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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: JUNE 30, 2000
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 JUNE 30, 2000 19,440,987 SHARES OF THE REGISTRANT'S COMMON STOCK
$.001 PAR VALUE, WERE OUTSTANDING.
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CYBEX COMPUTER PRODUCTS CORPORATION
FORM 10-Q
JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2000 and
June 30, 2000 ......................................................... 3
Condensed Consolidated Statements of Income for the three
months ended July 2, 1999 and June 30, 2000 ........................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended July 2, 1999 and June 30, 2000 ........................... 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 ............ 15
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ................... 16
Item 6. Exhibits .............................................................. 16
SIGNATURES ..................................................................... 17
INDEX OF EXHIBITS .............................................................. 18
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 2000
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 9,703,072 $ 34,878,093
Short-term investments ................................................... 25,480,653 4,984,931
Short-term investments, pledged as collateral for note payable ........... 23,000,000 --
Accounts receivable- trade, less allowance for doubtful accounts
of $2,214,195 and $2,170,489 respectively .............................. 23,151,321 26,557,318
Inventories .............................................................. 11,240,635 12,977,331
Other current assets ..................................................... 1,175,372 1,172,041
Deferred income taxes .................................................... 2,684,099 2,684,099
------------- -------------
Total current assets ......................................... 96,435,152 83,253,813
Investments available for sale, at market .................................. 8,016,340 8,647,036
Property held for lease .................................................... 1,593,221 1,544,847
Property and equipment, net of accumulated depreciation .................... 12,481,939 12,687,491
Intangibles, net of accumulated amortization ............................... 6,560,475 6,403,640
Deferred income taxes ...................................................... 1,879,487 1,878,873
Other assets ............................................................... 328,880 186,497
------------- -------------
$ 127,295,494 $ 114,602,197
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable ............................................................. $ 23,000,000 $ --
Accounts payable and accrued expenses .................................... 9,185,765 8,392,762
Income taxes payable ..................................................... 2,644,955 5,955,868
Other current liabilities ................................................ 7,423,142 7,617,747
------------- -------------
Total current liabilities .................................... 42,253,862 21,966,377
Shareholders' equity:
Preferred stock, par value $.001 per share; 5,000,000 shares
authorized; no shares issued
Common stock, par value $.001 per share; 50,000,000 shares
authorized; March 31, 2000 -- 21,584,664 shares issued,
19,345,605 shares outstanding; June 30, 2000 -- 21,682,397
shares issued, 19,440,987 shares outstanding ............................ 21,585 21,682
Additional paid in capital ................................................ 40,062,786 40,787,896
Accumulated other comprehensive income .................................... (660,564) (391,156)
Retained earnings ......................................................... 50,981,395 57,672,951
Treasury stock, at cost; 2,239,059 and 2,241,410, respectively ............ (5,363,570) (5,455,553)
------------- -------------
Total shareholders' equity ................................... 85,041,632 92,635,820
------------- -------------
$ 127,295,494 $ 114,602,197
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
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CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 2, JUNE 30,
1999 2000
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<S> <C> <C>
Net sales .................................................................. $ 24,299,755 $ 37,086,676
Cost of sales .............................................................. 11,199,093 16,684,101
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Gross profit ............................................................. 13,100,662 20,402,575
Research and development expenses .......................................... 1,664,629 2,061,149
Merger related expenses .................................................... -- 71,293
Selling, general and administrative expenses ............................... 5,503,699 8,447,613
------------- -------------
Operating income ......................................................... 5,932,334 9,822,520
Other income ............................................................... 452,205 60,816
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Income before provision for income taxes ................................. 6,384,539 9,883,336
Provision for income taxes ................................................. 2,136,523 3,191,780
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Net income ............................................................... $ 4,248,016 $ 6,691,556
============= =============
Net income per common and common
equivalent share:
Basic .................................................................... $ .22 $ .35
============= =============
Diluted .................................................................. $ .21 $ .32
============= =============
