<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) May 21, 1998
------------
Cybex International, Inc.
-------------------------
(Exact name of registrant as specified in its Charter)
New York 0-4538 11-1731581
-------- ------ ----------
(State or other jurisdiction of Commission File Number (IRS Employer
incorporation or organization) Identification Number)
10 Trotter Drive
Medway, Massachusetts 02053
(508) 533-4300
---------------------------------
(Address, including zip code, and telephone
number [including area code] of registrant's
principal executive office)
---------------------------------
<PAGE>
Item 7: Financial Statements and Exhibits
The Registrant has previously filed a Report on Form 8-K, dated as of May 21,
1998, in connection with Registrant's acquisition of all of the outstanding
capital stock of Tectrix Fitness Equipment, Inc., a California corporation
("Tectrix"). The Registrant is hereby amending the aforementioned Report on Form
8-K to include the Financial statements required by Item 7 of Form 8-K.
Exhibit 23.1 Consent of Independent Auditors
Exhibit 23.2 Consent of Auditors
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 hereunto duly authorized.
Dated: August 4, 1998
CYBEX INTERNATIONAL, INC.
By: /s/ Peter C. Haines
---------------------------
Peter C. Haines, President
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
CYBEX INTERNATIONAL, INC.--UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS:
Basis of Presentation.................................................. F-2
Unaudited Pro Forma Combined Balance Sheet March 28, 1998............. F-3
Unaudited Pro Forma Combined Statement of Operations
Three Months Ended March 28, 1998...................................... F-4
Unaudited Pro Forma Combined Statement of Operations Year Ended
December 31, 1997...................................................... F-5
Notes To Unaudited Pro Forma Combined Financial Statements............. F-6
TECTRIX FITNESS EQUIPMENT, INC. - HISTORICAL UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS:
Unaudited Consolidated Balance Sheet March 31, 1998................... F-12
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997............................. F-13
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997............................. F-14
Notes to Unaudited Consolidated Financial Statements................... F-15
TECTRIX FITNESS EQUIPMENT, INC. AND TECTRIX INTERNATIONAL, INC. -
HISTORICAL COMBINED FINANCIAL STATEMENTS:
Report of Independent Auditors--Ernst & Young LLP...................... F-17
Auditors' Report - SJ Mayled & Co...................................... F-18
Combined Balance Sheet................................................. F-19
Combined Statement of Operations....................................... F-20
Combined Statement of Stockholders' Equity............................. F-21
Combined Statement of Cash Flows....................................... F-22
Notes to Combined Financial Statements................................. F-23
</TABLE>
F-1
<PAGE>
CYBEX INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
THE ACCOMPANYING UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS GIVE EFFECT
TO THE MAY 21, 1998 ACQUISITION OF TECTRIX FITNESS EQUIPMENT, INC. ("TECTRIX")
BY CYBEX INTERNATIONAL, INC. ("CYBEX" OR THE "COMPANY") AND THE MAY 23, 1997
MERGER BETWEEN CYBEX AND TROTTER INC. ("TROTTER"), AS DESCRIBED IN NOTES 2 AND 3
OF NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS. THE UNAUDITED
PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28,
1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997, GIVE EFFECT TO THE ACQUISITION OF
TECTRIX BY CYBEX AS IF IT HAD OCCURRED AT THE BEGINNING OF THE PERIODS
PRESENTED. THE UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1997 ALSO GIVES EFFECT TO THE MERGER BETWEEN TROTTER AND
CYBEX AS IF IT HAD OCCURRED ON JANUARY 1, 1997. THE UNAUDITED PRO FORMA
COMBINED BALANCE SHEET AS OF MARCH 28, 1998, GIVES EFFECT TO THE ACQUISITION OF
TECTRIX BY CYBEX AS IF IT HAD OCCURRED ON THAT DATE.
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 TECTRIX. 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 THAT ADDITIONAL SYNERGIES AND OPERATIONAL IMPROVEMENTS, NOT
REFLECTED IN THE ACCOMPANYING UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS,
WILL BE REALIZED BY THE ACQUISITION OF TECTRIX. HOWEVER, SUCH AMOUNTS CANNOT BE
REASONABLY QUANTIFIED AND, THEREFORE, ARE NOT REFLECTED IN THE UNAUDITED PRO
FORMA COMBINED FINANCIAL STATEMENTS.
F-2
<PAGE>
CYBEX INTERNATIONAL, INC.
-------------------------
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
------------------------------------------
MARCH 28, 1998
--------------
(in thousands)
<TABLE>
<CAPTION>
The
Company Tectrix Pro Forma Combined
-------------
Historical Historical Adjustments Pro Forma
------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............. $ 8,381 $ 208 $ -- $ 8,589
Accounts receivable, net.............. 19,920 4,829 -- 24,749
Lease receivables..................... 1,903 -- -- 1,903
Inventories........................... 7,990 4,317 (923) (a) 11,384
Recoverable income taxes.............. 1,100 -- -- 1,100
Deferred income taxes................. 5,838 -- -- 5,838
Prepaid expenses and other............ 1,347 200 -- 1,547
------- ------- ------- --------
Total current assets............. 46,479 9,554 (923) 55,110
Property, plant and
equipment, net......................... 12,742 1,278 (1,104) (b) 12,916
Lease receivables...................... 1,302 -- -- 1,302
Goodwill, net.......................... 10,711 -- 16,334 (c) 28,553
1,508 (d)
Deferred income taxes.................. 5,960 -- 574 (e) 6,534
Other assets........................... 817 656 156 (f) 1,629
------- ------- ------- --------
$78,011 $11,488 $16,545 $106,044
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Line of Credit........................ $ -- $1,726 $(1,726) (c) $ --
Current maturities of long-term debt.. 2,856 1,044 (944) (c) 2,956
Accounts payable...................... 5,533 2,800 -- 8,333
Accrued expenses...................... 15,750 1,122 1,072 (g) 17,944
Income taxes payable.................. 1,369 -- -- 1,369
------- ------- ------- --------
Total current liabilities........ 25,508 6,692 (1,598) 30,602
Long-term debt......................... 10,514 400 23,400 (h) 34,314
Accrued warranty obligation............ 1,278 -- -- 1,278
------- ------- ------- --------
Total liabilities................ 37,300 7,092 21,802 66,194
------- ------- ------- --------
Stockholders' equity................... 40,711 4,396 (4,396) (c) 39,850
(861) (i)
------- ------- ------- --------
$78,011 $11,488 $16,545 $106,044
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CYBEX INTERNATIONAL, INC.
