ITEM 1. BUSINESS.
GENERAL
Cybex Computer Products Corporation develops, produces and markets keyboard, video monitor and mouse ("KVM") switch, extension and remote access products for use in the computer industry. The Company's KVM switch products provide multiple users, each with a separate keyboard, video monitor and mouse, with the capability to control thousands of personal computers, thereby eliminating the need for individual keyboards, video monitors or mice for the controlled PCs. Elimination of these KVM peripherals can provide significant cost reductions including lower initial investment, reduced 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, IBM, Compaq, and Silicon Graphics workstations functioning either as stand-alone systems or as file, communications or print servers operating within a local area network ("LAN"). The Company's KVM switch products are particularly useful in networking environments where multiple computers are dedicated as servers and in situations where multiple computers need to be controlled from one location to facilitate network management.
The Company's family of KVM extension products allows 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. 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, Internet or 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 line of KVM extension products permits users to control attached PCs remotely.
The Company offers visual 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 products have benefited from the dramatic growth in the use of PCs and the accompanying growth in servers. The Company's products solve many of the space management, security and maintenance problems faced by facilities managers, network administrators and support personnel responsible for monitoring and servicing PCs and servers. All of the Company's products utilize technology developed, enhanced or acquired by the Company that allows the boosting, splitting, switching and converting of KVM signals over distances greater than allowed by conventional computer hardware and cabling. Although the Company does not rely exclusively on patent protection, the Company seeks to protect its technology through patents and nondisclosure agreements.
The Company's goal is to be the market leader in providing KVM switch, extension and remote access products to PC and server users. The Company believes that it offers a more comprehensive family of KVM switch and extension products than any of its competitors. The Company intends to build on its position as an
industry leader by continuing its aggressive research and development efforts to develop new and enhanced products to meet the network management challenges faced by its customers. In order to concentrate its capital resources on research and development, product design, marketing and customer support, the Company outsources most manufacturing functions.
The Company markets its products to a diversified group of dealers, distributors, original equipment manufacturers ("OEMs") and end users, primarily through its inside and outside sales and customer support staff, advertisements in trade publications and participation in major industry trade shows. The Company intends to increase its marketing efforts by:
(i) expanding existing relationships and developing new relationships with dealers, major distributors, end users and OEMs;
(ii) expanding domestic and international sales through new and existing distributors and utilizing its sales, distribution and manufacturing facility in Shannon, Ireland, and its sales offices in Germany, Japan and Singapore;
(iii) recruiting and training additional internal and field sales personnel domestically and abroad;
(iv) expanding its direct mail advertising and telemarketing programs; and
(v) increasing web-enabled management of leads to resellers.
From Fiscal 1998 to Fiscal 1999 and from Fiscal 1999 to Fiscal 2000, the Company's annual growth rates in net sales were 56.4% and 46.5%, respectively. From Fiscal 1998 to Fiscal 1999, net income grew 64.5%, excluding a $1.85 million write-off of purchased research and development costs in connection with the acquisition of certain assets of Fox Network Systems Corporation. In Fiscal 2000, 81.0% of net sales was attributable to KVM switch products, 10.6% was attributable to KVM extension products and 7.2% was attributable to visual display products. From Fiscal 1999 to Fiscal 2000 net income grew 56.2%, excluding a $2.4 million write-off of purchased research and development and acquisition costs in connection with the acquisition of PixelVision Technology, Inc. and $900,000 in legal, accounting and investment banking costs incurred in connection with the anticipated merger with Apex Inc. See "Recent Developments" below.
The Company operates predominantly in one industry: the design, production, marketing and selling of keyboard, video monitor and mouse switch, extension, remote access and display products. The Company's method of internal reporting, however, is disaggregated operationally. The two reportable segments, Cybex-U.S. and Cybex-International, are evaluated based on gross profit; therefore, selling, general and administrative costs, as well as research and development, interest income/expense and provision for taxes, is reported on an entity wide basis only. Reference is made to the information regarding operational distribution of the Company's revenues and gross margin and to the operational distribution of the Company's identifiable assets in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 25 through 34 of this Annual Report on Form 10-K and in Note 19 to the Consolidated Financial Statements set forth on pages 54 and 55 of this Annual Report on Form 10-K.
RECENT DEVELOPMENTS
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 the assets of PixelVision. The acquisition, which was funded from available cash, was accounted for using the purchase method of accounting.