Weighted average common and common
equivalent shares outstanding:
Basic .................................................................... 19,084,201 19,399,254
============= =============
Diluted .................................................................. 20,019,864 20,822,743
============= =============
</TABLE>
See notes to condensed consolidated financial statements
4
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CYBEX COMPUTER PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 2, JUNE 30,
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 4,248,016 $ 6,691,556
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 385,430 814,807
Amortization of discount investments ................................... (103,776) (236,278)
Provision for losses on accounts receivable ............................ 87,000 131,000
Loss on disposal of property, plant and equipment ...................... -- 32,708
(Gain) loss on sale of investments ...................................... (154,442) 171,403
Changes in operating assets and liabilities:
Accounts receivable-trade ............................................. (986,069) (3,536,997)
Inventories ........................................................... (590,587) (1,736,696)
Accounts payable and accrued expenses ................................. (999,575) (792,160)
Other.................................................................. (66,949) 239,323
Income taxes payable .................................................. 1,746,949 3,310,913
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Net cash provided by operating activities ................................. 3,565,997 5,089,579
Cash flows from investing activities:
Purchases of property and equipment ...................................... (336,674) (769,071)
Purchases of investments available for sale .............................. (9,230,685) (8,103,050)
Proceeds from the sale of investments .................................... 7,283,305 7,602,377
Proceeds from maturities of investments .................................. 36,259,000 43,732,000
------------- -------------
Net cash provided by investing activities ........................... 33,974,946 42,462,256
Cash flows from financing activities:
Repayment of note payable ................................................ (16,000,000) (23,000,000)
Proceeds from issuance of common stock ................................... 606,735 725,207
Purchase of treasury stock ............................................... (63,017) (91,983)
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Net cash used in financing activities ............................... (15,456,282) (22,366,776)
------------- -------------
Effect of exchange rate changes ............................................ (47,384) (10,038)
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Net increase in cash and cash equivalents ........................... 22,037,277 25,175,021
Cash and cash equivalents, beginning of period ............................. 4,060,565 9,703,072
------------- -------------
Cash and cash equivalents, end of period ................................... $ 26,097,842 $ 34,878,093
============= =============
</TABLE>
See notes to condensed consolidated financial statements
5
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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 June 30, 2000 should be read in
conjunction with the Company's consolidated financial statements as of and for
the year ended March 31, 2000, included in the Company's Form 10-K filed June
22, 2000. Operating results for the three months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 2001. The March 31, 2000 balance sheet data presented herein was
derived from audited financial statements but does not include all disclosures
required by generally accepted accounting principles.
2. STOCK OPTIONS
Options to purchase 415,500 shares of common stock were issued on
varying dates throughout the first quarter of Fiscal 2001 to employees under the
1998 Employee Stock Incentive Plan at the market price as of the effective date.
Also, options to purchase 97,733 shares of common stock were exercised during
the quarter first quarter of Fiscal 2001.
3. COMPREHENSIVE INCOME
The Company records unrealized gains or losses on the Company's foreign
currency translation adjustments and unrealized holding gains or losses on the
Company's available for sale investments as accumulated other comprehensive
income which is included in shareholders' equity. During the first quarter of
Fiscal 2001 and Fiscal 2000, total comprehensive income amounted to $6,960,963
and $4,227,299, respectively.
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share
("EPS") for the quarters ended July 2, 1999 and June 30, 2000, is
as follows:
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<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
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<S> <C> <C> <C>
For the quarter ended July 2, 1999
Basic EPS
Income available to common shareholders $4,248,016 19,084,201 $ 0.22
Effect of Dilutive Securities
Stock Options 935,663
Diluted EPS
Income available to common shareholders
and assumed conversions $4,248,016 20,019,864 $ 0.21
For the quarter ended June 30, 2000
Basic EPS
Income available to common shareholders $6,691,556 19,399,254 $ 0.35
Effect of Dilutive Securities
Stock Options 1,423,489
Diluted EPS
Income available to common shareholders
and assumed conversions $6,691,556 20,822,743 $ 0.32
</TABLE>
5. SEGMENT REPORTING
The Company's reportable segments are based on the Company's method of
internal reporting which is disaggregated operationally. The two reportable
segments, U.S. and International, are evaluated based on gross profit;
therefore, selling, general, and administrative costs, as well as research and
development, interest income/expense, and provision for taxes, is reported on
an entity-wide basis only.