-------------------------
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
----------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 28, 1998
-----------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
The Cybex/Tectrix
Company Tectrix Pro Forma Combined
Historical Historical Adjustments Pro Forma
----------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net sales...................................... $28,637 $8,997 $ (1,066) (j) $36,568
Cost of sales.................................. 16,572 5,920 (613) (k) 21,879
------- ------ --------- -------
Gross profit.............................. 12,065 3,077 (453) 14,689
Selling, general and administrative expenses... 9,372 2,690 (82) (l) 11,951
202 (m)
(231) (n)
------- ------ --------- -------
Operating income.......................... 2,693 387 (342) 2,738
Interest expense, net.......................... (70) (88) (438) (o) (596)
------- ------ --------- -------
Income before income taxes..................... 2,623 299 (780) 2,142
Income tax provision........................... 1,075 9 (184) (p) 900
------- ------ --------- -------
Net income..................................... $ 1,548 $ 290 $ (596) $ 1,242
======= ====== ========= =======
Basic earnings per share....................... $ .18 $ .14
======= =======
Diluted earnings per share..................... $ .18 $ .14
======= =======
Shares used in computing basic
earnings per share........................... 8,670 8,670
======= =======
Shares used in computing diluted
earnings per share........................... 8,826 8,826
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CYBEX INTERNATIONAL, INC.
-------------------------
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
The Cybex Trotter Merger
Company Pre-Merger Pro Forma Cybex
Historical Historical Adjustments Pro Forma
----------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Net sales............................................ $90,234 $28,141 $ (2,228)(q) $116,147
Cost of sales........................................ 54,101 16,801 (2,012)(r) 68,890
------- ------- --------- --------
Gross profit..................................... 36,133 11,340 (216) 47,257
------- ------- --------- --------
Selling, general and administrative expenses......... 35,069 13,730 (535)(s) 47,727
(482)(t)
(235)(u)
180 (v)
Nonrecurring charges................................. 7,134 -- (7,134)(w) --
------- ------- --------- --------
Operating loss from continuing
operations...................................... (6,070) (2,390) 7,990 (470)
Interest expense, net................................ (761) (35) -- (796)
------- ------- --------- --------
Loss before income taxes from continuing operations..
(6,831) (2,425) 7,990 (1,266)
Income tax provision (benefit)....................... (1,586) 8 1,085 (x) (493)
------- ------- --------- --------
Loss from continuing operations...................... $(5,245) $(2,433) $ 6,905 (773)
======= ======= ========= ========
Basic loss per share from continuing operations...... (.76) $ (.09)
======= ========
Diluted loss per share from continuing operations.... $ (.76) $ (.09)
======= ========
Shares used in computing basic loss per
share from continuing operations..................... 6,937 8,664
======= ========
Shares used in computing diluted loss per share from
continuing operations............................... 6,937 8,664
======= ========
</TABLE>
<TABLE>
<CAPTION>
Cybex/Tectrix
Tectrix Pro Forma Combined
Historical Adjustments Pro Forma
---------- --------------- ----------
<S> <C> <C> <C>
Net sales............................................ $33,357 $ (5,553)(j) $143,951
Cost of sales........................................ 22,116 (4,022)(k) 86,984
------- ---------- --------
Gross profit..................................... 11,241 (1,531) 56,967
------- ---------- --------
Selling, general and administrative expenses......... 11,816 (679)(l) 58,248
810 (m)
(1,426)(n)
Nonrecurring charges................................. -- -- --
------- ---------- --------
Operating loss from continuing
operations...................................... (575) (236) (1,281)
Interest expense, net................................ (370) (1,866)(o) (3,032)
------- ---------- --------
Loss before income taxes from continuing operations.. (945) (2,102) (4,313)
Income tax provision (benefit)....................... 4 (1,021)(p) (1,510)
------- ---------- --------
Loss from continuing operations...................... $ (949) $ (1,081) $ (2,803)
======= ========== ========
Basic loss per share from continuing operations...... $ (.32)
========
Diluted loss per share from continuing operations.... $ (.32)
========
Shares used in computing basic loss per
share from continuing operations.................... 8,664
========
Shares used in computing diluted loss per share from
continuing operations............................... 8,664
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CYBEX INTERNATIONAL, INC.
-------------------------
NOTES TO UNAUDITED PRO FORMA
----------------------------
COMBINED FINANCIAL STATEMENTS
-----------------------------
1. HISTORICAL:
- -- -----------
On May 23, 1997, the merger between a wholly owned subsidiary of Cybex and
Trotter was consummated (the "Merger") with Trotter surviving the Merger as a
subsidiary of Cybex. The 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. As a result, the
Company's historical balances included in the unaudited pro forma combined
statement of operations for the year ended December 31, 1997 include the results
of Trotter for the entire year and include the combined results of Trotter and
Cybex from the May 23, 1997 acquisition date to December 31, 1997, as reported
in the consolidated financial statements included in the Company's Form 10-K.
The historical balances of the Company included in the unaudited pro forma
combined financial statements as of March 28, 1998 and for the three months then
ended represent the financial position and results of operations of the Company
as reported in the consolidated financial statements included in the Company's
Form 10-Q as of March 28, 1998. The pre-merger historical balances of Cybex
included in the unaudited pro forma combined statement of operations for the
year ended December 31, 1997 include the results of Cybex for the period from
January 1, 1997 through the May 23, 1997 merger date. The historical balances
of Tectrix included in the unaudited pro forma combined financial statements
represent the financial position and results of operations of Tectrix as
reported in their financial statements included herein.
