<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: JULY 2, 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 AUGUST 16, 1999, 12,755,229 SHARES OF THE REGISTRANT'S COMMON STOCK
$.001 PAR VALUE, WERE OUTSTANDING.
<PAGE> 2
CYBEX COMPUTER PRODUCTS CORPORATION
FORM 10-Q
JULY 2, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1999 (audited)
and July 2, 1999 .................................................... 3
Condensed Consolidated Statements of Income for the three
months ended July 3, 1998 and July 2, 1999 ......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended July 3, 1998 and July 2, 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 .......... 16
Part II - OTHER INFORMATION
Item 6. Exhibits ............................................................ 17
SIGNATURES........................................................................ 18
INDEX OF EXHIBITS................................................................. 19
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JULY 2,
1999 1999
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 4,060,565 $26,097,842
Short-term investments .......................................... 26,000,778 7,811,749
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 $1,400,193, respectively ...................... 15,948,952 16,848,020
Inventories ..................................................... 7,447,252 8,037,839
Other current assets ............................................ 1,209,852 1,676,573
Deferred income taxes ........................................... 1,838,300 1,838,300
----------- -----------
Total current assets ...................................... 72,505,699 62,310,323
Investments available for sale, at market ........................ 2,930,404 3,239,095
Property and equipment, net of accumulated depreciation .......... 12,552,112 12,488,972
Intangibles, net ................................................. 3,709,712 3,489,347
Deferred income taxes ............................................ 832,224 832,224
Other assets ..................................................... 320,270 241,930
----------- -----------
$92,850,421 $82,601,891
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable .................................................... $16,000,000 $ --
Accounts payable and accrued expenses ........................... 5,256,745 4,389,182
Income taxes payable ............................................ 1,617,471 3,364,420
Other current liabilities ....................................... 5,780,231 5,881,297
----------- -----------
Total current liabilities ........................... 28,654,447 13,634,899
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, 1999 -- 14,173,281 shares issued,
12,682,877 shares outstanding; July 2, 1999 -- 14,246,585
shares issued, 12,753,879 shares outstanding ................... 14,173 14,247
Additional paid in capital ...................................... 37,500,614 38,107,276
Accumulated other comprehensive income .......................... (231,208) (251,925)
Retained earnings ............................................... 32,212,948 36,460,964
Treasury stock, at cost; 1,490,404 and 1,492,706 shares ......... (5,300,553) (5,363,570)
----------- ------------
Total shareholders' equity ....................... 64,195,974 68,966,992
----------- ------------
$92,850,421 $ 82,601,891
=========== ============
</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
JULY 3, JULY 2,
1998 1999
---- ----
<S> <C> <C>
Net sales ...................................................................... $18,565,573 $24,299,755
Cost of sales .................................................................. 8,723,570 11,199,093
----------- -----------
Gross profit ............................................................... 9,842,003 13,100,662
Research and development expenses .............................................. 1,177,932 1,664,629
Selling, general and administrative expenses ................................... 4,718,854 5,503,699
----------- -----------
Operating income ........................................................... 3,945,217 5,932,334
Other income .................................................................. 429,757 452,205
----------- -----------
Income before provision for income taxes ................................... 4,374,974 6,384,539
Provision for income taxes .................................................... 1,567,140 2,136,523
----------- -----------
Net income ................................................................... $ 2,807,834 $ 4,248,016
=========== ===========
Net income per common and common
equivalent share:
Basic. ....................................................................... $ .23 $ .33
=========== ===========
Diluted ...................................................................... $ .22 $ .32
=========== ===========
Weighted average common and common
equivalent shares outstanding:
Basic .......................................................................... 12,397,167 12,722,801
=========== ===========
Diluted ........................................................................ 12,853,918 13,346,576
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 3, JULY 2,
1998 1999
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 2,807,834 $ 4,248,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 298,460 385,430
Amortization of discount on investments ................................ (155,708) (103,776)
Provision for losses on accounts receivable ............................ 164,394 87,000
Gain on sale of investments ............................................ (18,726) (154,442)
Changes in operating assets and liabilities:
Accounts receivable-trade ............................................. (1,128,107) (986,069)
Inventories ........................................................... (851,991) (590,587)
Accounts payable and accrued expenses ................................. (670,274) (999,575)
Other ................................................................. (58,414) (66,949)
Income taxes payable .................................................. 992,900 1,746,949
----------- -----------
Net cash provided by operating activities ............................. 1,380,368 3,565,997
Cash flows from investing activities:
Purchases of property and equipment ..................................... (3,065,250) (336,674)
Purchases of investments available for sale ............................. (15,455,868) (9,230,685)
Proceeds from the sale of investments ................................... 2,905,140 7,283,305
Proceeds from maturities of investments ................................. 34,925,000 36,259,000
----------- -----------
Net cash provided by investing activities .............................. 19,309,022 33,974,946
Cash flows from financing activities:
Repayment of note payable ............................................... (12,016,678) (16,000,000)
Proceeds from issuance of common stock .................................. 276,511 606,735
Purchase of treasury stock .............................................. (63,017)
----------- -----------
Net cash used in financing activities .................................. (11,740,167) (15,456,282)
----------- -----------
Effect of exchange rate changes ......................................... 19,581 (47,384)
----------- -----------
Net increase in cash and cash equivalents ............................... 8,968,804 22,037,277
Cash and cash equivalents, beginning of period ........................... 2,411,085 4,060,565
----------- -----------
Cash and cash equivalents, end of period ................................. $11,379,889 $26,097,842
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................ $ 23,852 $ 18,053
=========== ===========
Cash paid during the period for income taxes ............................ $ 515,500 $ 331,300
=========== ===========
</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 July 2, 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 months ended July 2, 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.