The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies included in the
Company's Annual Report to the extent such policies affect the reported
segment information. The operational distributions of the Company's
revenues and gross margin for the three months ended July 2, 1999 and June 30,
2000 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
(In Thousands) July 2, 1999 June 30, 2000
------------ -------------
<S> <C> <C>
Total sales:
Cybex - U.S. $ 17,094 $ 27,239
Cybex - International 7,841 11,062
Less Intersegment (635) (1,214)
--------- ---------
$ 24,300 $ 37,087
========= =========
Gross Profit:
Cybex - U.S. $ 9,326 $ 14,955
Cybex - International 3,797 5,473
Less Intersegment (22) (25)
--------- ---------
$ 13,101 $ 20,403
========= =========
</TABLE>
The operational distribution of the Company's identifiable assets as of March
31, 2000 and June 31, 2000 is as follows:
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<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 2000 JUNE 30, 2000
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<S> <C> <C>
ASSETS:
CYBEX - U.S. $ 122,039 $ 106,865
CYBEX - INTERNATIONAL 21,510 24,326
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TOTAL IDENTIFIABLE ASSETS 143,549 131,191
ELIMINATIONS (16,254) (16,589)
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TOTAL ASSETS $ 127,295 $ 114,602
========= =========
</TABLE>
6. APPROVED MERGER WITH APEX
In March 2000, the Company announced a proposed merger with Apex Inc.
(Apex), a provider of server console management and switching technology. The
Company and Apex (collectively "the companies") entered into a merger agreement
under which they have agreed to combine the two companies in a merger, resulting
in a new combined corporation under a newly-created parent registrant, Aegean
Sea Inc. On March 31, 2000, the newly created registrant and the companies filed
a registration statement on Form S-4, which was declared effective by the
Securities and Exchange Commission on June 2, 2000. The companies received final
approval of the merger by the shareholders of the respective companies on June
30, 2000. The newly formed company subsequently changed its name to Avocent
Corporation. The merger was effective as of July 1, 2000.
The merger has been accounted for as a purchase in accordance with APB
16 with the purchase price allocated to the assets and liabilities of the
Company based upon their face values at the date of the transaction. The excess
of the purchase price over the fair value of the assets and liabilities has been
allocated to the identifiable intangible assets and goodwill. Additionally,
$94.0 million of the purchase price is expected to be expensed as in process
research and development. A preliminary purchase price allocation is as follows:
<TABLE>
<S> <C>
Tangible assets $110,775,673
Identifiable intangible assets 90,107,903
Goodwill 529,430,650
In-process R&D 94,000,000
Liabilities (28,843,613)
------------
Total purchase price $795,470,613
============
</TABLE>
8
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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, 2000, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JUNE 22, 2000.
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, 2000, as filed with the Securities and Exchange
Commission on June 22, 2000.
MERGER
In March 2000, the Company announced a proposed merger with Apex Inc.
(Apex), a provider of server console management and switching technology. The
Company and Apex (collectively "the companies") entered into a merger agreement
under which they have agreed to combine the two companies in a merger, resulting
in a new combined corporation under a newly-created parent registrant, Aegean
Sea Inc. On March 31, 2000, the newly created registrant and the companies filed
a registration statement on Form S-4, which was declared effective by the
Securities and Exchange Commission on June 2, 2000. The companies received final
approval of the merger by the shareholders of the respective companies on June
30, 2000. The newly formed company subsequently changed its name to Avocent
Corporation. The merger was effective as of July 1, 2000.