On January 20, 2000, the Company announced a 3 for 2 stock split, effected as a 50% stock dividend. The new shares were distributed on or about February 18, 2000, for shareholders of record as of January 31, 2000.
In March, 2000, Victor Odryna was appointed to the position of Senior Vice President of Corporate Strategic Marketing. Mr. Odryna was founder and Chief Executive Officer of PixelVision from 1991 until October 1999 when PixelVision was acquired by Cybex.
On March 8, 2000, the Company and Apex Inc. signed a definitive merger agreement under which they have agreed to combine the two companies in a merger, resulting in a new combined corporation temporarily named Aegean Sea Inc. Apex, a publicly traded company, currently designs, manufactures and sells stand-alone switching systems and remote access products for the client/server computer market. Like Apex and the Company, Aegean Sea will design, manufacture and market progressive solutions for network management, including keyboard/video/mouse switching systems, KVM extension products, digital video solutions and remote access management tools.
Upon completion of the merger, Apex shareholders will receive 1.0905 shares of Aegean Sea common stock for each share of Apex common stock they own, and the Company shareholders will receive one share of Aegean Sea common stock for each share of Cybex common stock they own. After the merger, former shareholders of Apex will hold approximately 54.5%, and former shareholders of the Company will hold approximately 45.5%, of the outstanding common stock of Aegean Sea. Assuming all conditions are satisfied, the Company expects the merger to be completed in late June or July of 2000. Aegean Sea has applied to list its common stock on The Nasdaq National Market under the symbol "ASEA."
The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, some of which have been waived or satisfied as of the date of this Annual Report, including:
(i) approval and adoption of the merger agreement and the merger by the shareholders of Apex;
(ii) the approval and adoption of the merger agreement and the merger by the shareholders of the Company;
(iii) Aegean Sea's registration statement is effective, no stop order suspending its effectiveness is in effect and no proceedings for suspension of its effectiveness are pending before or threatened by the SEC;
(iv) no law, regulation or order has been enacted or issued which has the effect of making the merger illegal or otherwise prohibiting completion of the merger substantially on the terms contemplated by the merger agreement;
(v) all applicable waiting periods under applicable antitrust laws have expired or been terminated;
(vi) Apex and the Company have each received from their respective tax counsel an opinion to the effect that the merger will constitute a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code;
(vii) the shares of Aegean Sea common stock to be issued in the merger must be authorized for the listing on Nasdaq, subject to notice of issuance;
(viii) Apex's and the Company's representations and warranties in the merger agreement must be true and correct unless the failure to be true and correct would not have a material adverse effect; and
(ix) Apex and the Company must have complied in all material respects with the agreements and covenants that each has made in the merger agreement.
In May 2000, the Company announced the resignation of Remigius Shatas as Executive Vice President of Special Projects and Secretary of the Company. Mr. Shatas will remain a director of the Company. Mr. Shatas left the Company to become Chief Executive Officer of CyCom, LLC, a joint venture with the Company focusing on computer technology and research.
THE INDUSTRY
The computer industry has experienced dramatic changes during the past 20 years. The personal computer has evolved from stand alone PCs with limited application into powerful information management tools as part of enterprise-wide networks. The evolution of computer hardware and software has allowed PCs in many instances to replace larger and more expensive mainframe computers as the preferred information management tool for individuals and organizations of all types and sizes throughout the world. Additionally, internet service providers ("ISPs") and application service providers ("ASPs") have experienced dramatic growth as a result of increased individual and business demand for use of and access to the Internet.
In the corporate environment, enterprise computing is evolving from large, centralized mainframe computers to distributed network computing through PCs interconnected using a client/server design. The typical client/server installation consists of a LAN with multiple centralized PCs operating as "servers" dedicated to performing specific functions, such as file servers, communications servers, and print servers, for multiple "client" PCs connected to the LAN. Separate LANs within a single facility or in geographically dispersed locations often are interconnected through a wide area network ("WAN"). Although IBM-compatible systems constitute the majority of the LANs in operation in the United States, many corporate information systems also include LANs comprised of Sun, Hewlett-Packard, Macintosh, Silicon Graphics, and Compaq workstations and servers.
