<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: OCTOBER 2, 1998
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 0-26496
CYBEX COMPUTER PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ALABAMA 63-0801728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4991 CORPORATE DRIVE
HUNTSVILLE, ALABAMA 35805
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(256) 430-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS 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 REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
AS OF NOVEMBER 13, 1998, 8,349,096 SHARES OF THE REGISTRANT'S COMMON STOCK
$.001 PAR VALUE, WERE O1UTSTANDING.
<PAGE> 2
CYBEX COMPUTER PRODUCTS CORPORATION
FORM 10-Q
OCTOBER 2, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1998 and
October 2, 1998 ................................................. 3
Condensed Consolidated Statements of Income for the three and six
months ended September 30, 1997 and October 2, 1998 ............ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 1997 and October 2, 1998 ............. 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 10
Part II - OTHER INFORMATION
Item 6 Exhibits ........................................................ 17
SIGNATURES ................................................................... 18
INDEX OF EXHIBITS ............................................................ 19
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, OCTOBER 2,
1998 1998
--------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 2,411,085 $ 14,104,767
Short-term investments ....................................................... 34,919,924 11,570,718
Accounts receivable- trade, less allowance for doubtful accounts
of $963,083 and $1,281,846, respectively ..................................... 11,430,990 12,085,442
Inventories ................................................................. 6,046,919 5,598,607
Other current assets ......................................................... 517,179 1,130,941
Deferred income taxes ........................................................ 1,144,000 1,144,000
------------ ------------
Total current assets .............................................. 56,470,097 45,634,475
Investments available for sale, at market ...................................... 3,040,833 2,627,077
Property and equipment, net of accumulated depreciation ........................ 7,251,912 11,956,476
Intangibles, net ............................................................... 3,821,371 3,964,106
Other assets ................................................................... 134,691 111,110
------------ ------------
$ 70,718,904 $ 64,293,244
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable ................................................................. $ 12,000,000 $ --
Accounts payable and accrued expenses ........................................ 4,697,027 4,190,031
Income taxes payable ......................................................... 1,313,415 710,423
Other current liabilities .................................................... 3,027,939 3,687,929
------------ ------------
Total current liabilities ........................................ 21,038,381 8,588,383
Deferred income taxes .......................................................... 109,000 109,000
Note payable ................................................................... 136,719 3,712
------------ ------------
Total liabilities ................................................ 21,284,100 8,701,095
Shareholders' equity:
Preferred stock, par value $.001 per share; 5,000,000 shares
authorized; no shares issued
Common stock, par value $.001 per share; 25,000,000 shares
authorized; March 31, 1998 -- 9,246,274 shares issued,
8,252,671 shares outstanding; October 2, 1998 -- 9,286,374
shares issued, 8,292,771 shares outstanding ................................. 9,246 9,286
Additional paid in capital .................................................... 34,714,753 35,176,213
Accumulated other comprehensive income (loss) ................................. 230,731 (110,251)
Retained earnings ............................................................. 19,780,627 25,817,442
Treasury stock, at cost; 993,603 shares ...................................... (5,300,553) (5,300,541)
------------ ------------
Total shareholders' equity .................................... 49,434,804 55,592,149
------------ ------------
$ 70,718,904 $ 64,293,244
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................................. $11,267,460 $19,599,651 $21,962,154 $38,165,225
Cost of sales ............................................. 5,344,454 9,133,384 10,393,375 17,856,954
----------- ----------- ----------- ----------
Gross profit .......................................... 5,923,006 10,466,267 11,568,779 20,308,271
Selling, general and administrative expenses .............. 2,740,046 4,455,688 5,452,069 9,086,504
Research and development expenses ......................... 794,268 1,449,103 1,568,980 2,627,035
----------- ----------- ----------- -----------
Operating income ...................................... 2,388,692 4,561,476 4,547,730 8,594,732
Other income .............................................. 597,858 259,249 1,083,244 600,967
----------- ----------- ----------- -----------
Income before provision for income taxes .............. 2,986,550 4,820,725 5,630,974 9,195,699
Provision for income taxes ................................ 1,050,000 1,591,744 1,992,000 3,158,884
----------- ----------- ----------- -----------
Net income .............................................. $ 1,936,550 $ 3,228,981 $ 3,638,974 $ 6,036,815
=========== =========== =========== ===========
Net income per common and common
equivalent share
Basic ................................................ $ .24 $ .39 $ .45 $ .73
=========== =========== =========== ===========
Diluted .............................................. $ .23 $ .37 $ .43 $ .70
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic ................................................. 8,158,097 8,291,207 8,153,337 8,278,045