The merger has been accounted for as a purchase in accordance with APB
16 with the purchase price allocated to the assets and liabilities of the
Company based upon their face values at the date of the transaction. The excess
of the purchase price over the fair value of the assets and liabilities has been
allocated to the identifiable intangible assets and goodwill. Additionally,
$94.0 million of the purchase price is expected to be expensed as in process
research and development. A preliminary purchase price allocation is as follows;
$110.8 million of tangible assets, $90.1 million of identifiable intangible
assets, $529.4 million of goodwill, $94.0 million of in-process R&D and $28.8
million of assumed liabilities. The amortization periods are 3 to 7 years for
intangibles and 5 years for goodwill.
GENERAL
The Company develops, produces and markets KVM switch, extension,
remote access and display products for use in the computer industry. The
Company's KVM switch products provide multiple users, each with a separate KVM
peripheral, with the capability to control thousands of PCs, thereby eliminating
the need for individual KVM peripherals for the controlled PCs. Elimination of
KVM peripherals can provide significant cost reduction including lower initial
investment, ongoing utility cost 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, Compaq,
IBM and Silicon Graphics workstations functioning either as stand-alone systems
or as file, communications or servers operating within a LAN.
The Company also has interfaces for its XP4040(TM) (formerly known as
the AutoBoot Commander 4xP(TM)/1xP(TM), which operates with models of
IBM RS/6000, Hewlett Packard, Compaq's Alpha, and Silicon Graphic's Indigo
workstations. The Company's AutoView Commander(TM) utilizes a cost-reduced
architecture that continues to provide the architecture for mid-range and entry
level products. SwitchView(R), a two and four port KVM switch product, is the
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Company's first product designed to be mass marketed. The Company completed its
first full quarter of shipping AutoView(TM) 200 during the second quarter of
Fiscal 2000. AutoView(TM) 200 extends the capabilities of KVM switching
technology by allowing two users independent and simultaneous access to any of
eight attached servers. The Company also markets several mid-range to high-end
switching solutions including the PolyCon/S, a single user console switching
hub, and the PolyCon/XS, a multi-user matrix console switching hub.
Additionally, in May of 2000, the Company announced the DS1800, a digital
switching solution which will allow system administrators secure access to an
unlimited number of servers using the existing networking infrastructure. The
DS1800 is expected to be complete and available for shipping during October
2000.
Novell Corporation certified certain KVM switch products for use with
its network software Netware(R) 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 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 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. The Company began shipping Key-View(TM) II, its
second generation and newest remote access solution, during the first quarter of
Fiscal 2000. When used in conjunction with a KVM switch product, the Company's
remote access line of extension products permits users to control attached PCs
remotely.
As a result of the PixelVision acquisition, the Company now offers
display products related to high information-content digital display solutions.
The SMARTGLAS(TM) technology offers users working in time or mission critical
environments simultaneous access to large amounts of information. This
technology permits the consolidation of information from multiple sources to be
displayed on single or multiple flat panel displays, forming a "tiled" display
solution.
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 and customers
of PixelVision discussed below. Net sales increases are expected to continue
with the consummation of the merger with Apex. The increases in annual net sales
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. These new
and enhanced products are price competitive when compared to prior generations
of the Company's products and to the products of competitors. As a part of this
strategy, the Company seeks to be price competitive and to be the high quality
provider of products in its markets. This strategy has enabled the Company to
sell succeeding generations of products to existing customers as well as to
increase its market share by selling products to new customers.
The Company markets its products to a diversified group of dealers,
distributors, OEM's and end users, primarily through its inside and outside
sales and customer support staff, advertisements in trade publications and
participation in major industry trade shows. The Company has broadened its
marketing strategy of expanding channels of distribution by increased
penetration in the OEM market, major distribution and catalog markets. In the
third quarter of Fiscal 2000, the Company began shipments of an OEM product to a
major U.S. computer manufacturer.
The Company expanded its marketing strategy to include the retail
channel of distribution with the introduction of SwitchView(R), which targets
the desktop market. SwitchView(R) 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,
multi-
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platform 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 reviews its hardware solutions for the computer
industry and 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 and a one-year warranty on parts. The Company also
allows additional rights of return to certain of its distributors, which
generally extend the return period to ninety days. The Company accrues for sales
returns as a reduction of revenue and cost of sales at the time the product
revenue is recognized based on historical sales return experience, which
management believes provides a reasonable estimate of future returns. The
Company accrues for warranty returns at cost to repair or replace products. The
Company also offers sales discounts to its customers based on the level of
sales.
