<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 1, 1999
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 15, 1999, 12,784,504 SHARES OF THE REGISTRANT'S COMMON STOCK
$.001 PAR VALUE, WERE OUTSTANDING.
<PAGE> 2
CYBEX COMPUTER PRODUCTS CORPORATION
FORM 10-Q
OCTOBER 1, 1999
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, 1999 and
October 1, 1999 .......................................................... 3
Condensed Consolidated Statements of Income for the three and six
months ended October 2, 1998 and October 1, 1999.......................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended October 2, 1998 and October 1, 1999.......................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............... 18
Part II - OTHER INFORMATION
Item 2. Changes in Securities..................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ...................... 19
Item 6. Exhibits.................................................................. 20
SIGNATURES.............................................................................. 21
INDEX OF EXHIBITS....................................................................... 22
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, OCTOBER 1,
1999 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 4,060,565 $ 31,060,534
Short-term investments.............................................. 26,000,778 6,881,703
Short-term investments, pledged as collateral for note payable...... 16,000,000
Accounts receivable - trade, less allowance for doubtful accounts
of $1,338,863 and $1,537,618, respectively.......................... 15,948,952 18,725,858
Inventories......................................................... 7,447,252 7,412,604
Other current assets................................................ 1,209,852 1,550,501
Deferred income taxes............................................... 1,838,300 1,838,300
------------ ------------
Total current assets..................................... 72,505,699 67,469,500
Investments available for sale, at market........................... 2,930,404 2,804,684
Property and equipment, net of accumulated depreciation............. 12,552,112 12,317,621
Intangibles, net.................................................... 3,709,712 3,495,071
Deferred income taxes............................................... 832,224 833,743
Other assets........................................................ 320,270 157,776
------------ ------------
$ 92,850,421 $ 87,078,395
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable........................................................ $ 16,000,000 $ --
Accounts payable and accrued expenses............................... 5,256,745 4,944,150
Income taxes payable................................................ 1,617,471 1,682,540
Other current liabilities........................................... 5,780,231 6,661,659
------------ ------------
Total current liabilities............................... 28,654,447 13,288,349
Shareholders' equity:
Preferred stock, par value $.001 per share; 5,000,000 shares
authorized; no shares issued......................................
Common stock, par value $.001 per share; 50,000,000 shares
authorized; March 31, 1999 -- 14,173,281 shares issued,
12,682,877 shares outstanding; October 1, 1999 -- 14,250,185
shares issued, 12,757,479 shares outstanding....................... 14,173 14,250
Additional paid in capital............................................ 37,500,614 38,146,398
Accumulated other comprehensive income................................ (231,208) (490,801)
Retained earnings..................................................... 32,212,948 41,483,769
Treasury stock, at cost; 1,490,404 and 1,492,706 shares.............. (5,300,553) (5,363,570)
------------ ------------
Total shareholders' equity........................... 64,195,974 73,790,046
------------ ------------
$ 92,850,421 $ 87,078,395
============ ============
</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
OCTOBER 2, OCTOBER 1, OCTOBER 2, OCTOBER 1,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................................. $19,599,651 $27,500,153 $38,165,225 $51,799,908
Cost of sales.............................................. 9,133,384 12,091,795 17,856,954 23,290,888
----------- ----------- ----------- -----------
Gross profit........................................... 10,466,267 15,408,358 20,308,271 28,509,020
Selling, general and administrative expenses............... 4,546,091 6,545,002 9,264,946 12,048,701
Research and development expenses.......................... 1,449,103 1,633,016 2,627,035 3,297,645
----------- ----------- ----------- -----------
Operating income....................................... 4,471,073 7,230,340 8,416,290 13,162,674
Other income............................................... 349,652 316,562 779,409 768,767
----------- ----------- ----------- -----------
Income before provision for income taxes............... 4,820,725 7,546,902 9,195,699 13,931,441
Provision for income taxes................................. 1,591,744 2,524,097 3,158,884 4,660,620
----------- ----------- ----------- -----------
Net income................................................. $ 3,228,981 $ 5,022,805 $ 6,036,815 $ 9,270,821
=========== =========== =========== ===========
Net income per common and common
equivalent share
Basic................................................. $ .26 $ .39 $ .49 $ .73
=========== =========== =========== ===========
Diluted............................................... $ .25 $ .37 $ .47 $ .69
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic................................................. 12,436,811 12,755,113 12,417,068 12,738,782
=========== =========== =========== ===========
Diluted............................................... 13,032,888 13,538,488 12,945,209 13,446,431
=========== =========== =========== ===========
</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
OCTOBER 2, OCTOBER 1,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 6,036,815 $ 9,270,821
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 755,335 1,186,478
Amortization of discount on investments................................ (282,844) (179,360)
Provision for losses on accounts receivable............................ 343,824 284,000
Loss on sale of property and equipment................................. 9,581 --
(Gain) loss on sale of investments..................................... 51,495 (92,745)
Changes in operating assets and liabilities:
Accounts receivable- trade........................................... (998,276) (3,060,906)
Inventories.......................................................... 448,312 34,648
Accounts payable and accrued expenses................................ (326,197) (288,421)
Other................................................................ (320,122) 694,148
Income taxes payable................................................. (602,992) 63,550
------------ ------------
Net cash provided by operating activities.......................... 5,114,931 7,912,213
Cash flows from investing activities:
Purchases of property and equipment...................................... (5,337,311) (738,622)
Proceeds from the sale of property and equipment......................... 115,027 --
Purchases of investments available for sale.............................. (25,512,331) (20,445,433)
Proceeds from the sale of investments.................................... 6,423,542 12,775,091
Proceeds from maturities of investments.................................. 42,471,000 43,009,000
------------ ------------
Net cash provided by investing activities........................... 18,159,927 34,600,036
Cash flows from financing activities:
Repayment of note payable................................................ (12,133,007) (16,000,000)
Proceeds from issuance of common stock................................... 461,512 645,861
Purchase of treasury stock............................................... -- (63,017)
------------ ------------
Net cash used in financing activities.................................... (11,671,495) (15,417,156)
------------ ------------
Effect of exchange rate changes........................................ 90,319 (95,124)
------------ ------------
Net increase in cash and cash equivalents........................... 11,693,682 26,999,969
Cash and cash equivalents, beginning of period............................. 2,411,085 4,060,565
------------ ------------
Cash and cash equivalents, end of period................................... $ 14,104,767 $ 31,060,534
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................. $ 27,118 $ 18,053
============ ============
Cash paid during the period for taxes.................................... $ 3,449,627 $ 4,542,313
============ ============
</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 1, 1999 should be
read in conjunction with the Company's consolidated financial statements as of
and for the year ended March 31, 1999 included in the Company's Form 10-K filed
June 23, 1999. Operating results for the three and six months ended October 1,
1999 are not necessarily indicative of the results that may be expected for the
year ended March 31, 2000. The March 31, 1999 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.