2. ACQUISITION OF TECTRIX:
- -- -----------------------
On May 21, 1998, Cybex entered into an agreement with Tectrix (the "Agreement")
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
$2,585,000 was used by Tectrix stockholders to repay Tectrix debt, and a
promissory note in the amount of $2,340,000. 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 acquisition, as defined. The Acquisition will be
accounted for using the purchase method of accounting and the parties have made
a Section 338(h)10 election for the acquisition to be accounted for as an asset
purchase for income tax purposes. In connection with the Acquisition, Cybex
entered into a new credit agreement, which provides for a term loan of
$25,000,000 and revolving loans up to $30,000,000.
In connection with the Acquisition, the Company will discontinue Tectrix's
virtual reality product line and treadmill product line, which is currently in
development, and will close Tectrix's international sales offices. The costs
associated with the product line discontinuances and the exit costs of the
F-6
<PAGE>
international sales offices will be included in the application of purchase
accounting by the Company. The Company also plans to discontinue manufacturing
Cybex's bike. The costs to discontinue the Cybex bike will be charged to the
statement of operations upon consummation of the Acquisition.
3. CYBEX/TROTTER MERGER:
- -- ---------------------
On May 23, 1997, a subsidiary of Cybex merged with Trotter with Trotter
surviving the merger as a subsidiary of Cybex (see Note 1). Pursuant to the
terms of the Merger, 4,273,056 shares of the Company's Common stock were issued
to a subsidiary of UM Holdings, Ltd. (UM), the sole stockholder of Trotter, in
exchange for all of the issued and outstanding Trotter shares. The purchase
price of the Merger was $44,102,000 which consisted 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
transaction costs of $1,645,000. The Company assigned $2,500,000 to in-process
research and development and such amount was charged to operations in the
Company's historical statement of operations for the year ended December 31,
1997. The Company also recorded goodwill of $10,097,000, which is being
amortized on a straight-line basis over 30 years.
In connection with the Merger, the Company discontinued Cybex's commercial
treadmill product line, closed Cybex's Colorado Springs, Colorado corporate
offices, terminated Cybex's European joint venture and closed Trotter's
Sharpsville, Pennsylvania facility. The costs to discontinue Cybex's commercial
treadmill product line, close Cybex's Colorado Springs facility and terminate
Cybex's European joint venture were included in the application of purchase
accounting by the Company. The costs to exit the Sharpsville facility and the
write-off of related intangible assets totaled $2,734,000 and were charged to
the Company's statement of operations for the year ended December 31, 1997.
Revenues and costs related to Cybex's commercial treadmill product line have
been eliminated in the unaudited combined pro forma statement of operations for
the year ended December 31, 1997.
Additionally, prior to the Merger, Cybex completed the sale of substantially all
of the assets of its Lumex Division to Fuqua Enterprises, Inc. ("Fuqua") for
$40,750,000 in cash. The asset sale agreement provided 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. Fuqua claimed that
the stated amount of the net assets of the Lumex Division was overstated. Prior
to the Merger, Cybex determined to proceed with arbitration to resolve the
dispute. A final decision with respect to the arbitration was received on
February 3, 1998, which resulted in the Company recording 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.
F-7
<PAGE>
4. PRO FORMA BALANCE SHEET ADJUSTMENTS:
- -- ------------------------------------
a) Reflects decreases in inventories resulting from the following:
<TABLE>
<S> <C>
Discontinuance of the Tectrix virtual reality product line $407,000
Discontinuance of the Cybex bike 516,000
--------
$923,000
========
</TABLE>
b) Reflects decreases to fixed assets resulting from the following:
<TABLE>
<S> <C>
Discontinuance of the Tectrix virtual reality product line $ 185,000
Discontinuance of the Cybex bike 919,000
----------
$1,104,000
==========
</TABLE>
c) Reflects a $16,334,000 increase in goodwill as a result of applying
purchase accounting (the purchase price of $23,400,000 less the book value
of Tectrix on March 31, 1998 of $4,396,000 less $2,670,000 for the Tectrix
debt which was repaid by the Tectrix stockholders).
d) Reflects a net increase in goodwill resulting from the following:
<TABLE>
<S> <C>
Estimated transaction costs $ 400,000
Discontinuance of the Tectrix virtual reality product line 1,181,000
International subsidiary exit costs 100,000
Severance and relocation 101,000
Discontinuance of Tectrix treadmill 371,000
Allocation of purchase price to prepaid insurance provided by
the Tectrix stockholders (645,000)
----------
$1,508,000
==========
</TABLE>
e) Reflects the income tax benefit of the charges related to the
discontinuance of Cybex's bike.
f) Reflects a net increase in other assets resulting from the following:
<TABLE>
<S> <C>
Prepaid insurance provided by the Tectrix stockholders $ 645,000
Write-off of intangible assets related to the Tectrix virtual
reality product line (489,000)
---------
$ 156,000
=========
</TABLE>
F-8
<PAGE>
g) Reflects liabilities relating to the following:
<TABLE>
<S> <C>
Transaction costs $ 400,000
Tectrix severance and relocation 101,000
International subsidiary exit costs 100,000
Discontinuance of the Tectrix virtual reality product line 100,000
Discontinuance of the Tectrix treadmill product line 371,000
----------
$1,072,000
==========
</TABLE>
h) Reflects increased borrowings incurred to acquire Tectrix.
i) Reflects the retained earnings effect of the discontinuance of the Cybex
bike.
5. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
- -- ----------------------------------------------
Cybex Acquisition of Tectrix: Pro Forma Adjustments For the Three Months Ended
March 28, 1998 and For the Year Ended December 31, 1997--
j) Reflects a decrease in revenue resulting from the discontinuance of
Tectrix's virtual reality product line.
k) Reflects a decrease in cost of sales resulting from the discontinuance of
Tectrix's virtual reality product line.
l) Reflects decreased amortization expense on intangible assets related to the
Tectrix virtual reality product line.
m) Reflects additional amortization expense related to goodwill and prepaid
insurance resulting from the acquisition of Tectrix. Goodwill resulting
from the acquisition is being amortized on a straight-line basis over 30
years and prepaid insurance is being amortized over the three year life of
the policy.
n) Reflects a decrease in direct costs related to Tectrix's virtual reality
product line and treadmill product line which will be eliminated as a
direct result of the acquisition, as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Year Ended
March 28, 1998 December 31, 1997
-------------------------- ------------------
<S> <C> <C>
Costs related to Tectrix's virtual reality
product line $110,000 $1,170,000
Costs related to Tectrix's treadmill
product line 121,000 256,000
-------- ----------
$231,000 $1,426,000
======== ==========
</TABLE>
Management believes that significant additional costs were incurred by Tectrix
for the three months ended March 28, 1998 and the year ended December 31, 1997
related to the virtual reality product line, however, such costs cannot be
specifically identified and, therefore, have not been eliminated in the
unaudited pro forma statement of operations.
o) Reflects additional interest expense from the debt incurred to finance the
purchase of Tectrix, using an average interest rate of 9.0%, net of the
reduction in Tectrix interest expense as a result of the repayment of
Tectrix debt in connection with the acquisition.
p) To adjust the income tax provision using appropriate rates.
The unaudited pro forma combined statements of operations do not include one-
time, after-tax charges expected to be incurred upon consummation of the
Tectrix acquisition of $861,000 related to the discontinuance of the Cybex
bike.
F-9
<PAGE>
Cybex/Trotter Merger: Pro Forma Adjustments For the Twelve Months Ended
December 31, 1997--
q) Reflects decrease in revenue related to discontinuance of the Cybex
treadmill product line.
r) Reflects decreased cost of sales related to the following:
<TABLE>
<S> <C>
Sharpsville facility costs $ 158,000
Sharpsville depreciation 68,000
Cybex's commercial treadmill line 1,786,000
----------
$2,012,000
==========
</TABLE>
s) Reflects decreased selling, general and administrative expenses related
to the Sharpsville plant closure and the discontinuance of Cybex's
treadmill product line, as follows:
<TABLE>
<S> <C>
Sharpsville amortization $163,000
Costs related to Cybex's commercial treadmill line 130,000
Costs related to Trotters' Sharpsville facility 242,000
--------
$535,000
========
</TABLE>
t) Reflects professional fees incurred by Cybex related to the Merger which
were expensed to the Cybex historical statement of operations because
Trotter was deemed to be the acquiror for accounting purposes.
u) Reflects the $235,000 decrease in Cybex executive support compensation as a
direct result of the Merger.
v) Reflects additional amortization expense related to the goodwill resulting
from the Merger. Merger goodwill is being amortized on a straight-line
basis over 30 years.
w) Reflects the reduction of nonrecurring charges of $7,134,000, comprised of
costs of $2,734,000 related to the Sharpsville plant closure, the write-off
of acquired research and development of $2,500,000 and $1,900,000 of costs
related to the Fuqua arbitration (see Note 3).
x) 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 incurred upon consummation of the Cybex/Trotter merger
as follows:
<TABLE>
<S> <C>
Sharpsville closure and asset write-offs $1,705,000
Fuqua settlement 1,178,000
Research and development charge 2,500,000
----------
$5,383,000
==========
</TABLE>
F-10
<PAGE>
6. PRO FORMA EARNINGS PER SHARE:
- -- -----------------------------
The shares used in computing pro forma earnings per share for the three months
ended March 28, 1998 represent the Company's historical weighted average shares
outstanding (basic) and the dilutive effect of Common stock options (diluted).
The shares used in computing pro forma loss per share for the year ended
December 31, 1997 represent Cybex's historical weighted average shares
outstanding and Trotter's historical weighted average shares outstanding,
adjusted by the exchange ratio pursuant to the merger agreement (see Note 3).
F-11
<PAGE>
TECTRIX FITNESS EQUIPMENT, INC.
-------------------------------
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
MARCH 31, 1998
--------------
(in thousands, except share information)
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................... $ 208
Accounts receivable, net.................................... 4,829
Inventories................................................. 4,317
Prepaid expenses and other.................................. 200
-------
Total current assets.................................... 9,554
Property and equipment, net................................. 1,278
Other assets................................................ 656
-------
$11,488
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Line of credit.............................................. $ 1,726
Current portion of long-term debt........................... 1,044
Accounts payable............................................ 2,800
Accrued expenses............................................ 1,122
-------
Total current liabilities............................... 6,692
Long-term debt.............................................. 400
-------
Total liabilities....................................... 7,092
-------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 15,000,000
shares authorized, 7,288,561 shares
issued and outstanding..................................... 5,923
Accumulated deficit......................................... (1,484)
Cumulative translation adjustment........................... (43)
-------
Total stockholder's equity.............................. 4,396
-------
$11,488
=======
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE>
TECTRIX FITNESS EQUIPMENT, INC.
-------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net sales.............................................. $8,997 $8,174
Cost of sales.......................................... 5,920 5,266
------ ------
Gross profit...................................... 3,077 2,910
Selling, general and administrative expenses........... 2,690 2,658
------ ------
Operating income.................................. 387 250
Interest expense, net.................................. 88 92
------ ------
Income before income taxes............................. 299 158
Income taxes........................................... 9 --
------ ------
Net income............................................. $ 290 $ 158
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE>
TECTRIX FITNESS EQUIPMENT, INC.