The Company generally records sales upon shipment of the related
product, net of any discounts, as the Company generally has no significant post
delivery obligations, the product price is fixed and determinable, collection of
the resulting receivable is probable, and product returns are reasonably
estimable. Revenue on products shipped FOB destination is recorded when the
customer takes possession of the goods.
The Company believes that increasing its international sales is an
important element in the overall strategy of future revenue growth.
International sales comprised 32% for the quarter ended June 30, 2000 and, 32%,
and 35% of the Company's total sales in, Fiscal 2000, and Fiscal 1999,
respectively.
STRATEGIC ACQUISITION
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 new and enhanced product
development, but also through strategic acquisition and expansion efforts.
Consistent with this philosophy, on October 5, 1999 the Company acquired
substantially all the assets, including the related intellectual property and
patents, of PixelVision Technology, Inc., pursuant to an asset purchase
agreement dated October 5, 1999 between the Company and PixelVision.
PixelVision, a privately held company, designs, manufactures and markets
products and services related to high-information content digital display
solutions. The Company paid approximately $6.7 million including
acquisition-related expenses to acquire PixelVision. 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
totaling $370,000 were allocated to research and development assets with
alternative future uses and were capitalized. The remaining $2.2 million of
purchased research and development were expensed as a one-time charge during the
third quarter of Fiscal 2000.
The Company obtained an independent valuation of PixelVision and values
were assigned to developed technology, in-process research and development,
assembled work force, customer base and patents. The valuations of developed
technology, in-process R&D and patents were established using an income-based
approach. The valuation of the assembled work force and customer base were
valued using a cost-based approach. Revenue estimates for the technology under
development were based on discussions with management, anticipated product
development schedules, product sales cycles and estimated life of the
technology. Revenues for the products under development were estimated beginning
in the fourth quarter of calendar 1999 and through the years ended December 31,
2000 through 2004. Projected expenses were based on historical selling, general
and administrative expenses and maintenance research and development expenses of
both the Company and PixelVision. It is anticipated that future profit margins
and growth will vary significantly from the historical operating results of
PixelVision. The resulting operating income was adjusted for income tax expense
using the Company's tax rate. In addition, estimated required
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returns on beginning net working capital, assembled work force, customer base,
patents, other assets and developed technologies, along with a deduction for
cash flow attributable to the assembled work force, other assets, customer base,
patents and developed technologies, were considered in the discounted cash flow
analysis. The risk-adjusted discount rate applied to after-tax cash flow was 25%
for completed technology and 35% for in-process technology, compared to an
estimated weighted-average cost of capital for PixelVision of approximately 35%.
The total value of in-process R&D was estimated to be approximately
$2.2 million. The estimated in-process research and development was attributable
to certain specific component technologies within PixelVision's products that
were still in development at the time of the acquisition. The products under
development were at various stages of completion and include: new circuit cards
for digitizing and displaying images (Pearl and Super B-Video), monitors that
incorporate the new cards (18QX, 20MC and 15@SG3 monitor). Most of these
products were completed on-time and began shipping in the latter part of Fiscal
2000. The 15"SG3 is expected to be completed and available for shipping in late
Fiscal 2001. The completed products include the Pearl and Super B-Video circuit
cards as well as the 18QX and 20MC monitors incorporating these cards.
