 86
-------------- -------------- -------------- --------------
Shares used in computing
diluted earnings per share 8,698 8,745 8,747 6,446
============== ============== ============== ==============
</TABLE>
8
<PAGE>
NOTE 8 -- PRO FORMA
The following table summarizes the unaudited pro forma combined results of
operations for the nine months ended September 26, 1998 and September 27, 1997
as if the Merger and Acquisition had occurred at the beginning of those periods:
NINE MONTHS ENDED
------------------------------------
September 26, September 27,
1998 1997
---------------- ----------------
(in thousands)
Net sales $ 99,439 $102,604
---------------- ----------------
Net income (loss) $ 163 $ (5,201)
---------------- ----------------
Net income (loss) per share $ 0.02 $ (0 .60)
================ ================
The pro forma data for the nine months ended September 26, 1998 excludes the
Tectrix Virtual Reality product and other adjustments as a direct result of the
Acquisition. The data does not include $1,435,000, or $0.10 per share of
nonrecurring charges expensed by the Company in the second quarter of 1998
related to the Cybex bike but includes $2,135,000, or $0.14 per share, of
unusual costs primarily related to the elimination of the Reactor product line.
The pro forma data for the nine months ended September 27, 1997 excludes Cybex's
pre-merger treadmill product line, the Tectrix Virtual Reality product line and
adjustments for certain duplicate costs, which were eliminated as a direct
result of the Merger and Acquisition. Pro forma sales for the nine months ended
September 27, 1997 include $7,060,000 of isokinetic product sales. The
isokinetic product line was acquired as part of the Cybex merger and was sold on
September 30, 1997. The data does not include $5,234,000, or $0.48 per share of
nonrecurring charges expensed by the Company in the second quarter of 1997
related to the Sharpsville plant closure and acquired research and development
expenses but includes $6,974,000, or $0.49 per share, of unusual and
nonrecurring merger related costs related primarily to conforming to new
accounting and operating policies of the merged companies, including
reorganizing the Company's domestic and international sales operations and
manufacturing initiatives aimed at achieving the full benefit of synergies.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
Cybex is a strength and cardiovascular equipment company which develops,
manufactures and markets premium performance, professional quality, human
performance products for the commercial and consumer markets.
On May 21, 1998, Cybex acquired all of the outstanding Common Stock of Tectrix
(the "Acquisition"). The purchase price consisted of cash of $21,060,000, of
which $2,670,000 was used to repay Tectrix debt, and a promissory note in the
amount of $2,340,000 which is subject to adjustment following the audit of
Tectrix's closing balance sheet, as defined in the Stock Purchase Agreement. In
addition, the selling stockholders have the right to receive aggregate
additional payments of up to $6,600,000 based on Tectrix's post-closing margin
performance during the three-year period following the Acquisition. The
Acquisition has been accounted for using the purchase method of accounting and
the parties have made a Section 338(h)10 election for the Acquisition to be
accounted for as an asset purchase for income tax purposes. In order to fund
the Acquisition, Cybex entered into a credit agreement, which provides for a
term loan of $25,000,000 and revolving loans of up to $26,700,000.
In connection with the Tectrix acquisition, the Company discontinued Tectrix's
Virtual Reality products and treadmill development program, and will close
Tectrix's international sales offices and Cambridge, Massachusetts research and
development facility. The costs associated with the discontinuance of the
Virtual Reality and treadmill, as well as the exit costs of the international
sales offices has been included in the application of purchase accounting by the
Company. The Company also discontinued the manufacture of Cybex branded bikes
in connection with the Acquisition, thereby eliminating a duplicate product.
The cost to discontinue the Cybex bike has been charged to the Statement of
Operations in the second quarter of 1998.
On May 23, 1997, a wholly owned subsidiary of Cybex merged with Trotter Inc.
("Trotter") with Trotter surviving the merger (the "Merger"). The Merger was
accounted for as a purchase with Trotter deemed to be the acquiring company.
Results for the three and nine months ended September 26, 1998 include the
results of Tectrix from its May 21, 1998 acquisition date. The 1997 results
include results of Trotter for the entire period and the results of Cybex from
the May 23, 1997 merger date.