-------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Operating activities:
Net income..................................................... $ 290 $ 158
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization................................ 150 256
Changes in operating assets and liabilities--
Accounts receivable........................................ (226) 727
Inventories, prepaid expenses and other assets............. (331) (142)
Accounts payable and accrued expenses...................... 86 (882)
----- ------
Net cash provided by (used in) operating activities...... (31) 117
----- ------
Investing activities:
Purchases of property and equipment............................ (86) (77)
----- ------
Financing activities:
Repayment of long-term debt and line of credit................. (426) --
Payment of dividends........................................... -- (490)
----- ------
Net used in financing activities......................... (426) (490)
----- ------
Effect of foreign currency rate fluctuation on cash...... (9) (133)
----- ------
Net decrease in cash and cash equivalents....................... (552) (583)
Cash and cash equivalents, beginning of period.................. 760 1,173
----- ------
Cash and cash equivalents, end of period........................ $ 208 $ 590
===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE>
TECTRIX FITNESS EQUIPMENT, INC.
-------------------------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
1. BASIS OF PRESENTATION:
----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and changes in cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
2. PURCHASE AGREEMENT:
-------------------
On May 21, 1998, Tectrix common shareholders agreed to sell 100% of their
outstanding shares to Cybex International ("Cybex") in exchange for $21,060,000
in cash and a promissory note in the amount of $2,340,000. In addition, the
selling shareholders have the right to receive aggregate additional payments up
to $6,600,000 based upon Tectrix's post-closing margin performance during the
three-year period following May 21, 1998, as defined.
3. INVENTORIES:
------------
Inventories are stated at the lower of cost (weighted average) or market and
consist of the following at March 31, 1998 (in thousands):
<TABLE>
<S> <C>
Raw materials........................ $2,117
Work-in-process...................... 210
Finished goods....................... 1,990
------
$4,317
======
</TABLE>
F-15
<PAGE>
4. MERGER BETWEEN TECTRIX FITNESS EQUIPMENT, INC.
-----------------------------------------------
AND TECTRIX INTERNATIONAL, INC.:
--------------------------------
Effective March 11, 1998, Tectrix Fitness Equipment, Inc. (the "Company") and
Tectrix International, inc. ("TI") (collectively the "Companies") entered into
an agreement to merge TI into the Company through the issuance of one share of
the Company's stock in exchange for all of the outstanding stock of TI. Prior
to the merger, the Companies were controlled through common ownership. The
transaction was accounted for as merger between entities under common control
and the net assets of TI were recorded at historical cost. For all periods
prior to the merger, the accompanying financial statements include the
consolidated financial statements of the Company combined with the financial
statements of TI.
F-16
<PAGE>
Report of Independent Auditors
The Board of Directors
Tectrix Fitness Equipment, Inc.
Tectrix International, Inc.
We have audited the accompanying combined balance sheet of Tectrix Fitness
Equipment, Inc. and Tectrix International, Inc., (the Companies) as of December
31, 1997, and the related combined statements of operations, stockholders'
equity and cash flows for the year then ended. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the 1997 financial statements of a certain foreign
entity which statements reflect total assets of $800,000 as of December 31,
1997 and total revenues of $1,855,000 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the 1997 data included for that foreign
entity, is based solely on the report of the other auditor.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies at December 31, 1997, and the combined results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
--------------------------------
February 27, 1998
F-17
<PAGE>
TECTRIX FITNESS EQUIPMENT (UK) LTD
AUDITORS' REPORT
AUDITORS' REPORT TO THE MEMBERS OF
TECTRIX FITNESS EQUIPMENT (UK) LTD
We have audited the financial statements of Tectrix Fitness Equipment (UK) Ltd.
which have been prepared under the historical cost convention and the accounting
policies set out on pages F-23 through F-26.
RESPECTIVE RESPONSIBILITY OF DIRECTORS AND AUDITORS
The Company's directors are responsible for the preparation of financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or error or other
irregularity. In forming our opinion we also evaluated the overall adequacy of
the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31st December 1997 and of its loss for the year
then ended and have been properly prepared in accordance with the Companies Act
1985.
/s/ SJ MAYLED & CO.
SJ MAYLED & CO.
Cardiff Registered Auditors
4th February 1998 Chartered Accountants
F-18
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Combined Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 760,000
Accounts and notes receivable, less allowance
for doubtful accounts of $206,000 4,603,000
Inventories 4,024,000
Prepaid expenses 152,000
-----------
Total current assets 9,539,000
Equipment and leasehold improvements, net 1,257,000
Intangibles and other assets, net 751,000
-----------
Total assets $11,547,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,124,000
Accounts payable 2,683,000
Accrued compensation 504,000
Accrued warranty costs 381,000
Other accrued expenses 268,000
Current portion of long-term debt 1,072,000
-----------
Total current liabilities 7,032,000
Long-term debt, less current portion 400,000
Commitments and contingencies
Stockholders' equity:
Tectrix Fitness Equipment, Inc.:
Common stock, no par value
Authorized shares 15,000,000
Issued and outstanding shares 7,288,561 5,923,000
Tectrix Fitness Equipment (UK) Limited:
Common stock, (Pounds).01 par value
Authorized shares 10,000
Issued and outstanding shares none --
Tectrix International, Inc.:
Common stock, no par value
Authorized shares 15,000,000
Issued and outstanding shares none --
Accumulated deficit (1,774,000)
Foreign currency translation adjustment (34,000)
-----------
Total stockholders' equity 4,115,000
-----------
Total liabilities and stockholders' equity $11,547,000
===========
</TABLE>
See accompanying notes.