=========== =========== =========== ===========
Diluted ............................................... 8,432,566 8,688,592 8,369,515 8,630,139
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, OCTOBER 2,
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,638,974 $ 6,036,815
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 249,195 755,335
Amortization of discount on investments ........................... (706,986) (282,844)
Provision for losses on accounts receivable ....................... 226,000 343,824
Loss on sale of property and equipment ............................ 9,581
(Gain) loss on sale of investments ................................ (203,742) 51,495
Changes in operating assets and liabilities:
Accounts receivable- trade ...................................... (1,851,849) (998,276)
Inventories ..................................................... (802,324) 448,312
Accounts payable and accrued expenses ........................... 270,402 (326,197)
Other ........................................................... 458,087 (320,122)
Income taxes payable ............................................ 72,035 (602,992)
------------ ------------
Net cash provided by operating activities .................. 1,349,792 5,114,931
Cash flows from investing activities:
Purchases of property and equipment ................................. (758,361) (5,337,311)
Proceeds from the sale of property and equipment .................... 115,027
Purchases of investments available for sale ......................... (18,803,969) (25,512,331)
Proceeds from the sale of investments ............................... 3,758,547 6,423,542
Proceeds from maturities of investments ............................. 28,649,000 42,471,000
------------ ------------
Net cash provided by investing activities .......................... 12,845,217 18,159,927
Cash flows from financing activities:
Repayment of note payable ........................................... (8,000,000) (12,133,007)
Proceeds from issuance of common stock .............................. 46,670 461,512
------------ ------------
Net cash (used in) financing activities ..................... (7,953,330) (11,671,495)
------------ ------------
Effect of exchange rate changes .................................... -- 90,319
------------ ------------
Net increase in cash and cash equivalents ......................... 6,241,679 11,693,682
Cash and cash equivalents, beginning of period ........................ 2,424,385 2,411,085
------------ ------------
Cash and cash equivalents, end of period .............................. $ 8,666,064 $ 14,104,767
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ............................ $ 13,216 $ 27,118
============ ============
Cash paid during the period for taxes .............................. $ 1,960,000 $ 3 ,449,627
============ ============
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
CYBEX COMPUTER PRODUCTS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Cybex Computer Products Corporation (the Company) have been
prepared by management in accordance with generally accepted accounting
principles for interim financial information and in conjunction with the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments necessary for a fair presentation of the interim
condensed consolidated financial statements have been included, and all
adjustments are of a normal and recurring nature. The condensed consolidated
financial statements as of and for the interim period ended October 2, 1998
should be read in conjunction with the Company's consolidated financial
statements as of and for the year ended March 31, 1998 included in the
Company's Form 10-K filed June 26, 1998. Operating results for the three and
six months ended October 2, 1998 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1999. The March 31, 1998
balance sheet data presented herein was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.
Beginning in the first quarter of Fiscal 1999, the Company elected to
report quarterly results based on a 13 week quarter. The change was made to
reflect the results of operations and financial position of the Company and its
subsidiaries on a more timely basis and to increase operating and financial
reporting efficiency.
2. LINE OF CREDIT
The Company renegotiated its line of credit in July, 1998, to provide
borrowings of up to $7.5 million at the LIBOR plus 2.5%. The line of credit
expires in August, 1999. There were no borrowings outstanding under the
Company's line of credit as of October 2, 1998, or March 31, 1998.
Polycon Computertechnik, GmbH ("PolyCon"), a subsidiary of the
Company, has a bank line of credit which provides for borrowings up to
$2,500,000. The Company had no amounts outstanding under the line of credit at
October 2, 1998 , or March 31, 1998.
3. STOCK OPTIONS
Options to purchase 38,000 shares of common stock were issued on
varying dates throughout the quarter to employees under the 1995 Employee Stock
Option Plan and the 1998 Employee Stock Option Plan at the market price as of
the effective date. Also, options to purchase 18,000 shares of common stock
were exercised during the quarter.
4. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Financial Accounting
Standards Board Statement 130, Reporting Comprehensive Income ("Statement
130"). Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of Statement 130
has no impact on net income or shareholders' equity. Statement 130 requires
unrealized gains or
6
<PAGE> 7
losses on the Company's foreign currency translation adjustments and unrealized
holding gains or losses on securities, which prior to adoption were reported
separately in shareholders' equity, to be included in accumulated other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement 130. During the second quarter of
Fiscal 1999 and Fiscal 1998, total comprehensive income amounted to $3,004,368
and $2,188,535, respectively. For the first six months of Fiscal 1999 and
Fiscal 1998, total comprehensive income amounted to $5,695,833 and $3,908,144,
respectively.
5. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the three months and six months ended September 30, 1997, and
October 2, 1998, is as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the three months ended September 30, 1997
Basic EPS
Income available to common shareholders $1,936,550 8,158,097 $ 0.24
Effect of Dilutive Securities
Stock Options 274,469
Diluted EPS
Income available to common shareholders
and assumed conversions $1,936,550 8,432,566 $ 0.23
For the six months ended September 30, 1997
Basic EPS
Income available to common shareholders $3,638,974 8,153,337 $ 0.45
Effect of Dilutive Securities
Stock Options 216,178
Diluted EPS
Income available to common shareholders
and assumed conversions $3,638,974 8,369,515 $ 0.43
For the three months ended October 2, 1998
Basic EPS
Income available to common shareholders $3,228,981 8,291,207 $ 0.39
Effect of Dilutive Securities
Stock Options 397,385
Diluted EPS
Income available to common shareholders
and assumed conversions $3,228,981 8,688,592 $ 0.37
</TABLE>
7
<PAGE> 8
5. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the six months ended October 2, 1998
Basic EPS
Income available to common shareholders $6,036,815 8,278,045 $ 0.73
Effect of Dilutive Securities
Stock Options 352,094
Diluted EPS
Income available to common shareholders
and assumed conversions $6,036,815 8,630,139 $ 0.70
</TABLE>
6. SUBSEQUENT EVENT
On November 13, 1998, the Company announced a 3 for 2 stock split,
effected as a 50% stock dividend. The new shares will be distributed on or
about December 15, 1998, for shareholders of record as of November 23, 1998.
The financial statements presented herein do not reflect the effect of the
stock split. The proforma calculation of basic and diluted earnings per share
("EPS") giving effect to the stock split for the three months and six months
ended September 30, 1997, and October 2, 1998, is as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the three months ended September 30, 1997
Basic EPS
Income available to common shareholders $1,936,550 12,237,145 $ 0.16
Effect of Dilutive Securities
Stock Options 411,704
Diluted EPS
Income available to common shareholders
and assumed conversions $1,936,550 12,648,849 $ 0.15
For the six months ended September 30, 1997
Basic EPS
Income available to common shareholders $3,638,974 12,230,005 $ 0.30
Effect of Dilutive Securities
Stock Options 324,267
Diluted EPS
Income available to common shareholders
and assumed conversions $3,638,974 12,554,272 $ 0.29
For the three months ended October 2, 1998
Basic EPS
Income available to common shareholders $3,228,981 12,436,810 $ 0.26
Effect of Dilutive Securities
Stock Options 596,078
Diluted EPS
Income available to common shareholders
and assumed conversions $3,228,981 13,032,888 $ 0.25
</TABLE>
8
<PAGE> 9
6. SUBSEQUENT EVENT (CONTINUED)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the six months ended October 2, 1998
Basic EPS
Income available to common shareholders $6,036,815 12,417,067 $ 0.49
Effect of Dilutive Securities
Stock Options 528,142
Diluted EPS
Income available to common shareholders
and assumed conversions $6,036,815 12,945,209 $ 0.47
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in the Company's
form 10-K for the year ended March 31, 1998 filed with the Securities and
Exchange Commission on June 26, 1998.
GENERAL
The Company develops, produces and markets keyboard, video monitor and
mouse ("KVM") switch and extension products for use in the computer industry.
The Company's KVM switch products ("KVM Switch Products") provide up to four
users, each with a separate keyboard, video monitor and mouse, with the
capability to control up to 2,160 personal computers ("PCs"), thereby
eliminating the need for individual keyboards, video monitors or mice ("KVM
Peripherals") for the controlled PCs. Elimination of KVM Peripherals can provide
significant cost reduction (lower initial investment and ongoing utility costs)
and space savings as well as more efficient technical support capabilities. The
Company's KVM Switch Products allow users to control IBM-compatible and
Macintosh PCs and many Sun, Hewlett Packard, Digital Equipment Corporation
(DEC), IBM and Silicon Graphics workstations functioning either as stand-alone
systems or as file, communications or print servers ("Servers") operating within
a local area network ("LAN"). The Company also has computer interfaces for its
Autoboot Commander 4xP(TM)/1xP(TM), which operate with models of IBM RS/6000,
Hewlett Packard, DEC's Alpha, and Silicon Graphic's Indigo workstations. The
Company's AutoView Commander(TM), introduced in mid Fiscal 1997, utilizes a cost
reduced design, which continues to provide the architecture for mid range and
entry level products. The Company introduced SwitchView(TM), a two and four port
KVM Switch Product in mid Fiscal 1998, and is the Company's first product
designed to be mass marketed. As a result of the acquisition of PolyCon the
Company obtained several mid range to high-end switching solutions including the
PolyCon/S, a single user console switching hub, and the PolyCon/XS, a multi-user
matrix console switching hub. Certain KVM Switch Products are certified by
Novell Corporation for use with its network operating system software Netware
4.1. The Company's KVM Switch Products are particularly useful in networking
environments where multiple computers are dedicated as Servers and in situations
where multiple computers need to be controlled from one location to facilitate
network management.