Certain reclassifications have been made to the Fiscal 1999
consolidated financial statements in order to conform to the Fiscal 2000
presentation. These reclassifications had no effect on previously reported net
income, operating cash flows, or total shareholder's equity.
2. LINE OF CREDIT
The Company has a line of credit to provide borrowings of up to $7.5
million at LIBOR plus 2.5%. The line of credit expires in August, 2000. There
were no borrowings outstanding under the Company's line of credit as of October
1, 1999, or March 31, 1999.
3. COMPREHENSIVE INCOME
The Company records unrealized gains or losses on the Company's
foreign currency translation adjustments and unrealized holding gains or losses
as accumulated other comprehensive income which is included in shareholders'
equity. During the second quarter of Fiscal 2000 and Fiscal 1999, total
comprehensive income amounted to $4,783,930 and $3,136,958, respectively. For
the first six months of Fiscal 2000 and Fiscal 1999, total comprehensive income
amounted to $9,011,229 and $5,695,833 respectively.
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the three months and six months ended October 2, 1998, and October
1, 1999, is as follows:
6
<PAGE> 7
4. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the three months ended October 2, 1998
Basic EPS
Income available to common shareholders $3,228,981 12,436,811 $ 0.26
Effect of Dilutive Securities
Stock Options 596,077
Diluted EPS
Income available to common shareholders
and assumed conversions $3,228,981 13,032,888 $ 0.25
For the six months ended October 2, 1998
Basic EPS
Income available to common shareholders $6,036,815 12,417,068 $ 0.49
Effect of Dilutive Securities
Stock Options 528,141
Diluted EPS
Income available to common shareholders
and assumed conversions $6,036,815 12,945,209 $ 0.47
For the three months ended October 1, 1999
Basic EPS
Income available to common shareholders $5,022,805 12,755,113 $ 0.39
Effect of Dilutive Securities
Stock Options 783,375
Diluted EPS
Income available to common shareholders
and assumed conversions $5,022,805 13,538,488 $ 0.37
For the six months ended October 1, 1999
Basic EPS
Income available to common shareholders $9,270,821 12,738,782 $ 0.73
Effect of Dilutive Securities
Stock Options 707,649
Diluted EPS
Income available to common shareholders
and assumed conversions $9,270,821 13,446,431 $ 0.69
</TABLE>
5. SEGMENT REPORTING
The Company's reportable segments are based on the Company's method of
internal reporting which is disaggregated operationally. The two reportable
segments, U.S. and International, are evaluated based on gross profit;
therefore, selling, general, and administrative costs, as well as research and
development , interest income/expense, and provision for taxes, is reported on
an entity-wide basis only.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies included in the Company's Annual
Report to the extent such policies affect the reported segment information. The
operational distributions of the Company's revenues and gross margin for the
three and six months ended October 2, 1998, and October 1, 1999, are as
follows:
7
<PAGE> 8
5. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(In Thousands) October 2, 1998 October 1, 1999 October 2, 1998 October 1, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total sales:
Cybex - U.S. $13,653 $19,783 $27,289 $36,878
Cybex - International 6,111 8,374 11,110 16,215
Less Intercompany (164) (657) (234) (1,293)
------- ------- ------- -------
$19,600 $27,500 $38,165 $51,800
======= ======= ======= =======
Gross Profit:
Cybex - U.S. $7,371 $11,214 $14,571 $20,540
Cybex - International 3,098 4,147 5,752 7,944
Less Intercompany (3) 47 (15) 25
------- ------- ------- -------
$10,466 $15,408 $20,308 $28,509
======= ======= ======= =======
</TABLE>
The operational distribution of the Company's identifiable assets as of March
31, 1999 and October 1, 1999 is as follows:
<TABLE>
<CAPTION>
(In Thousands) March 31, 1999 October 1, 1999
-------------- ---------------
<S> <C> <C>
Assets:
Cybex - U.S. $ 88,815 $ 79,953
Cybex - International 16,678 18,726
--------- ---------
Total identifiable assets 105,493 98,679
Eliminations (12,643) (11,601)
--------- ---------
Total Assets $ 92,850 $ 87,078
========= =========
</TABLE>
6. CHANGE IN CAPITALIZATION
In July 1999, the shareholders of the Company approved a resolution to amend
the Amended and Restated Articles of Incorporation to increase authorized
common stock from 25,000,000 shares to 50,000,000 shares.