F-19
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Combined Statement of Operations
For the year ended December 31, 1997
<TABLE>
<S> <C>
Net sales $33,357,000
Cost of goods sold 22,116,000
-----------
Gross profit 11,241,000
Operating expenses:
Selling, general and administrative 8,246,000
Research and development 2,791,000
Other expense 779,000
-----------
Operating loss (575,000)
Interest expense 370,000
-----------
Loss before income tax expense (945,000)
Income tax expense 4,000
-----------
Net loss $ (949,000)
===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Combined Statement of Stockholders' Equity
For the year ended December 31, 1997
<TABLE>
<CAPTION>
TECTRIX FITNESS TECTRIX FITNESS EQUIPMENT
EQUIPMENT, INC. (UK) LIMITED
COMMON STOCK COMMON STOCK
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 6,367,284 $2,911,000 10,000 $ --
Issuance of shares to retire
subordinated notes payable and
accrued interest 921,277 3,012,000 -- --
Acquisition of Tectrix Fitness
Equipment (UK) Limited by
Tectrix Fitness Equipment, Inc. -- -- (10,000) --
Dividends to Tectrix Fitness
Equipment, Inc. common
shareholders -- -- -- --
Foreign currency translation
adjustment -- -- -- --
Net loss -- -- -- --
---------------------------------------------------
Balance at December 31, 1997 7,288,561 $5,923,000 -- $ --
===================================================
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
-------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (335,000) $ 59,000 $2,635,000
Issuance of shares to retire
subordinated notes payable and
accrued interest -- -- 3,012,000
Acquisition of Tectrix Fitness
Equipment (UK) Limited by
Tectrix Fitness Equipment, Inc. -- -- --
Dividends to Tectrix Fitness
Equipment, Inc. common
shareholders (490,000) -- (490,000)
Foreign currency translation
adjustment -- (93,000) (93,000)
Net loss (949,000) -- (949,000)
-------------------------------------------
Balance at December 31, 1997 $(1,774,000) $(34,000) $4,115,000
===========================================
</TABLE>
See accompanying notes.
F-21
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Combined Statement of Cash Flows
For the year ended December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (949,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 396,000
Amortization 688,000
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts and notes receivable (720,000)
Inventories (246,000)
Prepaid expenses and other assets (35,000)
Accounts payable 385,000
Accrued expenses (2,000)
----------
Net cash used in operating activities (483,000)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (601,000)
Purchase of intangibles (26,000)
----------
Net cash used in investing activities (627,000)
FINANCING ACTIVITIES
Net borrowings on line of credit 324,000
Borrowings on long-term debt 1,000,000
Payments on long-term debt (128,000)
Dividends paid (490,000)
----------
Net cash provided by financing activities 706,000
Effect of foreign currency rate fluctuations on cash (9,000)
----------
Decrease in cash (413,000)
Cash at beginning of year 1,173,000
----------
Cash at end of year $ 760,000
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 370,000
==========
Cash paid for income taxes $ 30,000
==========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock to retire subordinated notes
payable and accrued interest $3,012,000
==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Tectrix Fitness Equipment, Inc., designs, manufactures and distributes high-end,
microprocessor-controlled cardiovascular fitness equipment for the commercial
and consumer markets in the United States and internationally.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the consolidated
financial statements of Tectrix Fitness Equipment, Inc. (the Company) and the
financial statements of Tectrix International, Inc. (TI), (collectively the
Companies). The Companies are controlled through common ownership. During 1997,
the Company acquired 100% of the stock of Tectrix Fitness Equipment (UK) Limited
(TFE-UK). The Company and TI own a 79% interest and a 21% interest,
respectively, in Tectrix Fitness Equipment Vertriebs GmbH (TFE - GmbH). The
financial statements of TFE-GmbH and TFE-UK have been consolidated with the
Company prior to combination. All material intercompany balances and
transactions have been eliminated in combination.
F-23
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost, using the first-in, first-out
("FIFO") method, or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
provided using the declining balance method, which is not materially different
than the straight-line method, over the estimated useful lives of the assets
ranging from 5 to 7 years.
INTANGIBLE ASSETS
Intangible assets are stated at cost and are amortized using the straight-line
method over the following estimated lives:
Patents 15 years
Technology and trade secrets 2 years
Capitalized software 2 years
RECOVERABILITY OF LONG-LIVED ASSETS
The Company routinely evaluates the carrying value of long-lived assets to
determine if impairment exists based upon estimated undiscounted future cash
flows. The impairment, if any, is measured by the difference between carrying
value and estimated discounted future cash flows and is charged to expense in
the period identified. It is at least reasonably possible that the Company's
estimate of future undiscounted cash flows may change during 1998. In addition,
if the Company's estimate of future undiscounted cash
F-24
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF LONG-LIVED ASSETS (CONTINUED)
flows should change or if the operating plan is not achieved, future analyses
may indicate insufficient future undiscounted cash flows to recover the carrying
value of the Company's long-lived assets, in which case such assets would be
written down to estimated fair value.
REVENUE RECOGNITION
Revenue from the sale of products is recognized upon shipment. Sales to the
Companies' customers are generally made on open account terms. The Companies
perform periodic credit evaluations of their ongoing customers and do not
generally require collateral. Reserves are maintained for potential credit
losses and such losses have been within management's expectations.
ADVERTISING COSTS
The production cost of advertising is charged to expense as incurred. Total
advertising expense was $540,000 in 1997.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code for federal and state income tax reporting purposes. As an
S corporation, income is passed to the stockholders and is not taxed directly
for federal income tax reporting purposes and is only subject to a nominal state
franchise tax. TI has elected to be taxed under the provisions of Subchapter C
of the Internal Revenue Code. TFE-UK and TFE-GmbH are taxed under the tax rules
of Great Britain and Germany, respectively.
FOREIGN CURRENCY TRANSLATION
Foreign currency financial statements of foreign operations where the local
currency is the functional currency are translated using the exchange rates in
effect at period-end for assets and liabilities and average exchange rates
during the period for results of operations. Related translation adjustments are
reported as a separate component of stockholders' equity.
F-25
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123) requires the use of
option valuation models that were not developed for use in valuing employees
stock options. Under APB 25, when 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Segment Information. Both of
these standards are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. SFAS No. 131 amends the requirements for public
enterprises to report financial and descriptive information about its reportable
operating segments. Operating segments, as defined in SFAS No. 131, are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is required to
be reported on the basis that is used internally for evaluating the segment
performance. The Company believes it operates in one business and operating
segment and does not believe the adoption of these standards will have a
material impact on the Company's combined financial statements.