The Company's KVM extension products ("KVM Extension Products") allow
users to separate the KVM Peripherals up to 600 feet from the PC. In addition,
certain KVM Extension Products allow multiple users shared access to the same
PC from different KVM Peripherals. Also, certain other KVM Extension Products
utilize standard Category 5 UTP cabling, a commonly installed cable in Ethernet
networks, and reduce cabling costs by half. KVM Extension Products are
particularly useful in congested work areas or where working conditions may be
hazardous to the function of the computer.
The Company evaluates its products and its customer needs on an ongoing
basis to advance its competitive position in the marketplace. As part of this
process, the Company seeks expansion not only through internal development but
through strategic acquisition and expansion efforts. Consistent with this
philosophy, the Company completed its acquisition of PolyCon on December 31,
1997 discussed later herein. The acquisition of PolyCon included intellectual
property that the Company plans to leverage and integrate with its research and
development resources worldwide to expand the Company's high-end console
switching products for mid- and large-scale networks. The acquisition of
PolyCon was consistent with the Company's strategy to expand its operations in
Europe and immediately added new customer relationships and expanded
distribution channels.
The Company's net sales have increased in each fiscal year due primarily
to increases in the number of units sold to both new and existing customers.
These annual net sales increases reflect the Company's strategy of increasing
unit volume and market share through the introduction of new products as well
as increasingly enhanced generations of already accepted products with
increased functionality which are price competitive as compared to prior
generations of the Company's products and to the products of competitors. As a
part of this strategy, the Company seeks to be price competitive and to be the
high quality provider of products in its markets. This strategy has enabled the
Company to sell succeeding generations of products to existing customers as
well as to increase its market share by selling products to new customers.
10
<PAGE> 11
The Company has broadened its marketing strategy of expanding channels of
distribution by increased penetration in the OEM market, major distributor
markets and catalog markets. In Fiscal 1997, the Company announced its first
products designed specifically for the OEM market. These products are intended
to expand the Company's share of sales in the OEM marketplace. During this same
period, the Company began shipping certain KVM Switch Products to a major
worldwide catalog marketer under private label. During the second quarter of
Fiscal 1998, the Company also began distribution of its branded products with a
major distributor. During Fiscal 1999 the Company was named the exclusive
supplier of a major systems integrator of desktop and networked computers.
Also, the Company was awarded a significant contract with the largest enclosure
manufacturer in the world. These relationships have broadened the Company's
channels of distribution of its products and are expected to increase market
share.
The Company expanded its marketing strategy to include the retail channel
of distribution with the introduction of SwitchView(TM), which targets the
desktop market. SwitchView(TM) was designed to address the high volume sales
channels and is the Company's first product targeted to the mass market. With
the acquisition of PolyCon, the Company believes it is the only KVM Switch
Product manufacturer offering products ranging from the entry level PC single
user switch to multi-user, multiplatform switches and console switching
solutions that can control thousands of computers in data centers and server
farms.
The Company contracts with third parties to provide completed
subassemblies of its products. The Company outsources entire products (turnkey)
for certain stable high volume products. The Company believes that outsourcing
manufacturing generally enables the Company to control product costs more
effectively.
The Company continually evaluates new product opportunities and engages in
substantial research and product development efforts. The Company expenses all
product research and development costs as incurred. Additionally, the Company
also incurs substantial expenses related to advertising, participation in trade
shows and other sales promotions.
Another important part of the Company's strategy is to emphasize customer
service and support. The Company offers a 30-day money back guarantee for all
of its products, a one year warranty for repair or replacement and allows
additional rights of return to certain of its customers. The Company estimates
and accrues a liability for sales and warranty returns. Actual returns have not
been significant to date. The Company also offers sales discounts to its
customers based on the level of sales. Such discounts have historically not had
a significant impact on the Company's results of operations.