2. LINE OF CREDIT
The Company has a bank line of credit which provides for borrowings
of up to $7.5 million. Interest on outstanding advances was payable monthly at
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 July 2, 1999,
or March 31, 1999.
3. STOCK OPTIONS
Options to purchase 335,000 shares of common stock were issued 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 Incentive Plan at the market price as of the effective date.
Also, options to purchase 73,304 shares of common stock were exercised during
the quarter.
4. 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 first quarter of Fiscal 2000 and Fiscal 1999, total
comprehensive income amounted to $4,227,299 and $2,558,875, respectively.
6
<PAGE> 7
5. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the three months ended July 3, 1998, and July 2, 1999, is as
follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
For the quarter ended July 3, 1998
Basic EPS
Income available to common shareholders $2,807,834 12,397,167 $0.23
Effect of Dilutive Securities
Stock Options 456,751
Diluted EPS
Income available to common shareholders
and assumed conversions $2,807,834 12,853,918 $0.22
For the quarter ended July 2, 1999
Basic EPS
Income available to common shareholders $4,248,016 12,722,801 $0.33
Effect of Dilutive Securities
Stock Options 623,775
Diluted EPS
Income available to common shareholders
and assumed conversions $4,248,016 13,346,576 $0.32
</TABLE>
6. 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
en 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 months ended July 3, 1998, and July 2, 1999, is as follows:
<TABLE>
<CAPTION>
(In Thousands) July 3, 1998 July 2, 1999
------------ ------------
<S> <C> <C>
Total sales:
Cybex - U.S. $13,637 $17,094
Cybex - International 4,999 7,841
Less Intercompany (70) (635)
------- -------
$18,566 $24,300
======= =======
Gross Profit:
Cybex - U.S. $ 7,200 $ 9,326
Cybex - International 2,654 3,797
Less Intercompany (12) (22)
------- -------
$ 9,842 $13,101
======= =======
</TABLE>
7
<PAGE> 8
The operational distribution of the Company's identifiable assets as of March
31, 1999 and July 2, 1999 is as follows:
<TABLE>
<CAPTION>
(In Thousands) March 31, 1999 July 2, 1999
-------------- ------------
<S> <C> <C>
Assets:
Cybex - U.S. $88,815 $77,165
Cybex - International 16,678 17,118
------- -------
Total identifiable assets 105,493 94,283
Eliminations (12,643) (11,681)
------- -------
Total Assets $92,850 $82,602
======= =======
</TABLE>
7. SUBSEQUENT EVENT
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.
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 up to four
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 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. 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 the PolyCon
Companies, 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. 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 access hardware or software on the
PCs or Servers being accessed. When used in conjunction with a KVM Switch
Product, the Company's remote access KVM Extension Products permits users to
control attached PCs remotely.
9
<PAGE> 10
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 February 1, 1999, the Company acquired substantially all the
assets, including the related intellectual property and patents, of Fox, a
privately held company that develops remote access technology for the control
and operation of personal computers and file servers.
Additionally, the Company completed its acquisition of the PolyCon
Companies on December 31, 1997, discussed later herein. 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.
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. 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 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 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.
10
<PAGE> 11
The Company believes that increasing its international sales is an
important element in the overall strategy of future revenue growth.
International sales comprised 35% of the Companies sales for the quarter ended
July 2, 1999 and 35% and 26% of the Company's total sales in Fiscal 1999 and
Fiscal 1998, respectively.
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. 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.