F-26
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials $2,231,000
Work in process 319,000
Finished goods 1,474,000
----------
$4,024,000
==========
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<S> <C>
Machinery and equipment $1,776,000
Computer equipment and software 418,000
Furniture, fixtures and office equipment 244,000
Leasehold improvements 120,000
----------
2,558,000
Less accumulated depreciation 1,301,000
----------
$1,257,000
==========
</TABLE>
4. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<S> <C>
Technology and trade secrets $ 872,000
Patents 723,000
Capitalized software 375,000
Deposits 66,000
----------
2,036,000
Less accumulated amortization 1,285,000
----------
$ 751,000
==========
</TABLE>
F-27
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
5. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
The Company has a $4,000,000 line of credit with a bank (the Agreement), bearing
interest at prime plus 0.25% (8.75% at December 31, 1997). The line is secured
by substantially all the assets of the Company, expires on September 30, 1998
and is guaranteed by three stockholders. The Agreement requires maintenance of
certain financial covenants pertaining to key financial ratios and a minimum
level of tangible net worth. The Company was in compliance with these covenants
at December 31, 1997.
The weighted-average interest rate on the line of credit was 8.9% in 1997.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable, bearing interest at prime plus .5%
(9.0% at December 31, 1997), maturing on
September 30, 1998, secured by substantially all
the assets of the Company $ 972,000
Long-term payable maturing as follows: $100,000
annually 1997 to 1999, $150,000 annually 2000 and 2001 500,000
----------
1,472,000
Less current portion 1,072,000
----------
$ 400,000
==========
</TABLE>
The fair value of the note payable is estimated at its carrying value as the
note payable bears interest at prevailing market rates. The long-term payable is
not subject to fluctuations in market rates and is therefore also considered to
be stated at fair market value.
In September 1997, subordinated notes payable to stockholders bearing interest
at 7% totaling $2,910,000 and accrued interest aggregating $102,000 were
converted into 921,277 shares of the Company's common stock.
F-28
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
6. INCOME TAXES
The Companies utilize the liability method of accounting for income taxes
whereby deferred taxes are determined based on differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
The primary difference between the Company's effective income tax rate and the
statutory federal rate for the year ended December 31, 1997 relates primarily to
losses incurred for which no tax benefit was recognized.
At December 31, 1997, TFE-UK and TFE-GmbH had net operating loss carryforwards
of approximately $600,000 and $430,000 for United Kingdom and German income tax
purposes, respectively, which can be carried forward indefinitely. In addition,
the Company had a net operating loss of approximately $50,000 arising from its
acquisition of CyberGear, Inc. This net operating loss is suspended for federal
income tax purposes until such time as the Company's S election terminates. The
Company also has S corporation state net operating loss carryforwards totaling
$307,000.
Significant components of the deferred tax assets are as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 410,000
Valuation reserve (410,000)
----------
$ --
==========
</TABLE>
Losses before income taxes attributable to foreign operations were $498,000 in
1997.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Companies lease certain equipment and office and production facilities under
operating lease agreements which expire through June 2001.
F-29
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments at December 31, 1997 under noncancelable leases
with initial terms in excess of one year are as follows:
<TABLE>
<S> <C>
1998 $ 467,000
1999 452,000
2000 442,000
2001 221,000
----------
$1,582,000
==========
</TABLE>
Rent expense in 1997 was $589,000.
The Company has entered into agreements with certain suppliers for the
production of subassemblies. The minimum purchase commitment under these
contracts at December 31, 1997 was approximately $304,000. Total purchases from
one such supplier were $5,565,000 in 1997.
FLOORPLAN REPURCHASE AGREEMENT
As an inducement to authorized dealers to increase their floor plan inventory to
enhance the visability of the Company's product, the Company has contracted with
a financial institution to provide financial assistance to certain dealers.
Under the contract, the Company has agreed to repurchase any merchandise sold by
the Company that was financed by the institutions. The financing is normally for
30 to 90 days. During 1997, the institutions financed approximately $3,036,000
under this arrangement. At December 31, 1997, the Company is contingently liable
for approximately $544,000 of merchandise sold under this arrangement. During
1997, the Company was not required to repurchase any merchandise subject to this
agreement.
F-30
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PROFIT SHARING AND MONEY PURCHASE PLAN
The Company has a contributory profit sharing plan (the Profit Sharing Plan)
whereby employees with one year of service are eligible to participate and may
contribute up to 15% of their salaries to the Profit Sharing Plan. The Company
matches the lesser of 7% of the employees' salary or the employees' individual
contribution and may also make discretionary contributions as determined by the
Board of Directors. In 1997, the Company contributed $234,000 to the Profit
Sharing Plan.
The Company also has a noncontributory money purchase plan (the Purchase Plan)
whereby employees with one year of service are eligible to participate in the
Purchase Plan. The Company may contribute up to 3% of eligible employee
salaries. In 1997, the Company contributed $50,000 to the Purchase Plan. The
Company discontinued contributions to the Purchase Plan beginning June 1997.
8. STOCKHOLDERS' EQUITY
TECTRIX INTERNATIONAL, INC.
At December 31, 1997, Tectrix International, Inc. had not issued shares to the
owners of TI. Accordingly, the accompanying combined statements of stockholders'
equity disclose no outstanding shares for TI at December 31, 1997.
STOCKHOLDERS' AGREEMENTS
In connection with the 1996 acquisition of CyberGear, Inc., the former CyberGear
stockholders may require the Company to repurchase all of their shares of common
stock and options, which were formerly CyberGear shares and options, if there is
not either a public offering (as defined) or a disposition (as defined) by
February 29, 1999.