The Company believes that increasing its international sales is an
important element in the overall strategy of future revenue growth.
International sales comprised 32% of the Companies sales for the six months
ended October 2, 1998 and 26% and 21% of the Company's total sales for
comparable periods in Fiscal 1998 and Fiscal 1997, respectively. International
sales have continued to increase as a result of the Company's operations
established in Shannon, Ireland, through its subsidiary Cybex Europe Ltd.
("Cybex Europe") in 1996 and the acquisition of PolyCon located in Steinhagen,
Germany, in December, 1997.
On March 30, 1998, the Company announced a 3-for-2 stock split, effected
as a 50% stock dividend. The additional new shares were distributed to
shareholders on April 28, 1998.
In August, 1998, The Company moved into it's newly constructed corporate
facility in Hunstville, Alabama built on an 18 acre purchased in Fiscal 1997.
The new facility contains approximately 120,000 square feet with space for
future expansion. The facility is designed to house the Company's sales,
marketing, research and development, manufacturing and administrative
functions.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table presents selected financial information derived from
the Company's statements of income expressed as a percentage of net sales for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT. 30, OCT. 2, SEPT. 30, OCT. 2,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 47.4 46.6 47.3 46.8
----- ----- ----- -----
Gross profit..................................... 52.6 53.4 52.7 53.2
Research and development expenses.............. 7.1 7.4 7.2 6.9
Selling, general and administrative expenses... 24.3 22.7 24.8 23.8
----- ----- ----- -----
Operating income................................. 21.2 23.3 20.7 22.5
Other income................................... 5.3 1.3 4.9 1.6
----- ----- ----- -----
Income before income taxes....................... 26.5 24.6 25.6 24.1
Provision for income taxes..................... 9.3 8.1 9.0 8.3
----- ----- ----- -----
Net income....................................... 17.2% 16.5% 16.6% 15.8%
===== ===== ===== =====
</TABLE>
Three Months Ended October 2, 1998 Compared to the Three Months Ended September
30, 1997
Net sales increased 74.0% to $19.6 million in the three months ended
October 2, 1998 from $11.3 million in the three months ended September 30,
1997. The net sales increase resulted from increased sales volume of the
Company's KVM Switch Products and Extension Products, as well as additional
revenues provided from the acquisition of PolyCon in December 1997. Sales of
KVM Switch Products increased 86.1% to $17.5 million in the three months ended
October 2, 1998 from $9.4 million in the three months ended September 30, 1997,
primarily due to sales growth of the mid- and high-end Switch Products, as well
as the entry level KVM Switch Products. The mid- to high-end products grew
59.9% from second quarter of Fiscal 1998 to the second quarter of Fiscal 1999,
while the entry level product segment grew 307.4% for the same period. The
entry level product sales growth was primarily due to sales of SwitchView(TM),
which was introduced in mid Fiscal 1998. Sales of KVM Extension Products
increased 16.0% to $1.9 million in the three months ended October 2, 1998 from
$1.6 million in the three months ended September 30, 1997. The PC Plus line and
the PolyCon RC line accounted primarily for the growth in KVM Extension Product
sales.
As a percentage of net sales, the Company's KVM Switch Products increased
to 89.1% from 83.2% and KVM Extension Products declined to 9.5% from 14.3%
during the same period in Fiscal 1998. Management anticipates that sales of KVM
Extension Products will continue to be a substantial portion of the Company's
net sales.
International sales increased 152.2% to $6.4 million in the three months
ended October 2, 1998 from $2.5 million in the three months ended September 30,
1997 and accounted for 32.9% of total revenues. Sales to customers in Europe
represented approximately 25.3% of total revenues for the quarter.
Gross profit is affected by many factors including: product mix,
discounts, price competition, new product introductions and startup costs,
increasing material and labor costs and the levels of outsourcing of
manufacturing and assembly services. Gross profit increased 76.7% to $10.5
million in three months ended October 2, 1998 from $5.9 million in the three
months ended September 30, 1997. Gross profit as a percentage of net sales
increased from 52.6% to 53.4% due to increased volume of newer products
designed for margin retention while being discounted for volume distributions,
cost reductions due to volume efficiencies and increased outsourcing, and
design changes, all of which were offset somewhat by increases in warranty and
inventory reserves. The increase in reserves was the result of the Company's
evaluation of the composition of inventory and the increased sales to major
distributors and OEMs, which are subject to certain rights of return. The
Company believes its potential exposure to these risks is adequately reserved.