In February 1999, the Company acquired Fox for a combined purchase price of
approximately $2.5 million including acquisition-related expenses. Fox has
technology and products that 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-based remote access device that allows control
of servers over ordinary telephone lines and the Internet from a remote
location ("Key-View II(TM)").
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 II(TM) 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 II(TM). The development of Key-View
II(TM) 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 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
11
<PAGE> 12
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 74% of the estimated in-process research and development
were attributable to 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 the digital switching technology was expected to
take a minimum of two years to complete. The project is currently anticipated
to complete in late Fiscal 2000 or early Fiscal 2001.
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.
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 quarters ended indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 3, JULY 2,
------- -------
1998 1999
---- ----
<S> <C> <C>
Net sales ......................................................................... 100.0% 100.0%
Cost of sales .................................................................... 47.0 46.1
----- -----
Gross profit ...................................................................... 53.0 53.9
Research and development expenses ................................................ 6.4 6.9
Selling, general and administrative expenses ..................................... 25.4 22.6
----- -----
Operating income .................................................................. 21.2 24.4
Other income ..................................................................... 2.3 1.9
----- -----
Income before income taxes ........................................................ 23.5 26.3
Provision for income taxes ....................................................... 8.4 8.8
----- -----
Net income ........................................................................ 15.1% 17.5%
===== =====
</TABLE>
Three Months Ended July 2, 1999 Compared to the Three Months Ended July 3, 1998
Net sales increased 30.9% to $24.3 million in the three months ended July
2, 1999 from $18.6 million in the three months ended July 3, 1998. Additionally
sales for the reportable segment Cybex - U.S. increased 25.4% from $13.6
million in the first quarter of Fiscal 1999 to $17.1 million in Fiscal 2000,
while sales for the reportable segment Cybex - International increased 56.9%
from $5.0 million in the first quarter of Fiscal 1999 to $7.8 million in Fiscal
2000. Overall , the increased sales resulted from increased sales volume of the
Company's KVM Switch Products. Sales of KVM Switch Products increased 32.2% to
$21.9 million in the three months ended July 2, 1999 from $16.6 million in the
three months ended July 3, 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 32% from Fiscal 1999 to Fiscal 2000, while
the entry level product line grew 52%. The entry level product sales growth was
fueled by sales of SwitchView(TM), which grew over 100% from fiscal 1999 to
fiscal 2000. Additionally, sales of KVM Extension Products increased 31.1% to
$2.1 million in the three months ended July 2, 1999 from $1.6 million in the
three months ended July 3, 1998. The LongView, introduced in the third quarter
of fiscal 1999, accounted for most of the growth in KVM Extension Product
sales.
The Company's international sales volume (sales to locations outside the
U.S) continued to increase in three months ended July 2, 1999, causing
international sales as a percentage of net sales to increase to 35% as compared
to 31% in the three months ended July 3, 1998. International sales increased
49.8% to $8.5 million in the first quarter of
12
<PAGE> 13
Fiscal 2000 from $5.7 million in first quarter of Fiscal 1999. Sales in the
European Community accounted for approximately $6.4 million, or 75.4% of
international sales, and grew 53.7% from Fiscal 1999 to Fiscal 2000.
Gross profit is affected by many factors including: product mix,
discounts, price competition, new product introductions and start-up costs,
increasing material and labor costs and the levels of outsourcing of
manufacturing and assembly services. Gross profit increased 33.1% to $13.1
million in three months ended July 2, 1999 from $9.8 million in the three
months ended July 3, 1998. Gross profit for the reportable segment Cybex - U.S.
increased 29.5% from $7.2 million in the three months ended July 3, 1998 to
$9.3 million in the three months ended July 2, 1999, while the gross profit for
Cybex - International increased 43.1% from $2.7 million in the first quarter of
Fiscal 1999 to $3.8 million in the first quarter of Fiscal 2000. Gross profit
as a percentage of net sales increased from 53.0% to 53.9% due to increased
volume in 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
increase 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 16.6% to
$5.5 million (22.6% of net sales) in the three months ended July 2, 1999, from
$4.7 million (25.4% of net sales) in the three months ended July 3, 1998. 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
and abroad. However, SG&A did decline as a percentage of sales due to certain
efficiencies recognized from the increased volume. Also contributing to SG&A's
decline as a percentage of sales, was the 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 41.3% to $1.7 million or 6.9%
of net sales in the three months ended July 2, 1999, from $1.2 million or 6.4%
of net sales in the three months ended July 3, 1998. The increase 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.