7. SUBSEQUENT EVENT
On October 5, 1999 the Company acquired substantially all the assets, including
the related intellectual property and patents, of PixelVision Technology,
Inc.(PixelVision), pursuant to an Asset Purchase Agreement dated October 5,
1999 between the Company and PixelVision. PixelVision, a privately held
company, designs, manufactures and markets products and services related to
high-information content digital display solutions. The Company paid
approximately $6.6 million at closing. The acquisition, which was funded from
available cash, was accounted for using the purchase method of accounting.
In accordance with generally accepted accounting principals, costs allocated to
research and development assets with alternative future uses will be
capitalized and the remaining amounts of purchased research and development
will be expensed as a one-time charge during the third quarter of fiscal 2000.
The allocation of the purchase price has not been determined as of the filing
date of this report.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE INFORMATION IN THIS ITEM 2 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING
STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO THE COMPANY'S
REVENUES, EXPENSES, MARGINS, LIQUIDITY AND CAPITAL NEEDS. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "BUSINESS - FACTORS AFFECTING THE
COMPANY'S BUSINESS AND PROSPECTS" CONTAINED IN THE COMPANY'S FORM 10-K FOR THE
YEAR ENDED MARCH 31, 1999, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 23, 1999.
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, 1999, as filed with the Securities and Exchange
Commission on June 23, 1999.
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 multiple
users, each with a separate keyboard, video monitor and mouse, with the
capability to control over 2,000 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 XP4040 (formerly known as
the 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) utilizes a cost reduced
design that continues to provide the architecture for mid-range and entry-level
products. SwitchView(TM), a two and four port KVM Switch Product, is the
Company's first product designed to be mass marketed. The Company completed its
first full quarter of shipping AutoView(TM) 200 during the second quarter of
Fiscal 2000. AutoView(TM) 200 extends the capabilities of KVM Switching
technology by allowing two users independent and simultaneous access to any of
eight attached servers. The Company also markets 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. Also, Microsoft
Corporation certified certain KVM Switch Products for use with its Windows NT
and Windows 98 operating systems. 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.
Certain products within the Company's family of KVM extension and remote
access products (collectively, "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. During the third quarter of Fiscal 1999, the Company
introduced LongView(TM), which allows the extension of KVM Peripherals and
multimedia functions up to 500 feet using a single Category 5 cable. 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's remote access line of KVM Extension Products allows users to control
Servers from remote locations using a standard modem, the Internet or a network
connection, without the necessity of remote
9
<PAGE> 10
access hardware or software on the PCs or Servers being accessed. The Company
completed its first quarter of shipping Key-View(TM) II, its second generation
and newest remote access solution, during the second quarter of Fiscal 2000.
When used in conjunction with a KVM Switch Product, the Company's remote access
KVM Extension Products permits users to control attached PCs remotely.
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 as
well as sales to customers of the PolyCon Companies, discussed later herein.
The increases in annual net sales reflects 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.
The Company markets its products to a diversified group of dealers,
distributors, original equipment manufacturers ("OEMs") and end users, primarily
through its inside and outside sales and customer support staff, advertisements
in trade publications, and participation in major industry trade shows. The
Company has broadened its marketing strategy of expanding channels of
distribution by increased penetration in the OEM market, major distribution 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. These relationships have broadened the Company's channels of
distribution of its products and are expected to increase market share. The
Company recently completed the final stages of product testing and certification
with a major U.S. computer manufacturer. Shipments of an OEM product to this
customer began in mid November, 1999.
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. 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 on parts and allows additional rights of
return to certain of its customers. The Company estimates and accrues a
liability for sales and warranty returns and offers sales discounts to its
customers based on the level of sales.
The Company believes that increasing its international sales is an
important element in the overall strategy of future revenue growth.
International sales comprised 34% of the Company's sales for the six months
ended October 1, 1999 and 35% and 26% of the Company's total sales in Fiscal
1999 and Fiscal 1998, respectively.
STRATEGIC ACQUISITIONS
10
<PAGE> 11
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, on October 5, 1999 the Company acquired substantially all the
assets, including the related intellectual property and patents, of PixelVision
Technology, Inc.(PixelVision), pursuant to an Asset Purchase Agreement dated
October 5, 1999 between the Company and PixelVision. PixelVision, a privately
held company, designs, manufactures and markets products and services related
to high-information content digital display solutions. The Company paid
approximately $6.6 million at closing. The acquisition, which was funded from
available cash, was accounted for using the purchase method of accounting.
In accordance with generally accepted accounting principals, costs
allocated to research and development assets with alternative future uses will
be capitalized and the remaining amounts of purchased research and development
will be expensed as a one-time charge during the third quarter of fiscal. The
allocation of the purchase price has not been determined as of the filing date
of this report.
On February 1, 1999, the Company acquired substantially all of the assets,
including the related intellectual property and patents, of Fox, pursuant to an
Asset Purchase Agreement dated January 20, 1999, between the Company, Fox and
the shareholders of Fox. The Company paid approximately $2.5 million at closing
and may pay an additional amount of up to $2.5 million in future payments based
on future sales of Fox's products over a maximum period of five years. Fox
technology and products include remote access and power control products
solutions for management of PCs and Servers. Fox's major development project
was the development of a Windows(TM)-based remote access device that allows
control of servers over ordinary telephone lines and the Internet from a remote
location ("Key-View((TM)) II"). The acquisition, which was funded from available
cash, was accounted for using the purchase method of accounting. In accordance
with generally accepted accounting principles, costs allocated to research and
development assets with alternative future uses were capitalized and the
remaining $1.85 million of purchased research and development were expensed as
a one-time charge during the fourth quarter of Fiscal 1999.