12
<PAGE> 13
Selling, general and administrative (SG&A) expenses increased 62.6% to
$4.5 million (22.7% of net sales) in the three months ended October 2, 1998,
from $2.7 million (24.3% of net sales) in the three months ended September 30,
1997. The increase in dollars spent for SG&A reflects the increased level of
expenditures in administration, sales, customer support, advertising, and
marketing activities required to support the Company's expanded sales base
domestically as well as the additional SG&A costs for PolyCon acquired in
December 1997. The increase also includes amounts accrued for legal costs
associated with the defense of a patent infringement claim discussed below.
Management anticipates that the dollar amount of selling, general and
administrative expense will continue to increase.
Research and development (R&D) expense grew 82.4% to $1.5 million or 7.4%
of net sales in the three months ended October 2, 1998, from $.8 million or
7.1% of net sales in the three months ended September 30, 1997. The increase in
R&D reflects the additional expenses of PolyCon acquired in December 1997.
Management anticipates that the dollar amount of research and development
expenses will increase and as a percentage of net sales will increase slightly.
As a result of the factors discussed above, operating income increased
91.0% to $4.6 million (23.3% of net sales) in the three months ended October 2,
1998, from $2.4 million (21.2% of net sales) in the three months ended
September 30, 1997.
Other income decreased 56.7% to $259,000 (1.3% of net sales) in the three
months ended October 2, 1998, compared to $598,000 in the three months ended
September 30, 1997. The decrease in other income was the result of a decrease
in funds invested as a result of the cash requirements for the acquisition of
PolyCon ($8.8 million including transaction fees) in December 1997 and cash
requirements for the new facility construction discussed herein. Other income
was also effected by realized losses on the sale of certain investments.
Net income increased 66.7% to $3.2 million (16.5% of net sales) in the
three months ended October 2, 1998, from $1.9 million (17.2% of net sales) in
the three months ended September 30, 1997, as a result of the factors discussed
above.
Six Months Ended October 2, 1998 Compared to the Six Months Ended September 30,
1997.
Net sales increased 73.8% to $38.2 million for the six months ended
October 2, 1998. The increase in net sales was due to increased sales of the
Company's KVM Switch and KVM Extension Products. Sales of KVM Switch Products
increased 84.2% to $34.0 million in the six months ended October 2, 1998 from
$18.5 million in the six months ended September 30, 1997. Sales of KVM
Extension Products increased 16.9% to $3.5 million in the six months ended
October 2, 1998 from $3.0 million in the six months ended September 30, 1997.
The PC Plus line and the PolyCon RC line accounted primarily for the growth in
KVM Extension Product sales. As a percentage of net sales, the Company's KVM
Switch Products increased to 89.2% from 84.3% and KVM Extension Products
declined to 9.2% from 13.6% during the same period. International sales
increased 143.2% to $12.1 million or 32.0% of net sales in the six months ended
October 2, 1998 as compared to $5.0 million or 22.8% of net sales in the six
months ended September 30, 1997.
Gross profit increased 77.1% to $20.3 million in the six months ended
October 2, 1998 from $11.5 million in the six months ended September 30, 1997.
Gross profit as a percentage of net sales increased from 52.7% to 53.2% due to
increased volume of newer products designed for margin retention while being
discounted for volume distributions, cost reductions due to volume efficiencies
and increased outsourcing, and design changes, all of which were offset
somewhat by increases in warranty and inventory reserves. The increase in
reserves was the result of the Company's evaluation of the composition of
inventory and the increased sales to major distributors and OEMs, which are
subject to certain rights of return. . The Company believes its potential
exposure to these risks is adequately reserved.
Selling, general and administrative expenses increased 66.7% to $9.1
million or 23.8% of net sales in the six months ended October 2, 1998 from $5.5
million or 24.8% of net sales in the six months ended September 30, 1997. The
increase in dollars spent for SG&A reflects the increased level of expenditures
in administration, sales, customer
13
<PAGE> 14
support, advertising, and marketing activities required to support the
Company's expanded sales base domestically as well as the additional SG&A costs
for PolyCon acquired in December 1997.
Research and development expense was $2.6 million or 6.9% of net sales in
the six months ended October 2, 1998 as compared to $1.6 million or 7.2% of net
sales for the six months ended September 30, 1997. The increase in dollars
spent for R&D reflects the additional expenses of PolyCon acquired in December
1997. Management anticipates that the dollar amount of research and development
expenses will increase and the percentage of net sales to increase slightly.
As a result of the factors discussed above, operating income increased
89.0% to $8.6 million or 22.5% of net sales for the six months ended October 2,
1998 as compared to $4.5 million or 20.7% of net sales for the six months ended
September 30, 1997.