The expansion of computer networks in recent years has created several problems for corporate users. The computer hardware and peripheral devices required to operate LANs, WANs, ISPs and ASPs can consume substantial physical space. Unlike mainframe computers, which were designed for central configuration and support of key components, PC-based systems were originally designed to operate as stand-alone systems where each server connected to the LAN was required to have its own central processing unit ("CPU"), keyboard, video monitor and mouse, even though generally only the CPU was necessary for the server to perform its designated function within the LAN. There are significant initial investment and ongoing utilities costs and space requirements associated with the KVM peripherals dedicated to each server. The multiple KVM peripherals required to operate individual servers consume valuable space and also make it more difficult for technical staff to support the network. Currently, many organizations have dealt with the space requirements by housing network servers on special racks in dedicated rooms. While this approach has alleviated part of the problem, the keyboards, video monitors and mice continue to occupy space and consume energy. Thus, the resulting facility space and network administration costs required to support LANs, WANs, ISPs and ASPs have grown significantly.
Computer networks have also created additional access, security, and maintenance problems. Unlike terminal-based mainframe computer systems, PC-based network systems generally require a separate CPU, keyboard, video monitor and mouse for each user of the network. The hardware required for each PC causes problems in space-constrained environments, such as brokerage firm trading areas, and creates additional equipment replacement and maintenance expenses in harsh work environments, such as manufacturing plants, where damage to the PCs/servers is more likely to occur. In addition, many organizations are concerned about the security of the system (i.e., unauthorized copying of files or loading of unauthorized programs into the system).
Finally, increased concurrent use of Macintosh, Sun, and other systems alongside PC-based LANs compounds the maintenance and efficiency problems faced by facilities managers and systems administrators. Servers that are needed to control separate operating systems also require space in the computer room for separate CPUs and KVM peripherals.
CYBEX SOLUTIONS
The Company develops products designed to solve many of the problems faced by facilities managers, network administrators, and support personnel responsible for monitoring and servicing the PCs/servers comprising network installations. The Company's products provide solutions in the following ways:
- The Company's announced DS1800, which is expected to ship in mid-Fiscal 2001, is a digital switching solution allowing administrators secure access to an unlimited number of servers, using the existing networking infrastructure. This solution was developed partially with technology obtained from acquisitions.
- The Company's high-end XP 4000(TM) Series, which includes the XP 4040, the XP 4080 and the XP 4400 provides multiple users, each utilizing one keyboard, video monitor and mouse, with the capability to monitor and control thousands of interconnected PCs and network servers, and its high-end PolyCon/XS Matrix Console Switching Hub permits 32 independent consoles to control up to 256 PCs/servers in a matrix format.
- Elimination of KVM peripherals for each of the connected servers through use of the KVM switch products provides significant cost reductions including lower initial investment, reduced utility costs and space savings, as well as more efficient technical support capabilities.
- Because the KVM switch products incorporate technology that intelligently manages the boot process ("AutoBoot(TM) Technology"), these products allow support personnel to automatically boot all connected servers after a power failure or other problem without operator intervention.
- With these switch products, users can organize, maintain, and support banks of IBM-compatible, Macintosh, and Unix-based servers with the same conveniences previously available with mainframe computers controlled from a single user console. For instance, using the KVM switch products, multiple technicians can simultaneously monitor and diagnose multiple servers located in different areas of a facility.
- The Company's KVM extension products provide greater systems design flexibility by allowing customers to locate keyboards, video monitors and mice up to 600 feet away from a PC/server. Certain KVM extension products also permit the addition of one or more keyboards, monitors, and mice to a single PC/server. These products are particularly useful in providing access to PCs/servers in harsh environments such as manufacturing plants where it is not desirable to locate PCs/servers on the plant floor. The use of KVM peripherals separated from the PC/server in this situation decreases the cost of replacing damaged equipment because the PC/server can be relocated to a safe area of the facility.
- The Company's KVM remote access line of extension products allows users to control servers from remote locations using a standard modem, Internet or 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 line of KVM extension products permits users to control attached PCs remotely.
- The extension products also provide advantages in work environments with limited space, such as brokerage firm trading areas, because the PCs/servers can be located outside of the principal work area.
- In both harsh work environments and limited space work areas, KVM extension products improve efficiency by allowing maintenance and support functions to be performed from outside of the main work areas. In addition, these products allow the PC/server to be placed in a secure area thereby limiting a user's ability to copy files onto transportable disks and preventing the insertion of unauthorized programs into the network.