The Company obtained an outside valuation of Fox and values were assigned
to developed technology, in-process research and development ("in-process R&D"),
employment and consulting agreements, and customer base. The valuations of
developed technology, in-process R&D and customer base were established using an
income-based approach. The valuation of the employment and consulting agreements
were valued using a cost-based approach. Revenue estimates for the technology
under development were based on discussions with management, existing product
family revenues of both Fox and the Company, anticipated product development
schedules, product sales cycles and estimated life of the technology. Revenues
for the product under development were estimated to begin in Fiscal 2000 and
continue through Fiscal 2009, with the majority of the revenues related to
in-process technology occurring after Fiscal 2002. Projected expenses were based
on historical selling, general and administrative expenses and maintenance
research and development expenses of the Company, as all aspects of
Key-View((TM)) II will be managed by the Company. The resulting operating income
was adjusted for income tax expense using the Company's tax rate. In addition,
estimated required returns on beginning net working capital, fixed assets and
employment and consulting agreement, along with a deduction for cash flow
attributable to the customer base, were considered in the discounted cash flow
analysis. The risk-adjusted discount rate applied to after-tax cash flow was 28%
for completed technology and for in-process technology, compared to an estimated
weighted-average cost of capital for Fox of approximately 28% as well.
The total value of in-process R&D was estimated to be approximately $1.85
million. All of the estimated in-process research and development was
attributable to the development of Key-View((TM)) II. The development of
Key-View((TM)) II was estimated to be 90% complete and was completed on time
with initial shipments in the first quarter of Fiscal 2000.
In December 1997, the Company acquired the PolyCon Companies for a combined
purchase price of $8.8 million including acquisition-related expenses. The
acquisition of the PolyCon Companies included intellectual property that the
Company is integrating 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 the PolyCon Companies was consistent
with the Company's strategy to expand its operations in Europe and immediately
added new customer relationships and expanded distribution channels.
11
<PAGE> 12
The PolyCon Companies had product lines that included high-end console
switching units as well as extension products. The major development projects
included Fiber-Optics Solution Technology, Console Switch Technology and
Digital Switching Technology. Other development projects include Software
Management Server Technology, Multi-Console Multiplier, and the Universal
Serial Bus Adapter Technology.
The Company obtained an outside valuation of the PolyCon Companies and
values were assigned to completed technology, in-process R&D, in-process R&D
with alternative future uses and trade names. The valuations of developed
technology and in-process R&D were established using an income-based approach.
Revenue estimates for each product line under development were based on
discussions with management, existing product family revenues, anticipated
product development schedules, product sales cycles and estimated life of each
of the technologies. Revenues on the products under development were estimated
to begin in Fiscal 1999 and continue through Fiscal 2008, with the majority of
the revenues related to in-process technology occurring after Fiscal year 2000.
Projected expenses were based on historical selling, general and administrative
expenses, and maintenance research and development expenses of the Company as
management believed it would be able to apply its general operating cost
structure to the PolyCon operations. The resulting operating income was
adjusted for income tax expense using the Company's tax rate and adjusted for
required returns on supporting assets. The risk-adjusted discount rate applied
to after-tax cash flow was 20% for completed technology and 35% to 40% for
in-process technology.
The total value of in-process R&D was estimated to be approximately $4.7
million. Approximately 90% of the estimated in-process research and development
were attributable to the fiber-optics solution technology, the console switch
technology and the digital switching technology. The development of the console
switch technology was completed on time in Fiscal 1999 and is currently
available to ship in certain PolyCon products. The development of fiber-optic
solution technology was completed on time and began shipping in early Fiscal
2000. The development of the digital switching technology was expected to take
a minimum of two years to complete. Some digital technology is included in
certain products within the XP4000 series. This XP4000 series is expected to
begin shipping in the third quarter of Fiscal 2000.
RECENT STOCK SPLIT
On November 13, 1998, the Company announced a 3-for-2 stock split, effected
as a 50% stock dividend. The additional shares were distributed to shareholders
on December 15, 1998. All capital stock information included in the condensed
consolidated financial statements and notes thereto gives retroactive effect to
the splits.
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
OCT. 2, OCT. 1, OCT. 2, OCT. 1,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 46.6 44.0 46.8 45.0
----- ----- ----- -----
Gross profit........................................ 53.4 56.0 53.2 55.0
Research and development expenses................. 7.4 5.9 6.9 6.3
Selling, general and administrative expenses...... 23.2 23.8 24.3 23.3
----- ----- ----- -----
Operating income.................................... 22.8 26.3 22.0 25.4
Other income...................................... 1.8 1.1 2.1 1.5
----- ----- ----- -----
Income before income taxes.......................... 24.6 27.4 24.1 26.9
Provision for income taxes........................ 8.1 9.1 8.3 9.0
----- ----- ----- -----
Net income.......................................... 16.5% 18.3% 15.8% 17.9%
===== ===== ===== =====
</TABLE>
The Company operates predominantly in one industry: the design,
production, marketing, and selling of keyboard, video monitor and mouse switch,
extension and remote access products. The Company's method of internal
reporting is disaggregated operationally, however. The two reportable segments,
Cybex - U.S. and Cybex - International, are evaluated based on gross profit;
therefore selling, general and administrative costs, as well as research and
development, interest income/expense, provision for taxes, is reported on an
entity-wide basis only. Reference is
12
<PAGE> 13
made to the information regarding operational distribution of the Company's
revenues and gross margin, and to the operational distribution of the Company's
identifiable assets, in Note 5 to the Condensed Consolidated Financial
Statements set forth on pages 7 and 8 of this Quarterly Report on Form 10-Q.