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 2, JUNE 30,
------- --------
1999 2000
------- --------
<S> <C> <C>
Net sales .................................................................. 100.0% 100.0%
Cost of sales ............................................................ 46.1 45.0
------ ------
Gross profit ............................................................... 53.9 55.0
Research and development expenses ........................................ 6.9 5.6
Merger related expenses .................................................. -- 0.1
Selling, general and administrative expenses ............................. 22.6 22.8
------ ------
Operating income ........................................................... 24.4 26.5
Other income ............................................................. 1.9 0.1
------ ------
Income before income taxes ................................................. 26.3 26.6
Provision for income taxes ............................................... 8.8 8.6
------ ------
Net income ................................................................. 17.5% 18.0%
====== ======
</TABLE>
Three Months Ended June 30, 2000 Compared to the Three Months Ended July 2, 1999
Net sales increased 52.6% to $37.1 million in the three months ended
June 30, 2000 from $24.3 million in the three months ended July 2, 1999.
Additionally, sales for the reportable segment Cybex -- U.S. increased 59.3%
from $17.1 million in the first quarter of Fiscal 2000 to $27.2 million in
Fiscal 2001, while sales for the reportable segment Cybex -- International
increased 41.1% from $7.8 million in the first quarter of Fiscal 2000 to $11.1
million in Fiscal 2001. Over 3.3 million of the increase in sales was attributed
to the display product line obtained as a result of the PixelVision acquisition
in October 1999. The display product sales typically include large orders that
follow a long sales cycle and quarter to quarter revenues for display products
are expected to fluctuate. The increased sales also resulted from increased
sales volume of the Company's KVM Switch Products and Extension Products. Sales
of KVM Switch Products increased 35.9% to $29.8 million in the three months
ended June 30, 2000 from $21.9 million in the three months ended July 2, 1999.
Additionally, sales of KVM Extension Products increased 63.4% to $3.5 million
in the three months ended June 30, 2000 from $2.1 million in the three months
ended July 2, 1999. The LongView and Key-View II products 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 the three months ended June 30, 2000.
International sales increased 36.4% to $11.6 million in the first quarter of
Fiscal 2001 from $8.5 million in first quarter of Fiscal 2000. Sales in the
European Community accounted for approximately $8.0 million, or 69.1% of
international sales, and grew 20.2% from Fiscal 2000 to Fiscal 2001.
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<PAGE> 13
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 55.7% to $20.4
million in three months ended June 30, 2000 from $13.1 million in the three
months ended July 2, 1999. Gross profit for the reportable segment Cybex -- U.S.
increased 60.4% from $9.3 million in the three months ended July 2, 1999 to
$15.0 million in the three months ended June 30, 2000, while the gross profit
for Cybex -- International increased 44.1% from $3.8 million in the first
quarter of Fiscal 1999 to $5.5 million in the first quarter of Fiscal 2000.
Gross profit as a percentage of net sales increased from 53.9% to 55.0%. The
increase in gross margin as a percentage of sales is the result of cost
reductions due to volume efficiencies and increased outsourcing, and design
changes. The increase was offset somewhat by the diluting effect of display
product sales, which have much lower margins than the other product lines.
Display product margin was 21.2% versus all other product's gross margin of
58.4%.
Selling, general and administrative (SG&A) expenses increased 53.5% to
$8.5 million (22.8% of net sales) in the three months ended June 30, 2000, from
$5.5 million (22.6% of net sales) in the three months ended July 2, 1999. The
increase in SG&A expenses reflects the increased level of expenditures in
administration, sales, customer support, advertising, and marketing activities
required to support the Company's expanded sales base domestically and abroad,
as well as additional SG&A costs from PixelVision. Management anticipates that
the dollar amount of selling, general and administrative expense will continue
to increase.
Research and development (R&D) expense grew 23.9% to $2.1 million or
5.6% of net sales in the three months ended June 30, 2000, from $1.7 million or
6.6% of net sales in the three months ended July 2, 1999. The increase in R&D
expense can be attributed to the continued focus on new product and technology
development as well as product integration and product cost reduction efforts
through improved product design. Management anticipates that the dollar amount
of research and development expenses will increase and as a percentage of net
sales will increase slightly.
As a result of the factors discussed above, operating income increased
65.6% to $9.8 million (26.5% of net sales) in the three months ended June 30,
2000, from $5.9 million (24.4% of net sales) in the three months ended July 2,
1999.