- The Company's visual display products offer users simultaneous access to large amounts of information by allowing the consolidation of information from multiple sources to be displayed on single or multiple flat panel displays, forming a "tiled" display solution.
BUSINESS STRATEGY
The Company's strategy is to be the market leader in developing, producing and marketing KVM switch, extension, remote access and visual display products for the computer industry around the world. The key elements of this strategy are as follows:
Capitalize on Opportunities Created by Networking Trends and Internet Growth. The Company believes that its KVM switch, extension and remote access products address many of the challenges faced by facilities managers, network administrators, and support personnel dealing with multiple hardware configurations and operating platforms as a result of the growth in the PC/server market in recent years. The networking trend and Internet growth has created various markets for products that increase space utilization, improve network management and maintenance functions, lower computer hardware and operating costs and provide security. The Company intends to continue to develop products that enhance its customers' ability to utilize and support standard PC/server hardware in stand-alone and network configurations.
Expand Market/Product Position. The Company believes that it offers a more comprehensive family of KVM switch, extension and remote access products than any of its competitors. The Company intends to build on its position in the KVM switch, extension and remote access products markets by continuing its aggressive research and development efforts aimed at introducing enhanced and new products ahead of its competitors. Given the high level of competition in and the continually evolving nature of its product markets, the Company believes that the introduction of products ahead of its competitors allows for greater sales and profit potential and an enhanced reputation in its markets. Many of the Company's new products have been and will continue to be enhanced versions of existing KVM switch, extension and remote access products, which offer increased application of existing or additional functions.
Increase Marketing and Sales. The Company intends to continue to emphasize marketing and sales by:
(i) expanding existing relationships and developing new relationships with dealers, major distributors, end users and OEMs;
(ii) expanding domestic and international sales through new and existing distributors and utilizing its sales, distribution and manufacturing facility in Shannon, Ireland and its sales offices in Germany, Japan and Singapore;
(iii) recruiting and training additional internal and field sales personnel domestically and abroad;
(iv) expanding its direct mail advertising and telemarketing programs;
(v) increasing web-enabled management of leads to resellers; and
(vi) relying on trade publication advertising, trade show participation and repeat business from existing customers to generate sales.
Continue Customer-Driven R&D. The Company's products and research and development efforts focus on meeting the challenges encountered by customers seeking to achieve efficient and cost-effective utilization of computing resources. The Company intends to continue its customer-driven research and development efforts, which focus on responding to the needs of its customers by producing innovative, practical and marketable products that have immediate applications in their markets. By maintaining extensive contact with customers throughout the installation and technical support process, the Company identifies and tests potential design
modifications and improvements as well as new applications of existing products. This process also leads to the development of entirely new product categories and applications based on existing technology developed to meet specific customer needs.
Outsource Manufacturing Operations. The Company intends to maintain the high degree to which it outsources the manufacturing of its products. Outsourcing of manufacturing functions enables the Company to avoid the capital investment required to establish and maintain an in-house manufacturing capability, thereby allowing the Company to allocate more of its resources to sales and marketing, research and development, product design and customer support.
Emphasize Customer Service and Support. The Company emphasizes 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 customers. Additional rights of return generally extend the return period from 30 to 90 days. The Company estimates and accrues a liability for sales and warranty returns. The Company also offers sales discounts to its customers based on the level of sales.
Identify Strategic Merger and Acquisition Candidates. 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.
PRODUCTS
KVM Switch Products
KVM switch products provide multiple users, each with a separate keyboard, video monitor and mouse, with the capability to control thousands of PCs, thereby eliminating the need for individual keyboards, video monitors and mice for the controlled PCs. The Company's products enable users to control multiplatform configurations, either as a stand-alone system or as a dedicated server operating within a LAN.
A PC/server network utilizing the Company's products is configured so that each PC/server is attached to a specific channel of the KVM switch. The user simply selects the attached PC/server he wishes to observe or control through push buttons on the front panel of the switch, a keyboard "hot-key" sequence or an optional on-screen menu system. The user's keyboard, video monitor and mouse operate as though they are attached directly to the selected PC/server. The KVM switch emits signals that emulate the existence of a keyboard, video monitor and mouse, thereby causing the controlled PC/server to operate just as if the user's KVM peripherals were connected directly to the PC/server whether or not selected. The Company's major KVM switch products include the following:
- The XP 4000(TM) Series, which includes the XP 4040, the XP 4080 and the XP 4400, adds multimedia, multiplatform and multiuser features providing the user with the capability to configure multiple user consoles simultaneously managing an array of thousands of PCs/servers located up to 500 feet from the control unit. The XP 4000(TM) Series can also be used to control terminals, routers, hubs and other equipment with one keyboard, video monitor and mouse. It is "hot-pluggable" and can be reconfigured while in operation without disruption of the operation of the switch or the attached PCs/servers.