Operating income for the quarter ended September 26, 1998 increased 91% to
$1,252,000. Net income for the quarter ended September 26, 1998 was $328,000 or
$0.04 per share on a diluted basis, compared to a net income of $292,000, or
$0.03 per share on a diluted basis for the comparable 1997 quarter. Net income
for the nine months ended September 26, 1998, excluding nonrecurring charges,
was $2,025,000 or $0.23 per share on a diluted basis, compared to net income,
excluding nonrecurring charges, of $1,449,000 or $0.22 per share on a diluted
basis (based on the then outstanding 6,446,000 weighted average shares) for the
comparable prior period. Pre-tax, nonrecurring charges totaled $3,570,000 for
the nine months ended September 26, 1998 and primarily related to the
acquisition and integration of Tectrix and the elimination of the Reactor
product line. Pre-tax, nonrecurring charges for the nine months ended September
27, 1997 (incurred in the second quarter 1997) totaled $12,208,000, reflecting
plant closures, acquired research and development and other costs considered
unusual or a direct result of the Cybex/Trotter Merger. For the respective nine
months of each year, including the nonrecurring charges, the Company's 1998 net
loss was $46,000, or $(0.01) per share compared to a net loss of $6,993,000, or
$(1.10) per share for the comparable period in 1997.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements of
operations as a percentage of net sales excluding $3,570,000 of unusual or
nonrecurring charges for the nine months ended September 26, 1998 and
$12,208,000 of unusual or nonrecurring charges for the nine months ended
September 27, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 63 56 61 58
-------------- -------------- -------------- --------------
Gross profit 37 44 39 42
Selling, general and
administrative expenses 33 42 34 37
-------------- -------------- -------------- --------------
Operating income 4% 2% 5% 5%
============== ============== ============== ==============
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 1997 VS. THREE AND NINE MONTHS ENDED
SEPTEMBER 26, 1998.
NET SALES
Net sales increased from $26,480,000 to $32,089,000 for the three months ended
September 27, 1997 and September 26, 1998, respectively. This increase in net
sales is primarily attributable to the inclusion of Tectrix revenue partially
offset by the inclusion of 1997 sales of the Company's isokinetic product line
which was sold on September 30, 1997. Net sales increased from $57,373,000 to
$88,594,000 for the nine months ended September 27, 1997 and September 26, 1998,
respectively. This increase in net sales is principally due to the inclusion of
Tectrix sales from the acquisition date commencing on May 21, 1998 and the
inclusion of the results of Cybex Sales for the entire period in 1998 as
compared to only four months during the 1997 period.
GROSS PROFIT
Gross profit increased from $11,601,000 to $11,967,000 for the three months
ended September 27, 1997 and September 26, 1998, respectively. Gross profit,
excluding nonrecurring or unusual costs, increased from $24,154,000 to
$34,560,000 for the nine months ended September 27, 1997 and September 26, 1998,
respectively. The increases are primarily due to the 1997 Merger and the 1998
Acquisition. The decline in margins as a percentage of sales for the three
months and nine months ended September 26, 1998 compared to the three months and
nine months ended September 27, 1997, is primarily due to higher warranty costs
related to cardiovascular products as well inherently lower margins at the
Irvine operations.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $10,947,000 to
$10,715,000 for the three months ended September 27, 1997 and September 26,
1998, respectively, mainly as a result of the 1997 sale of the isokinetic
business, partially offset by increased expenses as a result of the Tectrix
acquisition and higher bad debt expense. Selling, general and administrative
expense, excluding nonrecurring and unusual costs, increased from $21,103,000
to $29,943,000 for the nine months ended September 27, 1997 and September 26,
1998, respectively. The increase is primarily due to the 1997 Merger and the
1998 Acquisition. Selling, general and administrative expense, net of
nonrecurring and unusual costs, as a percentage of sales, decreased from 42% to
33% and 37% to 34% for the three and nine months ended September 27, 1997 and
September 26, 1998, respectively. The percentage decrease is primarily due to
synergies resulting from the Merger and Acquisition.
INTEREST INCOME
Interest income decreased from $137,000 to $125,000 for the three months ended
and increased from $278,000 to $482,000 for the nine months ended September 27,
1997 and September 26, 1998, respectively.
INTEREST EXPENSE
Interest expense increased for the three months and nine months ended September
27, 1997 versus September 26, 1998 from $313,000 to $812,000 and $830,000 to
$1,607,000 respectively. The increase is primarily a function of the Credit
Agreement related to the May 21, 1998 Tectrix acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $19,013,000 at December 31, 1997 to $23,673,000
at September 26, 1998 and cash and cash equivalents decreased from $6,689,000 at
December 31, 1997 to $5,749,000, at September 26, 1998.
For the nine months ended September 26, 1998, net cash provided by operating
activities was $354,000 compared to net cash used in operating activities of
$4,500,000 for the comparable period ended September 27, 1997. The increase in
net cash provided by operations was largely due to an increase in earnings
before depreciation, amortization and non-cash charges partially offset by a net
increase in operating assets (principally inventory and accounts receivable
related to the Tectrix acquisition).
Cash used in investing activities for the nine months ended September 26, 1998,
consisted of cash paid in the Tectrix acquisition of $21,331,000, capital
expenditures totaling $5,355,000 for the purchase of manufacturing equipment,
costs related to the Company's Enterprise Resource Planning ("ERP") system and
costs related to construction of an addition to the Company's Medway facility.
During 1998, the Company anticipates spending approximately $8,000,000 in
connection with the ERP system, Medway building expansion, and other
miscellaneous projects.