As a result of the factors discussed above, operating income increased
50.4% to $5.9 million (24.4% of net sales) in the three months ended July 2,
1999, from $3.9 million (21.2% of net sales) in the three months ended July 3,
1998.
Other income increased slightly 5.1% to $452,000 (1.9% of net sales) in
the three months ended July 2, 1999, compared to $430,000 (2.3% of net sales)
in the three months ended July 3, 1998. Interest and other income includes
realized gains on the sale of certain investments, interest income and expense
and the accretion of U.S. Treasury Bill discounts.
Net income increased 51.2% to $4.2 million (17.5% of net sales) in the
three months ended July 2, 1999, from $2.8 million (15.1% of net sales) in the
three months ended July 3, 1998, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations primarily through cash flow from
operations and cash reserves as needed. As of July 2, 1999, and for the three
months then ended, the Company and its subsidiaries had an available line of
credit of $7.5 million with no outstanding borrowings. The Company had no
amounts outstanding under the lines of credit at July 2, 1999.
The Company's working capital position improved from $46.8 million as of
March 31, 1999 to $51.9 million as of July 2, 1999 (adjusted to include $2.9
million and $3.2 of long term-investments, respectively). This improvement in
the Company's working capital position was due primarily to increased earnings
during the quarter ended July 2, 1999.
13
<PAGE> 14
Cash provided from operating activities increased from approximately $1.4
million for the three months ended July 3, 1998 to $3.6 million for the three
months ended July 2, 1999. The increase was attributed primarily to an increase
in net income. The increase in net income is attributed to the increase in
sales. Additionally, increases in accounts receivable at a decreasing rate from
the three months ended July 3, 1998 to the three months ended July 2, 1999
attributed to the increase in cash provided by operating activities. The
fluctuation in the accounts receivable increase can be attributed to timing of
sales and more prompt collection of receivable. Inventory levels increasing at
a decreasing rate also contributed to rise in cash flows from operating
activities. The increase in inventory is attributed to the overall anticipated
demand for new and existing products. The Company expects to 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 $337,000 in the first three months of Fiscal
2000. These capital expenditures related to purchases of office equipment,
computer hardware and software, engineering test equipment and manufacturing
test equipment for the Company and its subsidiaries.
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.
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 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 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.
14
<PAGE> 15
Internal Non-financial Software and Manufacturing Equipment. The Company is
in the final phase of review 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 the second quarter of Fiscal 2000. 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 are 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
final stages 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 the end of the second quarter of Fiscal 2000. To the extent that
responses to Year 2000 readiness are unsatisfactory, the Company intends to
change suppliers, service providers or contractors to those who have
demonstrated Year 2000 readiness but cannot be assured that it will be
successful in finding such alternative suppliers, service providers and
contractors. However, the Company has multiple source vendors for a majority of
its products, which minimizes the risk of an adverse affect on operations. The
Company does not currently have any formal information concerning the Year 2000
compliance status of its customers but has received indications that most of
its customers are addressing Year 2000 compliance issues. In the event that any
of the Company's significant customers and suppliers do not successfully and
timely achieve Year 2000 compliance and the Company is unable to replace them
with new customers or alternate suppliers, the Company's business or operations
could be adversely affected. 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 July 2, 1999, was over $1.1 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 $100,000;
approximately $50,000 relates to replacement of non-compliant software and
hardware and the remaining $50,000 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.
THE ESTIMATES AND CONCLUSIONS CONTAINED IN THIS SECTION ARE FORWARD-LOOKING
STATEMENTS, AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS.
RISKS
15
<PAGE> 16
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. 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
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 Cybex Computer Products Corporation (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. 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.
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 July 2, 1999. The Company
generally holds investments until maturity and carries the securities at
amortized cost, which approximates fair market value.
16
<PAGE> 17
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. Exhibits
<S> <C>
(a) The following exhibits are being filed with this report:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K. None.
</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: August 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
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUL-02-1999
<EXCHANGE-RATE> 1
<CASH> 26,098
<SECURITIES> 7,812
<RECEIVABLES> 18,248
<ALLOWANCES> 1,400
<INVENTORY> 8,038
<CURRENT-ASSETS> 62,310
<PP&E> 15,420
<DEPRECIATION> 2,931
<TOTAL-ASSETS> 82,602
<CURRENT-LIABILITIES> 13,635
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 74,316
<TOTAL-LIABILITY-AND-EQUITY> 82,602
<SALES> 24,300
<TOTAL-REVENUES> 24,300
<CGS> 11,199
<TOTAL-COSTS> 11,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 6,385
<INCOME-TAX> 2,136
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,248
<EPS-BASIC> .33
<EPS-DILUTED> .32
</TABLE>