Three Months Ended October 1, 1999 Compared to the Three Months Ended October
2, 1998
Net sales increased 40.3% to $27.5 million in the three months ended
October 1, 1999 from $19.6 million in the three months ended October 2, 1998.
Additionally, sales for the reportable segment Cybex - U.S. increased 44.9%
from $13.7 million in the second quarter of Fiscal 1999 to $19.8 million in
Fiscal 2000, while sales for the reportable segment Cybex - International
increased 37.0% from $6.1 million in the second quarter of Fiscal 1999 to $8.4
million in Fiscal 2000. Overall, the increased sales resulted from increased
sales volume of the Company's KVM Switch Products and Extension Products. Sales
of KVM Switch Products increased 35.4% to $21.9 million in the three months
ended October 1, 1999 from $17.5 million in the three months ended October 2,
1998, primarily due to sales growth of the mid- and high-end KVM Switch
Products, as well as the entry level KVM Switch Products. The mid- to high-end
products grew 34% from second quarter of Fiscal 1999 to the second quarter of
Fiscal 2000, while the entry level product segment grew 58% 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 90.9% to $3.6 million in the three months ended October 1,
1999 from $1.9 million in the three months ended October 2, 1998. LongView(TM)
and Key-View(TM) II, a remote access solution, accounted primarily for the
growth in KVM Extension Product sales.
The Company's international sales (sales to any location outside the U.S.)
increased 42.3% to $9.1 million in the three months ended October 1, 1999 from
$6.4 million in the three months ended October 2, 1998 and accounted for over
33% of total revenues. Sales in the European Community accounted for
approximately $7.0 million or 25.5% 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,
increases in material and labor costs and the levels of outsourcing of
manufacturing and assembly services. Gross profit increased 47.2% to $15.4
million in three months ended October 1, 1999 from $10.5 million in the three
months ended October 2, 1998. Gross profit for Cybex - U.S. increased 52.1%
from $7.4 million in the three months ended October 2, 1998 to $11.2 million in
the three months ended October 1, 1999, while the gross profit for Cybex -
International increased 33.9% from $3.1 million in the second quarter of Fiscal
1999 to $4.1 million in the second quarter of Fiscal 2000. Gross profit as a
percentage of net sales increased from 53.4% to 56.0% 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 inventory related reserves. The increase in inventory related reserves was
the result of the Company's evaluation of the composition of inventory.
Selling, general and administrative (SG&A) expenses increased 43.9% to
$6.5 million (23.8% of net sales) in the three months ended October 1, 1999,
from $4.5 million (23.2% of net sales) in the three months ended October 2,
1998. The increase in SG&A expenses 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 and abroad. The increase was offset somewhat by a reduction in
expenses incurred for legal costs associated with the defense of a patent
infringement claim which was dismissed without prejudice by mutual agreement of
both parties in February 1999 (see Contingencies). Management anticipates that
the dollar amount of selling, general and administrative expense will continue
to increase.
Research and development (R&D) expense grew 12.7% to $1.6 million or 5.9%
of net sales in the three months ended October 1, 1999, from $1.4 million or
7.4% of net sales in the three months ended October 2, 1998. The increase in
R&D expense can be attributed to the continued focus on new product and
technology development as well as product integration and product cost
reduction efforts through improved product design. Management anticipates that
the dollar amount of research and development expenses will increase and as a
percentage of net sales will increase slightly.
13
<PAGE> 14
As a result of the factors discussed above, operating income increased
61.7% to $7.2 million (26.3% of net sales) in the three months ended October 1,
1999, from $4.5 million (22.8% of net sales) in the three months ended October
2, 1998.
Other income decreased 9.5% to approximately $317,000 (1.1% of net sales)
in the three months ended October 1, 1999, compared to approximately $350,000
in the three months ended October 2, 1998. Interest and other income includes
realized gains and losses on the sale of certain investments, interest income
and expense and the accretion of U.S. Treasury Bill discounts.
Net income increased 55.6% to $5.0 million (18.3% of net sales) in the
three months ended October 1, 1999, from $3.2 million (16.5% of net sales) in
the three months ended October 2, 1998, as a result of the factors discussed
above.
Six Months Ended October 1, 1999 Compared to the Six Months Ended October 2,
1998.
Net sales increased 35.7% to $51.8 million for the six months ended
October 1, 1999 from $38.2 million in the six months ended October 2, 1998.
Additionally sales for Cybex - U.S. increased 35.1% from $27.3 million in the
second quarter of Fiscal 1999 to $36.9 million in Fiscal 2000, while sales for
Cybex - International increased 45.9% from $11.1 million in the second quarter
of Fiscal 1999 to $16.2 million in Fiscal 2000. 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 33.9% to $45.6 million in the six months
ended October 1, 1999 from $34.0 million in the six months ended October 2,
1998. Sales of KVM Extension Products increased 62.8% to $5.7 million in the
six months ended October 1, 1999 from $3.5 million in the six months ended
October 2, 1998. LongView(TM) and Key-View(TM) II, a remote access solution,
accounted primarily for the growth in KVM Extension Product sales.