Other income decreased drastically 87% to $61,000 (0.1% of net sales)
in the three months ended June 30, 2000, compared to $452,000 (1.9% of net
sales) in the three months ended July 2, 1999. Interest income and other expense
includes realized gains on the sale of certain investments, interest income and
expense and the accretion of U.S. Treasury Bill discounts. The primary reason
for the decline was $171,000 in realized losses in equity investments during the
first quarter of fiscal 2001 versus $154,000 realized gain in fiscal 2000. This
loss in equities reflects the overall volatility of the stock market. Other
expense also includes foreign currency loss of almost $100,000 during the
quarter as compared to a foreign currency loss of only $32,000 in the prior
year's quarter. This fluctuation is attributed to the weakening of the Euro
against the dollar during the period. As a result of implementing new Treasury
policies, cash held in foreign currencies decreased during the quarter thereby
reducing translation exposure.
Net income increased 57.5% to $6.7 million (18.0% of net sales) in the
three months ended June 30, 2000, from $4.2 million (17.5% of net sales) in the
three months ended July 2, 1999, 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 June 30, 2000, 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 June 30, 2000.
The Company's working capital position improved from $62.2 million as
of March 31, 2000 to $69.9 million as of June 30, 2000 (adjusted to include $8.0
million and $8.6 million of long term-investments, respectively). This
13
<PAGE> 14
improvement in the Company's working capital position was due primarily to
increased earnings during the quarter ended June 30, 2000.
Cash provided from operating activities increased from approximately
$3.6 million for the three months ended July 2, 1999 to $5.1 million for the
three months ended July 2, 1999. The increase was attributed primarily to an
increase in net income and an increase in income taxes payable. These increases
were offset by increases in accounts receivable and inventories. The increase in
net income is directly related to the increase in sales, while the increase in
income taxes payable relates to the increase in income. The increase in accounts
receivable can be attributed to timing of sales and timing of collections. Over
$2.1 million in outstanding receivables were collected in the 3 days after
quarter end. The increase in inventory levels is attributed to the overall
anticipated demand for new and existing products as well as inventory for
products under development including the DS1800. The DS1800 is not expected to
ship until the beginning of the third quarter of fiscal 2001. 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 $769,000 in the first three months of
Fiscal 2001. 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 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities Deferral of
the Effective Date of FASB No. 133, which deferred the effective date provisions
of SFAS No. 133 for the Company until the first quarter of 2001. 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. The Company is evaluating the effect of
this new standard but does not believe it will be material to the Company.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
This pronouncement summarizes certain of the SEC staff's views on applying
generally accepted accounting principles to revenue recognition. The Company has
reviewed the requirements of SAB 101 and believes that its existing accounting
policies are in accordance with the guidance provided in the SAB.
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. Additionally, the Company
believes that, when the
14
<PAGE> 15
anticipated merger with Apex is completed, the PTO proceedings will be dismissed
since both the Company's re-issue application and Apex's patents will be owned
by the Avocent.
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 June
30, 2000. The Company generally holds investments until maturity and carries the
securities at amortized cost, which approximates fair market value.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Shareholders on June 30, 2000. At the
Special Meeting, the shareholders voted to ratify our merger with Apex Inc. and
the Agreement and Plan of Reorganization dated March 8, 2000, by the following
votes:
<TABLE>
<CAPTION>
NUMBER OF
SHARES %
---------- ----------
<S> <C> <C>
FOR 15,371,238 79.15%
AGAINST 42,049 0.22%
ABSTAIN 37,084 0.19%
NOT VOTED 3,969,475 20.44%
---------- ----------
Total 19,419,846 100.0%
========== ==========
</TABLE>
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>
(b) Reports on Form 8-K
On July 10, 2000, Avocent Corporation filed a Current Report on Form
8-K with the Securities and Exchange Commission relating to our merger
with Apex Inc., which was effected on July 1, 2000. Apex and the
Company are now wholly-owned subsidiaries of Avocent.
16
<PAGE> 17
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 14, 2000
17
<PAGE> 18
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule (For SEC use only)
</TABLE>
18