- The DS1800, which is expected to ship in mid-Fiscal 2001, is a digital switching solution allowing administrators secure access to an unlimited number of servers, using existing networking infrastructure. This solution was developed partially with technology obtained from acquisitions.
- The AutoView 200(TM) four and eight port matrix KVM switch is designed to allow 2 users access to up to 64 servers. When combined with the Company's Long View(TM) product receiver, the second user can be
located up to 500 feet from the AutoView 200(TM). Additionally, the AutoView 400(TM) eight port matrix KVM switch allows 2 users to access 64 servers and supports Sun, USB and PC based servers.
- The AutoView Commander(TM) adds computer selection through an optional on-screen menu system and adds hot pluggable operations to the AutoBoot(TM) Technology. Both a four-port and an eight-port model are available.
- The SwitchView(R) two and four port KVM switch is designed to switch KVM signals among up to 4 computers. The SwitchView(R) is the Company's first product designed for mass marketing. The SwitchView OSD is an eight port KVM switch designed for small and medium-sized businesses with on-screen display.
- The PolyCon/S Console Switching Hub is designed to control eight servers and can be configured to control 32 PCs/Servers from one console. A console is made up of a keyboard, a monitor and the PolyCon/S Switching Hub.
- The purpose of the PolyCon/XS Matrix Console Switching hub is to simultaneously and independently control multiple PCs/servers from multiple consoles in a matrix format. Available in eight or 16 ports, the PolyCon/XS product can be configured such that 256 PCs/servers can be controlled from 32 independent consoles. In concert with other PolyCon products, the number of PCs/servers can be increased to 1,024.
KVM switch products (other than the XP 4000(TM) Series) can be combined with the Company's KVM converter products to mix Macintosh and Sun systems with IBM PC-compatible systems within one configuration. The XP 4000(TM) Series and AutoView 400 products support multiple operating platforms without the need for separate converter devices. Most of the Company's KVM switch products attach to PCs/servers using the Company's proprietary cable assemblies and some do not require an external power source.
KVM Extension and Remote Access Products
KVM extension products allow users to separate the keyboard, video monitor and mouse up to 600 feet from the PC without significantly degrading the video quality, as compared to six to eight feet allowed by conventional cables. In addition, certain KVM extension products allow multiple users shared access to the same PC from KVM peripherals. KVM extension products are particularly useful in work areas where space is constrained, where working conditions may be hazardous to the function of the computer, or where PC/server security is an important consideration. The Company's remote access line of KVM extension products allows users to control servers from remote locations using a standard modem, Internet or 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 line of KVM extension products permits users to control attached PCs remotely.
The Company's products utilize the Company's proprietary technology that allows the boosting, splitting, switching and converting of usable video signals over distances greater than allowed by conventional computer hardware and cabling. The Company's KVM extension and remote access products include:
- The Key-View II(TM) products provide remote access hardware solutions that allow users to control servers via modem, Internet or network connection. Used alone or in conjunction with a KVM switch product, a user can access all levels of PCs and servers.
- The LongView(TM) allows control of servers from distances of up to 500 feet using a single Category 5 UTP cable. The LongView(TM) features AutoTuning (patent pending), which automatically configures systems without requiring user intervention. The Long View(TM) Companion allows for a second workstation to be located near a PC for convenient system maintenance.
- The PolyCon/RC and the RC+ (Remote Controller) allows the remote control of the PolyCon/S and the PolyCon/XS configurators with a single cable.
