<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: January 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 February 16, 1999, 12,614,745 shares of the Registrant's Common
Stock $.001 par value, were outstanding.
<PAGE> 2
CYBEX COMPUTER PRODUCTS CORPORATION
FORM 10-Q
January 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAGE
Part I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements (unaudited): ------
Condensed Consolidated Balance Sheets as of March 31,
1998 (audited) and January 1, 1999........................ 3
Condensed Consolidated Statements of Income for the
three and nine months ended December 31, 1997 and
January 1, 1999........................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and January 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
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, JANUARY 1,
1998 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 2,411,085 $ 20,558,490
Short-term investments ..................................................... 34,919,924 7,764,965
Accounts receivable-trade, less allowance for doubtful accounts
of $963,083 and $1,408,334, respectively ................................... 11,430,990 14,372,817
Inventories ................................................................ 6,046,919 5,835,964
Other current assets ....................................................... 517,179 1,230,829
Deferred income taxes ...................................................... 1,144,000 1,144,000
------------ ------------
Total current assets ............................................ 56,470,097 50,907,065
Investments available for sale, at market .................................... 3,040,833 3,154,575
Property and equipment, net of accumulated depreciation ...................... 7,251,912 12,476,173
Intangibles, net ............................................................. 3,821,371 3,890,605
Other assets ................................................................. 134,691 141,937
------------ ------------
$ 70,718,904 $ 70,570,355
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable ............................................................... $ 12,000,000 $ --
Accounts payable and accrued expenses ...................................... 4,697,027 4,601,324
Income taxes payable ....................................................... 1,313,415 542,364
Other current liabilities .................................................. 3,027,939 4,970,893
------------ ------------
Total current liabilities ...................................... 21,038,381 10,114,581
Deferred income taxes ........................................................ 109,000 109,000
Note payable ................................................................. 136,719 2,808
------------ ------------
Total liabilities .............................................. 21,284,100 10,226,389
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 -- 13,869,411 shares issued,
12,379,007 shares outstanding; January 1 1999 -- 14,071,103
shares issued, 12,580,699 shares outstanding .............................. 13,869 14,071
Additional paid in capital .................................................. 34,710,130 36,197,394
Accumulated other comprehensive income ...................................... 230,731 82,858
Retained earnings ........................................................... 19,780,627 29,350,184
Treasury stock, at cost; 1,490,404 shares ..,................................ (5,300,553) (5,300,541)
------------ ------------
Total shareholders' equity .................................. 49,434,804 60,343,966
------------ ------------
$ 70,718,904 $ 70,570,355
============ ============
</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 NINE MONTHS ENDED
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
1997 1999 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................................ $ 12,537,289 $20,496,554 $34,499,443 $58,661,778
Cost of sales ........................................ 5,985,949 9,514,329 16,379,324 27,371,283
------------ ----------- ----------- -----------
Gross profit ....................................... 6,551,340 10,982,225 18,120,119 31,290,495
Selling, general and administrative expenses ......... 3,130,537 5,285,855 8,582,606 14,372,359
Purchased research and development expenses .......... 4,705,000 4,705,000
Research and development expenses .................... 735,195 1,231,825 2,304,175 3,858,859
------------ ----------- ----------- -----------
Operating income ................................... (2,019,392) 4,464,545 2,528,338 13,059,277
Other income ......................................... 440,179 414,400 1,523,423 1,015,366
------------ ----------- ----------- -----------
Income before provision for income taxes ........... (1,579,213) 4,878,945 4,051,761 14,074,643
Provision for income taxes ........................... 1,080,000 1,346,202 3,072,000 4,505,086