Other income decreased to $.6 million or 1.6% of net sales in the six
months ended October 2, 1998 from $1.1 million or 4.9% of net sales in the six
months ended September 30, 1997. The decrease in other income recognized was
the result of a decrease in funds invested as a result of the cash requirements
for the acquisition of PolyCon ($8.8 million including transaction fees) in
December 1997 and cash requirements for the new facility construction discussed
herein. Other income was also effected by realized losses on the sale of
certain investments.
Net income increased 65.9% to $6.0 million or 15.8% of net sales for the
six months ended October 2, 1998 from $3.6 million or 16.6% of net sales for
the six months ended September 30, 1997 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in July 1995, the Company financed
its operations primarily through cash flow from operations, supplemented with
borrowings under its line of credit as needed. As of October 2, 1998, and for
the six months then ended, the Company had an available line of credit of $7.5
million with no outstanding borrowings. The Company renegotiated a $2.5 million
increase in the line of credit during July 1998, up from an available line of
$5 million. The Company's German subsidiary, PolyCon, has a bank line of credit
which provides for borrowings up to $2,500,000. The Company had no amounts
outstanding under the lines of credit at October 2, 1998.
The Company's working capital position improved from $38,472,549 as of
March 31, 1998 to $39,673,169 as of October 2, 1998 (adjusted to include
$3,040,833 and $2,627,077 of long term-investments, respectively). This
improvement in the Company's working capital position was due primarily to
increased earnings during the six months ended October 2, 1998 partially offset
by the Company's investment in it's new corporate headquarters.
Cash provided from operating activities increased from approximately $1.3
million for the six months ended September 30, 1997 to $5.1 million for the six
months ended October 2, 1998. This increase was caused by the offsetting effect
of an increase in net income, an increase in accounts receivable at a
decreasing rate from the prior year and a decrease in inventory. The increase
in net income is attributed to the increase in sales. The increase in accounts
receivable at a decreasing rate is attributed to the increase in sales offset
somewhat by increased attention to timely collections of outstanding
receivables. The decrease in inventory is also attributed to the increase in
sales, as well as to efforts to control the levels of inventory on-hand. The
Company will continue to increase the level of turnkey manufacturing of
products as they mature and designs stabilize, thereby reducing the level of
inventory relative to those products that the Company must maintain.
Capital expenditures totaled $5.3 million in the first six months of
Fiscal 1999. Approximately $3.9 million of the capital expenditures related to
the construction of the new corporate facility in Huntsville, Alabama. The
remaining capital expenditures related to purchases of shop equipment and
office furniture for the Company's new facility and purchases of equipment for
its subsidiaries.
In August, 1998, The Company moved into it's newly constructed corporate
facility in Hunstville, Alabama built on land purchased in Fiscal 1997. The new
facility contains approximately 120,000 square feet with space for future
14
<PAGE> 15
expansion. The facility is designed to house the Company's sales, marketing,
research and development, manufacturing and administrative functions. The
construction of the facility cost aproximately $7.6 million.
The Company believes that its current financial position and existing cash
and investments along with earnings and amounts available under its lines of
credit will be sufficient to meet its cash requirements over the next twelve
months.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
As part of a Year 2000 project to evaluate and determine the areas of
risk , as well as to provide assurance that the Year 2000 problem is adequately
addressed, the Company has identified its Year 2000 risk in four categories:
products; internal business software; internal non-financial software and
manufacturing equipment; and external noncompliance by customers and suppliers.
PRODUCTS. The Company has completed the review of its products. The review
determined that our products contain no software or firmware that is
date-sensitive and will therefore not be affected by dates at the turn of the
century. As a result, all current products are Year 2000 compliant.
INTERNAL BUSINESS SOFTWARE. In efforts to increase efficiencies in all
aspects of its business, the Company purchased an Enterprise Resource Planning
System (ERP System) which the software vendor has indicated is Year 2000
compliant. The total hardware, software and installation cost of the ERP System
was approximately $900,000. The Company began implementation of the ERP System
during Fiscal 1998 and was on-line at the beginning of Fiscal 1999. The
Company's financial systems are Year 2000 compliant.
INTERNAL NON-FINANCIAL SOFTWARE AND MANUFACTURING EQUIPMENT. The Company
is in the data gathering phase with regard to non-financial software and
manufacturing equipment and is currently gathering data to assess the impact of
the Year 2000 on its non-financial systems with Year 2000 compliance scheduled
for June, 1999. The Company recently moved into a newly constructed facility.