Visual Display Products
The Company offers display products related to high information-content digital 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 a single or multiple flat panel displays, forming a "tiled" display solution. The Company's products include 18" and 20" desktop flat panel displays and the Company's SMARTGLAS(TM) multi-tile solution that increases the amount of viewable information, the flexibility and format of the information on the desktop and the consequent value of the information to the user.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that the continued, timely development of new products and enhancements to its existing products is essential to maintaining its competitive position. The Company's research and development efforts focus on responding to the needs of its customers by producing innovative, practical and marketable products that have immediate applications in their markets. By maintaining extensive contact with customers throughout the installation and technical support process, the Company is able to identify and test potential design modifications and improvements as well as new applications and extensions for existing products. This process also leads to the development of entirely new product categories and applications based on existing technology developed to meet specific customer needs. The Company believes that product development activities directed toward solving the practical needs of its customers provides a competitive advantage in introducing new and enhanced products ahead of its competitors. While continuing to introduce enhanced and new products through the various sales channels at different price points, the Company continues to develop its high-end switching products and console switching solutions in Europe in order to leverage and integrate its research and development resources around the world to develop enhanced and new high-end products in the future. In Fiscal 1998, Fiscal 1999 and Fiscal 2000, the Company's research and development expenditures were $3.3 million, $5.2 million, and $7.0 million respectively (6.3%, 6.4%, and 5.8% of net sales, respectively). As of April 30, 2000, the Company's research and development staff consisted of 58 full-time employees.
The Company's products utilize components manufactured by third parties that are generally available to the Company's competitors and potential competitors. The Company's success in the future will depend in part upon its ability to continue to apply such commercially available components to the development of new products and new product categories and enhancement of existing products designed to meet technological changes and customer needs in a cost-effective manner. By emphasizing customer-driven research and development, the Company has been able to develop innovative, practical and marketable products that have had immediate application and acceptance in its markets. The failure by the Company to respond timely to technological changes or customer requirements could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
To meet the challenges of the rapidly changing technology in the computer industry, the Company expects to continue to increase the level of investment in research and development in the future. The Company's primary product development efforts emphasize new or enhanced versions of its KVM switch, extension and remote access products or related products. There can be no assurance that these new or enhanced versions or any other product development efforts of the Company will lead to commercially viable products, will be completed on a timely basis, or will include the features required to achieve market acceptance.
CUSTOMERS, SALES AND MARKETING
The Company's principal customers include a diversified group of dealers and major distributors (64% of net sales in Fiscal 2000), OEMs (26% of net sales in Fiscal 2000) and end users (10% of net sales in Fiscal 2000).
The Company believes that its broad range of products sold at different price points offers the Company the opportunity to market its products to customers of all sizes, in different industries, and with varying degrees of technical sophistication. In Fiscal 2000, Tech Data Corporation accounted for 17.3% of the Company's net sales. No other customer accounted for more than 10% of the Company's net sales in Fiscal 2000.
The Company markets its products primarily through an inside and outside sales and customer support staff, advertising in trade publications and participating in major industry trade shows. The Company's staff of inside sales and customer support personnel process written and telephonic orders, service existing customers and respond to information inquiries. The Company devotes a substantial portion of its marketing efforts to developing, monitoring, and enhancing its relationships with its network of independent dealers, distributors, OEMs and end users. The sales personnel are supported by the Company's engineering department and its customer service representatives who provide "hot line" technical support and advice to customers. While the Company continues to emphasize its traditional marketing efforts, it has also increased its inside and outside sales and customer support personnel staff and increased its direct mail advertising, telemarketing, publicity programs and enhanced its home page on the World Wide Web. In addition to enhancing its relationships with its existing customer base, the Company seeks to establish relationships with additional distributors, OEMs and systems integrators. As of April 30, 2000, the Company's total sales and customer support staff consisted of 103 full-time employees.
The Company's international sales accounted for approximately 26%, 35% and 32% of net sales in Fiscal 1998, Fiscal 1999 and Fiscal 2000, respectively, and are placed primarily through distributors located in Europe, Canada and other foreign countries. The Company is expanding international sales within the European community, Asia and the Pacific Rim through the utilization of its facilities in Shannon, Ireland and Steinhagen, Germany.
CUSTOMER SERVICE AND SUPPORT
The Company emphasizes customer service and support by developing quality products, encouraging customer feedback through extensive contact with key customers, maintaining extensive documentation of technical support requests and customer profiles and providing a customer hot-line that offers technical support for the life of its products. Any problems that cannot be solved by the technical support personnel are referred to the Company's engineering department. The Company offers a 30-day money-back guarantee for all of its products and a one year limited warranty on parts and service and incidental repairs. The Company seeks to respond quickly to customers' requests for technical support and service, including overnight exchange of defective parts or products. The Company also allows one of its customers an extended return period from 30 to 90 days.