------------ ----------- ----------- -----------
Net income ......................................... $ (2,659,213) $ 3,532,743 $ 979,761 $ 9,569,557
============ =========== =========== ===========
Net income per common and common equivalent share
Basic ............................................. $ (.22) $ .28 $ .08 $ .77
============ =========== =========== ===========
Diluted ........................................... $ (.21) $ .27 $ .08 $ .73
============ =========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic .............................................. 12,240,862 12,513,986 12,233,652 12,449,022
============ =========== =========== ===========
Diluted ............................................ 12,661,727 13,260,514 12,600,834 13,062,172
============ =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, JANUARY 1,
1997 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 979,761 $ 9,569,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 389,162 1,222,455
Amortization of discount on investments ................. (993,433) (389,305)
Provision for losses on accounts receivable ............. 353,000 486,129
(Gain) loss on sale of property and equipment ........... (1,355)
(Gain) loss on sale of investments ...................... (214,641) (50,411)
Purchased research and development ...................... 4,705,000 --
Changes in operating assets and liabilities:
Accounts receivable-trade ............................. (3,040,125) (3,427,957)
Inventories ........................................... (1,281,978) 210,955
Accounts payable and accrued expenses ................. 2,409,050 (24,356)
Other ................................................. (30,472) 780,684
Income taxes payable .................................. 112,000 (771,051)
------------ ------------
Net cash provided by operating activities ................... 3,387,324 7,605,345
Cash flows from investing activities:
Purchase of subsidiary, net of cash received .............. (8,663,273) --
Purchases of property and equipment ....................... (2,647,004) (6,223,798)
Proceeds from the sale of property and equipment .......... 150,579
Purchases of investments available for sale ............... (23,172,255) (31,565,890)
Proceeds from the sale of investments ..................... 11,059,706 11,264,681
Proceeds from maturities of investments ................... 37,135,000 47,468,000
------------ ------------
Net cash provided by investing activities ................ 13,712,174 21,093,572
Cash flows from financing activities:
Repayment of note payable ................................. (8,000,000) (12,133,912)
Proceeds from issuance of common stock .................... 46,670 1,487,479
------------ ------------
Net cash (used in) financing activities .................. (7,953,330) (10,646,433)
------------ ------------
Effect of exchange rate changes .......................... -- 94,921
------------ ------------
Net increase in cash and cash equivalents ................ 9,146,168 18,147,405
Cash and cash equivalents, beginning of period .............. 2,424,385 2,411,085
------------ ------------
Cash and cash equivalents, end of period .................... $ 11,570,553 $ 20,558,490
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................. $ 13,216 $ 37,770
============ ============
Cash paid during the period for taxes ..................... $ 2,960,000 $ 4,949,627
============ ============
</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 January 1, 1999 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 nine months ended January 1, 1999 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 January 1, 1999, 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 $2.5
million. The Company had no amounts outstanding under the line of credit at
January 1, 1999, or March 31, 1998.
3. STOCK OPTIONS
Options to purchase 71,250 shares of common stock were granted on
varying dates throughout the quarter to employees under the 1995 Employee Stock
Option Plan, the 1995 Outside Directors Stock Option Plan and the 1998 Employee
Stock Option Plan at the market price as of the effective date. Also, options to
purchase 141,542 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
6
<PAGE> 7
130 has no impact on net income or shareholders' equity. Statement 130 requires
unrealized gains or 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
third quarter of Fiscal 1999 and Fiscal 1998, total comprehensive income
amounted to $3,725,851 and $(2,801,733), respectively. For the first nine months
of Fiscal 1999 and Fiscal 1998, total comprehensive income amounted to
$9,421,684 and $1,261,569, respectively.
5. STOCK SPLIT
On November 13, 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 December 16, 1998. All capital stock and stock option
information included in the condensed consolidated financial statements and
notes thereto gives retroactive effect to the split.
6. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the three months and nine months ended December 31, 1997, and
January 1, 1999, is as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the three months ended December 31, 1997
Basic EPS
Income available to common shareholders $(2,659,213) 12,240,862 $(0.22)
Effect of Dilutive Securities
Stock Options 420,865
Diluted EPS
Income available to common shareholders
and assumed conversions $(2,659,213) 12,661,727 $(0.21)
For the nine months ended December 31, 1997
Basic EPS
Income available to common shareholders $979,761 12,233,652 $ 0.08
Effect of Dilutive Securities
Stock Options 367,182
Diluted EPS
Income available to common shareholders
and assumed conversions $979,761 12,600,834 $ 0.08
For the three months ended January 1, 1999
Basic EPS
Income available to common shareholders $3,532,743 12,513,986 $ 0.28
Effect of Dilutive Securities
Stock Options 746,528
Diluted EPS
Income available to common shareholders
and assumed conversions $3,532,743 13,260,514 $ 0.27
</TABLE>
7
<PAGE> 8
6. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the nine months ended January 1, 1999
Basic EPS
Income available to common shareholders $9,569,557 12,449,022 $0.77
Effect of Dilutive Securities
Stock Options 613,150
Diluted EPS
Income available to common shareholders
and assumed conversions $9,569,557 13,062,172 $0.73
</TABLE>
7. SUBSEQUENT EVENT
On February 1, 1999 the Company acquired all the assets, including the
related intellectual property and patents, of Fox Network Systems Corporation
(Fox), pursuant to an Asset Purchase Agreement dated January 20, 1999 between
the Company, Fox Network Systems Corporation and the Shareholders of Fox Network
Systems Corporation. Fox , a privately held company, develops remote access
technology for the control and operation of personal computers and file servers.
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. 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 fourth quarter of fiscal 1999.
The allocation of the purchase price has not been determined as of the filing
date of this report.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which specifies revised
guidelines for determining an entities operating segments and the type and level
of financial information to be required. The Company is required to adopt these
standards in fiscal 1999. The Company does not expect the impact of this
pronouncement to be material.
In February of 1998 and in June 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits" and
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
respectively. Adoption of these standards is not expected to impact the
financial results of the Company.
8
<PAGE> 9
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 4xPTM/1xPTM, 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. During the third quarter of Fiscal
1999 the Company introduced its newest KVM Extension Product, LongView, which
allows the extension of keyboard, video, mouse and multimedia functions over 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 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 is integrating 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.
9
<PAGE> 10
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. 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 34% of the Company's sales for the nine months
ended January 1, 1999 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 December 31, 1997, Cybex Europe acquired PolyCon, a privately held
company located in Steinhagen, Germany, pursuant to the terms and conditions of
a Purchase and Sale Agreement dated December 30, 1997 between the Company, Cybex
Europe and Edgar and Stephanie Elsner, for a combined purchase price of
approximately $8,800,000 including acquisition related expenditures. In
accordance with generally accepted accounting principles, costs allocated to
acquired research and development assets with alternative future uses were
capitalized, and the remaining $4,705,000 of acquired research and development
costs were expensed as a one-time charge on December 31, 1997. The acquisition
of PolyCon was funded by Cybex Europe from its available cash.
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. Additionally, on November 13, 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 December 16, 1998.
In August, 1998, The Company moved into it's newly constructed corporate
facility in Huntsville, Alabama built on 18 acres purchased in Fiscal 1997. The
new facility contains approximately 120,000 square feet with space for
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<PAGE> 11
future expansion. The facility is designed to house the Company's sales,
marketing, research and development, manufacturing and administrative functions.
On February 1, 1999 the Company acquired all the assets, including the
related intellectual property and patents, of Fox Network Systems Corporation
(Fox), pursuant to an Asset Purchase Agreement dated January 20, 1999 between
the Company, Fox Network Systems Corporation and the Shareholders of Fox Network
Systems Corporation. Fox, a privately held company, develops remote access
technology for the control and operation of personal computers and file servers.
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. 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 fourth quarter of fiscal 1999.
The allocation of the purchase price has not been determined as of the filing
date of this report.