International sales increased 45.8% to $17.6 million or 34.2% of net sales in
the six months ended October 1, 1999 as compared to $12.1 million or 32.0% of
net sales in the six months ended October 2, 1998.
Gross profit increased 40.4% to $28.5 million in the six months ended
October 1, 1999 from $20.3 million in the six months ended October 2, 1998.
Gross profit for Cybex - U.S. increased 41.0% from $14.6 million in the three
months ended October 2, 1998 to $20.5 million in the three months ended October
1, 1999, while the gross profit for Cybex - International increased 38.1% from
$5.8 million in the second quarter of Fiscal 1999 to $7.9 million in the second
quarter of Fiscal 2000. Gross profit as a percentage of net sales increased
from 53.2% to 55.0% 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 inventory related
reserves. The increase in inventory related reserves was the result of the
Company's evaluation of the composition of inventory.
Selling, general and administrative (SG&A) expenses increased 30.0% to
$12.0 million or 23.3% of net sales in the six months ended October 1, 1999
from $9.3 million or 24.3% of net sales in the six months ended October 2,
1998. The increase in SG&A expense 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
and abroad.
Research and development (R&D) expense was $3.3 million or 6.3% of net
sales in the six months ended October 1, 1999 as compared to $2.6 million or
6.9% of net sales for the six months ended October 2, 1998. The increase in R&D
expense reflects the Company's continued focus on new product and technology
development as well as product integration and product cost reduction efforts
through improved product design. Management anticipates that R&D expenses will
increase and that R&D expenses as a percentage of net sales will increase
slightly.
As a result of the factors discussed above, operating income increased
56.4% to $13.2 million or 25.4% of net sales for the six months ended October
1, 1999 as compared to $8.4 million or 22.0% of net sales for the six months
ended October 2, 1998.
Other income decreased slightly to approximately $769,000 or 1.5% of net
sales in the six months ended October 1, 1999 from approximately $779,000
million or 2.1% of net sales in the six months ended October 2, 1998. Interest
14
<PAGE> 15
and other income includes realized gains and losses on the sale of certain
investments, interest income and expense and the accretion of U.S. Treasury
Bill discounts.
Net income increased 53.6% to $9.3 million or 17.9% of net sales for the
six months ended October 1, 1999 from $6.0 million or 15.8% of net sales for
the six months ended October 2, 1998 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash flow from
operations and cash reserves as needed. As of October 1, 1999, and for the six
months then ended, the Company had an available line of credit of $7.5 million
with an interest rate of LIBOR plus 2.5%. The Company had no amounts
outstanding under the line of credit at October 1, 1999.
The Company's working capital position improved from $46.8 million as of
March 31, 1999 to $57.0 million as of October 1, 1999 (adjusted to include $2.9
and $2.8 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 1, 1999.
Cash flow provided from operating activities increased from approximately
$5.1 million for the six months ended October 2, 1998 to $7.9 million for the
six months ended October 1, 1999. This increase was attributed primarily to an
increase in net income. The increase in net income is attributed to the
increase in sales. The increase in net income was offset somewhat by an
increase in accounts receivable. The increase in accounts receivable is also
attributed to the increase in sales. Inventory levels remained flat, having
little impact on cash provided by operating activities. Again the increase in
sales attributed to the flattening of inventory levels, 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 approximately $739,000 in the first six
months of Fiscal 2000. These capital expenditures related to purchases of shop
equipment and office furniture for the Company's new facility and purchases of
equipment for the Company and its subsidiaries. A minor portion of the computer
purchases relates to year 2000 readiness program (see Year 2000 Readiness
Disclosure).
The Company believes that its current financial position and existing cash
and investments along with earnings and amounts available under its line of
credit will be sufficient to meet its cash requirements over the next twelve
months.
FINANCIAL ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities on the balance sheet. Changes in such fair value are
required to be recognized immediately in net income (loss) to the extent the
derivatives are not effective as hedges. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000, and is effective for interim periods in the
initial year of adoption.
YEAR 2000 READINESS DISCLOSURE
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 issue 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.
15
<PAGE> 16
Products. The Company has completed the review of its products. The review
determined that substantially all 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. The few products that contain date-sensitive software or
firmware have been tested and are Year 2000 compliant. As a result, all current
products are Year 2000 compliant. This phase of the Year 2000 project is
complete.
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. This phase of the Year
2000 project is completed.
Internal Non-financial Software and Manufacturing Equipment. The Company
has completed its review of non-financial software and manufacturing equipment.
Substantially all non-financial software and manufacturing equipment has been
upgraded to be Year 2000 compliant. Only a few upgrades to software remain and
these will be completed during the third quarter of Fiscal 2000. The Company
moved into its newly constructed facility in August 1998. 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 are Year 2000 compliant. Management believes the cost of Year
2000 compliance on the older equipment has not nor will be material to the
Company. This phase of the Year 2000 project is substantially complete.
External Noncompliance by Customers and Suppliers. The Company has
identified and contacted its critical suppliers, service providers and
contractors. At this time, management believes the majority of these parties to
be Year 2000 compliant. Most of the responses to Year 2000 readiness were
satisfactory. For any unsatisfactory responses, the Company intends to change
suppliers, service providers or contractors to those who have demonstrated Year
2000 readiness, but the Company 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. This phase of the Year 2000 project is substantially
complete.