The Company has also entered into an agreement with its stockholders that gives
the Company the right of first refusal on any sales of shares by the
stockholders.
F-31
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
The Tectrix Fitness Equipment, Inc. 1997 Stock Option/Stock Issuance Plan (the
1997 Plan) provides for the granting of incentive stock options (ISOs) and
nonstatutory stock options (NSOs) to purchase shares of the Company's common
stock to employees, officers, directors and consultants. Options expire no later
than ten years after date of grant and generally vest over five years. When the
stock options are issued, the option holders may elect to exercise their stock
options and obtain unvested stock. The unvested stock then vests over the same
period as the life of the original options. Unvested shares are subject to
repurchase by the Company. The exercise price per share for the options may not
be less than 85% of the fair market value of the stock on the date of grant
(110% of the fair market value for shareholders with a 10% or more interest in
the Company). The 1997 Plan also allows the Company to provide direct stock
issuances of vested or unvested shares.
The 1997 Plan is designed to serve as the successor to the previous 1990
Incentive Stock Option Plan (the 1990 Plan). All outstanding options under the
1990 Plan have been incorporated into the 1997 Plan, however, the options will
continue to be governed by the provisions of the agreements evidencing those
grants. Options under the 1990 Plan expire no later than ten years after date of
grant and generally vest over five years.
In connection with the 1996 acquisition of CyberGear, Inc., the Company assumed
the CyberGear, Inc. 1992 Stock Option Plan (the 1992 Plan) for all participants
of the 1992 Plan. The 1992 Plan provides for the grant of ISOs and NSOs to
purchase shares of the Company's common stock to employees, officers, directors
and consultants. The option price per share may not be less than the minimum
legal consideration required on the grant date for NSOs, nor less than the fair
value of the common stock on the date of grant for ISOs. Options expire no later
than ten years after date of grant and generally vest over three years.
At December 31, 1997, there were 1,278,892 common shares reserved for issuance
under the 1992 Plan and the 1997 Plan.
F-32
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
Stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE
OPTIONS PRICE PRICE
---------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 855,008 $ .95-3.60 $4.29
Granted 181,200 3.27-5.88 3.34
Canceled (237,400) 1.55-5.88 3.70
--------
Balance at December 31, 1997 798,808 .95-5.88 3.99
========
</TABLE>
The weighted average fair value of options issued in 1997 was $.96. Options
outstanding at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
NUMBER OF OPTIONS EXERCISE PRICE EXERCISABLE CONTRACTUAL LIFE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
113,400 $ .95 113,400 4 Years
101,892 1.07 93,820 7 Years
176,200 3.27 38,600 10 Years
407,316 5.88 81,466 8 Years
- ------------------ --------------
798,808 327,286
================== ==============
</TABLE>
In accordance with the 1997 Plan, all of the 176,200 options having an exercise
price of $3.27 may be immediately converted into shares. Upon conversion, 38,600
and 137,600 shares would be vested and unvested, respectively.
F-33
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The Company has elected to follow APB 25, in accounting for its employee stock
options. Had compensation costs for the Plans been determined based upon fair
value at the grant date consistent with SFAS No. 123 methodology, using the
minimum value method, the Companies would have reported the following pro forma
results at December 31, 1997:
<TABLE>
<S> <C>
Net loss as reported $ (949,000)
Net loss pro forma (1,189,000)
</TABLE>
The pro forma amounts in 1997 assume a risk free interest rate of 6% and an
average expected life of the options of six years.
9. FOREIGN OPERATIONS
Summarized financial information by geographic area is as follows at
December 31, 1997:
<TABLE>
<S> <C>
Net sales to unaffiliated customers:
United States $29,745,000
United Kingdom 1,855,000
Germany 1,757,000
-----------
$33,357,000
===========
Sales from United States to foreign operations $ 1,648,000
===========
Export sales from United States $ 5,251,000
===========
Operating income (loss):
United States $ (77,000)
United Kingdom (218,000)
Germany (280,000)
-----------
$ (575,000)
===========
Identifiable assets:
United States $10,046,000
United Kingdom 800,000
Germany 701,000
-----------
$11,547,000
===========
</TABLE>
Certain administrative expenses are allocated to geographic areas based on the
nature of the expense.
F-34
<PAGE>
Tectrix Fitness Equipment, Inc. and
Tectrix International, Inc.
Notes to Combined Financial Statements (continued)
10. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company has completed
an assessment of its systems to ensure Year 2000 compliance and believes the
systems will be compliant by the year 2000. There can be no assurance that the
systems of suppliers upon which the Company relies also will be compliant by the
Year 2000, however, the Company does not believe that any such failure by the
suppliers to convert would have a material adverse affect on the Company's
operations.
F-35
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 27, 1998, with respect to the
combined financial statements of Tectrix Fitness Equipment, Inc. and Tectrix
International, Inc. in this Form 8-K/A and to the incorporation of our report
into Cybex International, Inc.'s previously filed Registration Statement (Form
S-8 No. 333-29045); Registration Statement, as amended (Form S-3 No. 333-34309);
Registration Statement (Form S-8 No. 2-79563); Registration Statement File (Form
S-8 No. 33-46110); Registration Statement (Form S-8 No. 33-48124); Registration
Statement (Form S-8 No. 33-59947) and Registration Statement (Form S-8 No.
59945).
/s/ Ernst & Young LLP
Orange County, California
August 3, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF AUDITORS
As independent auditors, we hereby consent to the incorporation of our report
included in this Current Report on Form 8-K/A into the Company's previously
filed Form S-8 Registration Statement (File No. 333-29045), Form S-3
Registration Statement, as amended (File No. 333-34309), Form S-8 Registration
Statement (File No. 2-79563), Form S-8 Registration Statement (File No. 33-
46110), Form S-8 Registration (File No. 33-48124,), Form S-8 Registration
Statement (File No. 33-59947) and Form S-8 Registration Statement (File No.
59945).
SJ Mayled & Co.
August 3, 1998