All systems, such as the heating and cooling system and the security system, of
the new facility are Year 2000 compliant. All shop equipment and manufacturing
equipment purchased for the facility is Year 2000 compliant. Management
anticipates the cost of Year 2000 compliance on the older equipment will not be
material to the Company.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the
process of identifying and contacting its critical suppliers, service providers
and contractors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own Year
2000 issues. It is expected that full identification will be completed by June
1999. To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers, service providers or contractors to
those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers, service providers and
contractors. However, the Company has multiple source vendors for a majority of
its products, which minimizes the risk of an adverse affect on operations. The
Company does not currently have any formal information concerning the Year 2000
compliance status of its customers but has received indications that most of
its customers are addressing Year 2000 compliance issues. In the event that any
of the Company's significant customers and suppliers do not successfully and
timely achieve Year 2000 compliance, and the Company is unable to replace them
with new customers or alternate suppliers, the Company's business or operations
could be adversely affected.
COSTS. The total costs associated with becoming Year 2000 compliant is not
expected to be material to the Company's financial position. The estimated
total cost of the Year 2000 project is aproximately $1.2 million. The total
amount expended on the project through October 2, 1998 was approximately $1
million , of which $900,000 related to the purchase and installation of the ERP
System. The remaining amount related to replacement of non-compliant software
and hardware and related to costs associated with evaluating and communicating
with
15
<PAGE> 16
significant customers and suppliers. The estimated future cost of completing the
Year 2000 project is estimated to be approximately $200,000; aproximately
$100,000 relates to replacement of non-compliant software and hardware and the
remaining $100,000 relates to costs associated with evaluating and communicating
with significant customers and suppliers. Funds for the ERP System purchase and
installation were included in the Company's capital expenditure budget. The
remaining costs have been and will be funded by cash flows from operations.
RISKS. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 issue, resulting in part from the
uncertainty of the Year 2000 readiness of third-party customers and suppliers,
the Company is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity and financial condition. The Year 2000 project is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 readiness and
compliance of its significant customers and suppliers. The Company believes
that the successful implementation of its ERP System and completion of the Year
2000 project as scheduled, the possibility of significant interruptions of
normal operations should be reduced.
CONTINGENCIES
The Company has certain contingent liabilities resulting from litigation
initiated by Apex PC Solutions ("Apex"). Apex contends in a lawsuit filed in
February 1998 against the Company and others, in the US District Court in
Seattle, Washington, that the Company has infringed Patent No. 5,721,842.
Although the outcome of any litigation can never be certain , the Company does
not believe that any of its products are covered by any valid claim of Apex's
patent. It is the Company's opinion that the outcome of such contingencies will
not materially affect its business, operations, financial conditions or cash
flows. The Company has also been involved from time to time in litigation in
the normal course of its business. In the opinion of management, the Company is
not aware of any other pending or threatened matter that will have a material
adverse effect on the Company's business, operations, financial condition or
cash flows.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q , the words "believe," "anticipate," "think,"
"intend," "will be," and similar expressions identify forward looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward looking
statements which speak only as of the date hereof. Readers are also urged to
carefully review and consider the various disclosures made by the Company which
attempt to advise interested parties of the factors which affect the Company's
business, including the disclosures made in other periodic reports on Forms
10-K, 10-Q and 8K filed with the Securities and Exchange Commission.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) The following exhibits are being filed with this report:
Exhibit No. Description
27 Financial Data Schedule (For SEC use only)
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CYBEX COMPUTER PRODUCTS CORPORATION
/s/ Douglas E. Pritchett
--------------------------------------
Douglas E. Pritchett
Senior Vice President - Finance and
Chief Financial Officer and Treasurer
Date: November 13, 1998
18
<PAGE> 19
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule (For SEC use only)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> OCT-02-1998
<EXCHANGE-RATE> 1
<CASH> 14,105
<SECURITIES> 14,198
<RECEIVABLES> 13,367
<ALLOWANCES> 1,282
<INVENTORY> 5,599
<CURRENT-ASSETS> 45,634
<PP&E> 13,857
<DEPRECIATION> 1,901
<TOTAL-ASSETS> 64,293
<CURRENT-LIABILITIES> 8,588
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 60,883
<TOTAL-LIABILITY-AND-EQUITY> 64,293
<SALES> 38,165
<TOTAL-REVENUES> 38,165
<CGS> 17,857
<TOTAL-COSTS> 17,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 343
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 9,196
<INCOME-TAX> 3,159
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,037
<EPS-PRIMARY> .73
<EPS-DILUTED> .70
</TABLE>