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 Nine Months Ended
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1997 1999 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 47.7 46.4 47.4 46.7
----- ---- --- ----
Gross profit.............................................. 52.3 53.6 52.6 53.3
Research and development expenses....................... 5.9 6.0 6.7 6.6
Purchased research and development expenses............. 37.5 - 13.7 -
Selling, general and administrative expenses............ 25.0 25.8 24.9 24.4
----- ---- --- ----
Operating income.......................................... (16.1) 21.8 7.3 22.3
Other income ........................................... 3.5 2.0 4.4 1.7
----- ---- --- ----
Income before income taxes................................ (12.6) 23.8 11.7 24.0
Provision for income taxes.............................. 8.6 6.6 8.9 7.7
----- ---- --- ----
Net income (21.2)% 17.2% 2.8% 16.3%
===== ==== === ====
</TABLE>
Three Months Ended January 1, 1999 Compared to the Three Months Ended December
31, 1997
Net sales increased 63.5% to $20.5 million in the three months ended
January 1, 1999 from $12.5 million in the three months ended December 31, 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 67.1% to $18.2 million in the three months ended January 1, 1999 from
$10.9 million in the three months ended December 31, 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 55% from third
quarter of Fiscal 1998 to the third quarter of Fiscal 1999, while the entry
level product segment grew over 250% 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 28.5%
to $1.9 million in the three months ended January 1, 1999 from $1.4 million in
the three months ended December 31, 1997. The PC Plus line, the PolyCon RC line
and the newly introduced LongView product accounted primarily for the growth in
KVM Extension Product sales.
As a percentage of net sales, the Company's KVM Switch Products increased
to 88.6% from 86.7% and KVM Extension Products declined to 9.2% from 11.7%
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.
11
<PAGE> 12
International sales increased 203.4% to $7.8 million in the three months
ended January 1, 1999 from $2.7 million in the three months ended December 31,
1997 and accounted for 38.8% of total revenues. Sales to customers in Europe
represented approximately 29.7% 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 67.7% to $11.0 million in three months
ended January 1, 1999 from $6.6 million in the three months ended December 31,
1997. Gross profit as a percentage of net sales increased from 52.3% to 53.6%
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 (SG&A) expenses increased 68.9% to $5.3
million (25.8% of net sales) in the three months ended January 1, 1999, from
$3.1 million (25.0% of net sales) in the three months ended December 31, 1997.
The increase in 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 incurred for legal costs associated with the defense of a
patent infringement claim discussed below. Management anticipates that the
dollar amount of SG&A expense will continue to increase.
Research and development (R&D) expense grew 67.6% to $1.2 million or 6.0%
of net sales in the three months ended January 1, 1999, from $.7 million or 5.9%
of net sales in the three months ended December 31, 1997. The increase in R&D
reflects the additional expenses of PolyCon acquired in December 1997.
Management anticipates that the dollar amount of R&D expenses will increase and
as a percentage of net sales will increase slightly.
As a result of the factors discussed above, operating income, before a
one-time write-off of $4.7 million related to the Polycon acquisition in
December 1997, increased 66.2% to $4.5 million (21.8% of net sales) in the three
months ended January 1, 1999, from $2.7 million (21.4% of net sales) in the
three months ended December 31, 1997.
Other income decreased 5.9% to $414,000 (2.0% of net sales) in the three
months ended January 1, 1999, compared to $440,000 in the three months ended
December 31, 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.
Net income, before a one-time write-off of $4.7 million related to the
Polycon acquisition in December 1997 increased 72.7% to $3.5 million (17.2% of
net sales) in the three months ended January 1, 1999, from $2.0 million (16.3%
of net sales) in the three months ended December 31, 1997, as a result of the
factors discussed above.
Nine Months Ended January 1, 1999 Compared to the Nine Months Ended December 31,
1997.
Net sales increased 70.0% to $58.7 million for the nine months ended
January 1, 1999. 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 77.8% to $52.2 million in the nine months ended January 1, 1999 from
$29.3 million in the nine months ended December 31, 1997. Sales of KVM Extension
Products increased 20.7% to $5.4 million in the nine months ended January 1,
1999 from $4.5 million in the nine months ended December 31, 1997. The PC Plus
line, the PolyCon RC line and the newly introduced LongView product accounted
primarily for the growth in KVM Extension Product sales. As a percentage of net
sales, the Company's KVM Switch Products increased to 89.0% from 85.1% and KVM
Extension Products declined to 9.2% from 12.9% during the same period.
International sales increased 163.7% to $19.8 million or 34.3% of net sales in
the nine months ended January 1, 1999 as compared to $7.5 million or 22.0% of
net sales in the nine months ended December 31, 1997.