Costs. The total costs associated with becoming Year 2000 compliant are not
expected to be material to the Company's financial position. The estimated
total cost of the Year 2000 project is approximately $1.2 million. The total
amount expended on the project through October 1, 1999, was almost $1.15
million, of which $900,000 related to the purchase and installation of the ERP
System, which have been capitalized. All remaining costs have been expensed as
incurred. The remaining amount related to replacement of non-compliant software
and hardware and related to costs associated with evaluating and communicating
with significant customers and suppliers. The estimated future cost of
completing the Year 2000 project is estimated to be less than $50,000;
approximately $25,000 relates to replacement of non-compliant software and
hardware and the remaining $25,000 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 and will be expensed as incurred.
Contingency Planning. While the Company believes its approach to Year 2000
readiness is sound, it is possible that some business components are not
identified in the inventory, or that the scanning or testing process does not
result in analysis and remediation of all source code. The Company will assume
a third party is not Year 2000 ready if no survey response or an inadequate
survey response is received. The Company's contingency plan will address
alternative providers and processes to deal with business interruptions that
may be caused by internal system or third-party providers failure to be Year
2000 ready to the extent it is possible.
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,
16
<PAGE> 17
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.
THE ESTIMATES AND CONCLUSIONS CONTAINED IN THIS SECTION ARE FORWARD-LOOKING
STATEMENTS, AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS.
RISKS TO COMPLETING THE PLAN INCLUDE THE AVAILABILITY OF RESOURCES, THE
COMPANY'S ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE
PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON SPECIFIC FACILITIES, AND THE
ABILITY OF CUSTOMERS, SUPPLIERS, VENDORS, AND SERVICE PROVIDERS TO BRING THEIR
SYSTEMS INTO YEAR 2000 COMPLIANCE.
CONTINGENCIES
The Company has certain contingent liabilities resulting from litigation
initiated by Apex, Inc. Apex contended in a patent lawsuit filed in February
1998 against the Company and others in the United States District Court in
Seattle, Washington, that the Company has infringed Patent No. 5,721,842. By
mutual agreement and stipulation of Apex and the Company, the patent lawsuit
was dismissed without prejudice. Patent validity and ownership issues raised in
connection with the District Court lawsuit will now be heard before the United
States Patent and Trademark Office. The parties jointly requested the District
Court to urge accelerated consideration of these issues by the United States
Patent and Trademark Office. At the conclusion of the United States Patent and
Trademark Office proceeding, the lawsuit can be reinstated upon the request of
either party. After extensive review of the claims at issue, management does
not believe any of its products are covered by any valid claim of Apex's
patent. As a result, it is management's opinion that the probable resolution of
such contingencies will not have a material adverse affect on the financial
position, results of operations, or cash flows of the Company.
The Company has 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 litigation matter that will have a material
adverse affect on the financial position, results of operations, or cash flows
of the Company.
FORWARD LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS
Any statement contained in this Quarterly Report on Form 10-Q that is not a
historical fact, or that might otherwise be considered an opinion or projection
concerning the Company or its business, whether express or implied, is meant as
and should be considered a forward-looking statement as such term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements represent
management's opinions concerning future operations, strategies, financial
results or other developments and are based upon estimates and assumptions that
are subject to significant business, economic and competitive risks and
uncertainties, many of which are beyond the control of management. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected.
Risks and uncertainties that could cause actual results to differ materially
from those projected or implied include, but are not necessarily limited to,
rapid technological change and the need to continue to develop new products;
potential reductions or delays in orders from new or existing customers;
potential fluctuations in quarterly results; product returns; dependence on
limited product lines and technological obsolescence; intensely competitive
industry with increasing price competition; development of international
distribution networks and sales; dependence on key personnel; dependence upon
suppliers and outsourced manufacturing; ability to manage growth; reliance on
the PC/Server market; improved reliability of networks; ability to obtain and
protect proprietary rights; expansion of distribution channels; increased
demands on customer support operations; ability to grow new businesses and
successfully integrate and operate any acquired businesses; insufficient, excess
or obsolete inventory; ability to develop and introduce new products on a timely
basis; impact on the Company's business due to internal systems or systems of
17
<PAGE> 18
suppliers and other third parties adversely affected by year 2000 problems;
general business and economic conditions; and other factors described from time
to time in the Securities and Exchange Commission filings of the Company.
Readers are cautioned not to place undue reliance on these forward looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to update or revise forward-looking statements to reflect subsequent
events or circumstances. 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 8-K filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in the Company's financial instruments represents
the potential loss arising from adverse changes in interest rates. The Company
is exposed to market risk in the area of interest rate changes impacting the
fair value of its investment securities. The Company's investment policy is to
manage its investment portfolio to preserve principal and liquidity while
maximizing the return on the investment portfolio through the investment of
available funds. The Company diversifies the investment portfolio by investing
in a variety of highly rated investment grade securities and through the use of
different investment managers. The Company's marketable securities portfolio is
primarily invested in short-term securities with at least an investment grade
rating to minimize interest rate and credit risk as well as to provide for an
immediate source of funds. Market risk is estimated as the potential change in
fair value in the investment portfolio resulting from a hypothetical 10 percent
change in interest rates, which is not material at October 1, 1999. The Company
generally holds investments until maturity and carries the securities at
amortized cost, which approximates fair market value.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On July 27, 1999, the Company's shareholders approved an amendment to
the Company's Amended and Restated Articles of Incorporation to increase the
authorized Common Stock of the Company to 50,000,000 shares of Common Stock,
par value $.001 per share, from 25,000,000 shares of Common Stock, par value
$.001 per share.
Item 4. Submission of matters to a Vote of Security Holders
On July 27, 1999, the Company held its Annual Meeting of Shareholders.