On May 21, 1998, the Company entered into a Credit Agreement with banks that
consisted of a $26,700,000 revolving loan and a $25,000,000 term loan, replacing
its existing Loan and Security Agreement. The revolver matures on May 21, 2004
and the term loan matures on December 31, 2003. Borrowings under both the
revolver and term loans bear interest at the Company's option of either Base
Rate (as defined) or LIBOR plus an adjustment of 0.25% to 2.25%, adjusted up or
down based on the Company's level of compliance with certain financial
covenants, as defined.
12
<PAGE>
As of September 26, 1998, $10,400,000 and $25,000,000 were outstanding under the
revolver and term loan, respectively. At September 26, 1998, $13,928,000 was
available under the revolver after consideration of $2,372,000 in an outstanding
standby letter of credit.
Management believes that the cash flow from the Company's operations and
available borrowings under its Credit Agreement will be sufficient to meet its
general working capital and capital expenditure requirements in the near term.
YEAR 2000
The year 2000 computer issue creates certain risks for the Company. If internal
systems do not correctly recognize and process date information beyond the year
1999, there could be an adverse impact on the Company's operations. Many
systems will continue to run, but may interpret any date in the year '00 to be
prior to any date '99, posing potential date comparison problems, or may fail to
recognize that the year 2000, unlike 1900, is a leap year.
Following the 1997 Merger, the Company performed an extensive analysis of its
then current information technology ("IT") and non-information technology
systems ("NIT") for manufacturing, finance, sales and marketing and human
resources. Such analysis led to a decision in late 1997 to replace all IT
systems in their entirety. Commencing in 1998, the Company began the
installation of a new Enterprise Resource Planning System ("ERP") and
anticipates full implementation by mid 1999. The ERP system will be compliant
with the Year 2000 issues. In the NIT area, the Company has conducted an
analysis of its operations to identify potential problems and is in the process
of remedial action on an as needed basis.
The Company has also surveyed its suppliers of products and services to
determine that the suppliers operations are year 2000 capable, or where
applicable, to monitor their progress towards year 2000 compatibility and to
identify alternative suppliers.
In addition, the Company has commenced work on contingency planning to address
potential problem areas with internal systems, suppliers and other third
parties. It is expected that assessment, remediation and contingency planning
activities will be ongoing throughout the remainder of 1998 and 1999 with the
goal of appropriately resolving all identifiable material internal systems and
third party issues in 1999.
Committed costs to date related to these replacement programs approximate $3.6
million. The Company currently expects that the total cost of these programs,
including both incremental spending and redeployed resources, will approximate
$4.5 million. The total cost estimate does not include potential costs related
to any customer or other third party claims.
Based on currently available information, management does not believe that the
year 2000 matters discussed above related to internal systems or products sold
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
13
<PAGE>
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements.
There are a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated by the statements made above. These
include, but are not limited to, competitive factors, technological and product
developments, market demand, and uncertainties relating to the consolidation of
the merged and acquired companies' businesses. Further information on these and
other factors which could affect the Company's financial results can be found in
the Company's Reports filed with the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1997, Form 10-Q for the six months ended
June 27, 1998, Form 8-K filed June 2, 1998 and its proxy statements dated April
23, 1997 and April 3, 1998.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FUQUA ARBITRATION
-----------------
See Part I, Item 3 of the Company's Report on Form 10-K for the
year ended December 31, 1997 for a description of this proceeding.
Kirila et al v. Cybex International, Inc. et al
-----------------------------------------------
See Part II Item 1 of the Company's Report on Form 10-Q for the
quarter ended June 27, 1998 for a description of the proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27 Financial Data Schedule (Filed herewith)
(b) Reports on Form 8-K
-------------------
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYBEX International, Inc.
--------------------------
By: /s/ Peter C. Haines
--------------------------
November 10, 1998 Peter C. Haines
President and Chief Executive Officer
By: /s/ William S. Hurley
--------------------------
November 10, 1998 William S. Hurley
Vice President and Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
----------- -----------
(a) Exhibits
--------
27 Financial Data Schedule. (Filed herewith)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
financial statements contained in the body of the Form 10-Q and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-26-1998
<CASH> 5,749
<SECURITIES> 0
<RECEIVABLES> 26,931
<ALLOWANCES> 3,653
<INVENTORY> 10,286
<CURRENT-ASSETS> 51,527
<PP&E> 33,041
<DEPRECIATION> 16,402
<TOTAL-ASSETS> 107,932
<CURRENT-LIABILITIES> 27,854
<BONDS> 0
0
0
<COMMON> 888
<OTHER-SE> 37,937
<TOTAL-LIABILITY-AND-EQUITY> 107,932
<SALES> 88,594
<TOTAL-REVENUES> 88,594
<CGS> 54,706
<TOTAL-COSTS> 87,547
<OTHER-EXPENSES> (482)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,607
<INCOME-PRETAX> (78)
<INCOME-TAX> (32)
<INCOME-CONTINUING> (46)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