12
<PAGE> 13
Gross profit increased 72.5% to $31.3 million in the nine months ended
January 1, 1999 from $18.1 million in the nine months ended December 31, 1997.
Gross profit as a percentage of net sales increased from 52.6% to 53.3% 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, sales returns 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.
SG&A expenses increased 67.1% to $14.4 million or 24.4% of net sales in the
nine months ended January 1, 1999 from $8.6 million or 24.9% of net sales in the
nine months ended December 31, 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.
R&D expense was $3.9 million or 6.6% of net sales in the nine months ended
January 1, 1999 as compared to $2.3 million or 6.7% of net sales for the nine
months ended December 31, 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 R&D expenses will increase and the
percentage of net sales to increase slightly.
As a result of the factors discussed above, operating income, before a
one-time write-off of $4.7 million related to the Polycon acquisition in
December 1997, increased 80.5% to $13.1 million or 22.3% of net sales for the
nine months ended January 1, 1999 as compared to $7.2 million or 21.0% of net
sales for the nine months ended December 31, 1997.
Other income decreased to $1.0 million or 1.7% of net sales in the nine
months ended January 1, 1999 from $1.5 million or 4.4% of net sales in the nine
months ended December 31, 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 a reduction in realized gains on the sale of
certain investments.
Net income, before a one-time write-off of $4.7 million related to the
Polycon acquisition in December 1997, increased 68.3% to $9.6 million or 16.3%
of net sales for the nine months ended January 1, 1999 from $5.7 million or
16.5% of net sales for the nine months ended December 31, 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 January 1, 1999, and for
the nine 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 $2.5 million. The Company had no amounts
outstanding under the lines of credit at January 1, 1999.
The Company's working capital position improved from $38,472,549 as of
March 31, 1998 to $43,947,059 as of January 1, 1999 (adjusted to include
$3,040,833 and $3,154,575 of long term-investments, respectively). This
improvement in the Company's working capital position was due primarily to
increased earnings during the nine months ended January 1, 1999 partially offset
by the Company's investment in it's new corporate headquarters.
Cash provided from operating activities increased from approximately $3.4
million for the nine months ended December 31, 1997 to $7.6 million for the nine
months ended January 1, 1999. The increase in cash provided from operating
activities was caused by an increase in net income, partially offset by a change
in inventory usage between
13
<PAGE> 14
periods presented. The increase in net income is attributed to the increase in
sales. 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 $6.2 million in the first nine months of
Fiscal 1999. Approximately $4.3 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 Huntsville, Alabama built on land 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. The
construction of the facility cost approximately $7.7 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 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 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. 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 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. This phase of the Year 2000 project is substantially
complete.
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
14
<PAGE> 15
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. This phase of the
Year 2000 project is substantially complete.
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 approximately $1.2 million. The total amount
expended on the project through January 1, 1999 was over $1 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 approximately $200,000; approximately
$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 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, 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.
15
<PAGE> 16
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:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule (For SEC use only)
</TABLE>
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: February 16, 1999
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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CYBEX COMPUTER PRODUCTS CORPORATION FOR THE NINE MONTH
PERIOD ENDED JANUARY 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JAN-01-1999
<EXCHANGE-RATE> 1
<CASH> 20,558
<SECURITIES> 10,920
<RECEIVABLES> 15,781
<ALLOWANCES> 1,408
<INVENTORY> 5,836
<CURRENT-ASSETS> 50,907
<PP&E> 14,703
<DEPRECIATION> 2,227
<TOTAL-ASSETS> 70,570
<CURRENT-LIABILITIES> 10,115
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 65,630
<TOTAL-LIABILITY-AND-EQUITY> 70,570
<SALES> 58,662
<TOTAL-REVENUES> 58,662
<CGS> 27,371
<TOTAL-COSTS> 27,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 486
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 14,075
<INCOME-TAX> 4,505
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,570
<EPS-PRIMARY> .77
<EPS-DILUTED> .73
</TABLE>