The matters voted on at the meeting and the results of these votes are as
follows:
1. Election of Board of Directors.
<TABLE>
<CAPTION>
Votes for Votes Withheld Exception
---------- -------------- ---------
<S> <C> <C> <C>
1. Stephen F. Thornton 12,426,010 68,835 400
2. Remigius G. Shatas 12,424,585 70,260 1,825
3. Doyle C. Weeks 12,425,785 69,060 625
4. Douglas E. Pritchett 12,425,685 69,160 725
5. David S. Butler 12,424,160 70,685 2,250
6. John R. Cooper 12,425,860 68,985 550
</TABLE>
2. Amend the Company's Amended and Restated Articles of Incorporation,
Section 5.1, to increase the authorized shares of Common stock from 25,000,000
shares to 50,000,000 shares of Common Stock, par value $.001 per share.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
<S> <C> <C>
10,527,298 1,929,607 37,940
</TABLE>
3. Ratify engagement of the accounting firm of PricewaterhouseCoopers
LLP as independent auditors.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Abstained
---------- ------------- ---------------
<S> <C> <C>
12,475,823 6,175 12,847
</TABLE>
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<PAGE> 20
Item 6. Exhibits
(a) The following exhibits are being filed with this report:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3 Amendment to Amended and Restated Articles of Incorporation
as filed with the Secretary of State of the State of Alabama on
August 13,1999.
27 Financial Data Schedule (For SEC use only)
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the
quarter ended October 1, 1999.
20
<PAGE> 21
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 15, 1999
21
<PAGE> 22
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ---------- ----------- --------
<S> <C> <C>
3 Amendment to Amended and Restated Articles of Incorporation
27 Financial Data Schedule (For SEC use only)
</TABLE>
22
<PAGE> 1
EXHIBIT 3
THIS INSTRUMENT WAS PREPARED BY:
Sean T. Wheeler, Esq.
Sirote & Permutt, P.C.
2222 Arlington Avenue South
Birmingham, Alabama 35205
STATE OF ALABAMA
MADISON COUNTY
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CYBEX COMPUTER PRODUCTS CORPORATION
Pursuant to Sections 10-28-10.1, 10-2B-10.03 and 10-2B-10.06 of the Alabama
Business Corporation Act, CYBEX COMPUTER PRODUCTS CORPORATION, a corporation
organized and existing under the laws of the State of Alabama (the
"Corporation"), hereby submits the following:
1. The name of the Corporation is Cybex Computer Products Corporation.
2. The Amended and Restated Articles of Incorporation of the Corporation
shall be amended as follows:
Section 5.1 of the Amended and Restated Articles of Incorporation is hereby
deleted in its entirety, and there is substituted in lieu thereof the following:
"Section 5.1 Authorization. The aggregate number of shares which the
Corporation shall have authority to issue is 55,000,000, comprised of (a)
50,000,000 shares of common stock with a par value of $.001 per share (the
"Common Stock"), and (b) 5,000,000 shares of preferred stock with a par value of
$.001 per share (the "Preferred Stock"), constituting a total authorized capital
of all classes of capital stock of $55,000,000.
3. The foregoing amendment (the "Amendment") to the Amended and Restated
Articles of Incorporation was approved on May 4, 1999 by a unanimous vote of the
Board of Directors of the Corporation and on July 27, 1999 by shareholders
representing at least a majority of the outstanding the shares of the
Corporation.
4. The designation, number of outstanding shares, number of votes entitled
to be cast by each voting group entitled to vote separately on the Amendment,
the number of votes of each voting group indisputably represented at the meeting
at which the vote was taken, and the number of votes cast for and against the
Amendment are as follows:
<TABLE>
<CAPTION>
OUTSTANDING SHARES # ENTITLED # REPRESENTED # CAST
DESIGNATION AT RECORD DATE TO BE CAST AT THE MEETING # CAST FOR AGAINST
- ----------- ------------------ ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Common 12,746,401 12,746,401 12,494,845 10,527,298 1,929,607
</TABLE>
<PAGE> 2
EXHIBIT 3
These Articles of Amendment to the Amended and Restated Articles of
Amendment are being filed in the Office of the Judge of Probate of Madison
County, Alabama, for the purpose of effecting such amendment in accordance with
the requirements of the Alabama Business Corporation Act.
IN WITNESS WHEREOF, the undersigned corporation, by its duly authorized
officer and with full authority, has executed these Articles of Amendment to
Amended and Restated Articles of Incorporation as of this 13 day of August,
1999.
CYBEX COMPUTER PRODUCTS CORPORATION
By: Stephen F. Thornton
-------------------------------
Stephen F. Thornton
President and Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE CYBEX COMPUTER PRODUCTS CORPORATION FOR THE SIX
MONTHS ENDED OCTOBER 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000946360
<NAME> CYBEX COMPUTER PRODUCTS CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> OCT-01-1999
<EXCHANGE-RATE> 1
<CASH> 31,061
<SECURITIES> 6,882
<RECEIVABLES> 20,264
<ALLOWANCES> 1,538
<INVENTORY> 7,413
<CURRENT-ASSETS> 67,470
<PP&E> 15,826
<DEPRECIATION> 3,508
<TOTAL-ASSETS> 87,078
<CURRENT-LIABILITIES> 13,288
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 79,139
<TOTAL-LIABILITY-AND-EQUITY> 87,078
<SALES> 27,500
<TOTAL-REVENUES> 27,500
<CGS> 12,092
<TOTAL-COSTS> 12,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 13,931
<INCOME-TAX> 4,660
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,271
<EPS-BASIC> .73
<EPS-DILUTED> .69
</TABLE>