MANUFACTURING
The Company does not manufacture any of its products in their entirety. In order to avoid the capital investment required to establish and maintain in-house manufacturing capabilities, the Company relies on subcontractors for assembly of printed circuit board assemblies, subassemblies, chassis, equipment enclosures and flat panel displays. The Company believes that such assembly can typically be done by subcontractors at a lower cost than if the Company assembled such items internally. Outsourcing manufacturing operations allows the Company to concentrate its resources on marketing, research and development, product design, quality assurance and customer support. The Company or its subcontractors subject all of the components and products to automated testing, equipment burn-in procedures, comprehensive quality audits, functional testing and regulatory screening to assure quality and reliability.
The Company outsources substantially all capital intensive manufacturing functions and intends to continue to use third-party manufacturers to control more effectively the unit cost of the Company's products. This reliance on third party subcontractors for the assembly of its products involves several risks, including reduced control over product quality, delivery schedules, manufacturing yields and costs. The Company attempts to diversify its outsourced manufacturing operations and believes it has an adequate supply of alternative subcontractors.
The Company purchases industry-standard parts and components for the assembly of its products from multiple vendors and suppliers through a world-wide sourcing program. Custom molded cables and certain turnkey products procured from outside sources have significant delivery times (10 to 12 weeks), and failure to obtain adequate supplies could adversely affect product deliveries. In the past, the Company has experienced delays in the receipt of certain components, which have resulted in delays in related product deliveries. The Company attempts to manage such risks through developing alternative sources and maintaining relationships and close personal contact with each of its suppliers. There can be no assurance, however, that delays in component and product deliveries will not occur in the future. The inability to obtain sufficient components or to develop alternative sources if and as required in the future, could result in delays or reductions in product shipments, which, in turn, could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. The Company believes that there are adequate alternative sources for its components.
A substantial portion of the Company's shipments in any fiscal period relates to orders received in that period. To meet this demand, the Company maintains a substantial level of inventory. The Company believes that because a substantial portion of customer orders are filled within the fiscal quarter of receipt, the Company's backlog is not a meaningful indicator of actual sales for any succeeding period.
TRADEMARK INFORMATION
Various trademarks, service marks and trade names to which reference is made in this Annual Report on Form 10-K are the property of owners other than the Company. Such owners have all applicable rights with respect to their respective trademarks, service marks and trade names.
COMPETITION
The market for the Company's products is highly fragmented and competitive, and the Company expects competition to increase in the future. The Company believes that its primary competitors are other manufacturers of keyboard, video monitor and mouse access devices, such as Apex, Raritan Computer, Inc., Rose Electronics, CCC Network Systems Ltd., Minicom Advanced Systems, Inc., Aten International Co., Ltd., CompuCable Mfg. Group, Belkin and StarTech Computer Accessories Ltd. Large OEM server manufacturers, such as Compaq Computer Corporation, offer switch products supplied by the Company's competitors. The Company competes for customers on the basis of performance in relation to price, product features, adherence to standards, quality, reliability, development capabilities, product availability and support.
The Company's future success will depend to a significant degree upon its ability to remain competitive in the areas of marketing, research and development, technology and distribution. As the Company's channels of distribution expand, the Company expects to experience increased price competition. Increased competition could result in price reductions and loss of market share which would adversely affect the Company's business, financial condition, results of operations and cash flows.
PROPRIETARY TECHNOLOGY
The Company's future success is dependent in part upon its ability to protect its proprietary rights in its products. The Company seeks to protect its intellectual property rights by invoking the benefits of the patent, trademark, copyright, trade secret and unfair competition laws of the United States, which afford only limited protection. The Company has various patent applications pending under the provisions of the Patent Cooperation Treaty (which permits the filing of corresponding foreign patent applications in numerous foreign countries within a limited time period). The Company also has other United States and foreign patent applications pending. There can be no assurance that any additional patents will issue from any of the Company's pending applications, that any patents will be issued in any additional countries where the Company's products can be sold, or that any claims allowed in the Company's patents or in any pending patent applications will be of sufficient scope or strength for, or provide any meaningful protection or any commercial advantage to, the Company. Moreover, competitors of the Company may challenge the validity of, or be able to design around, these patents or any other patents that may be issued to the Company. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus increase the likelihood of piracy of the Company's technology and products.
In an effort to protect its intellectual property rights, the Company filed multiple motions for partial summary judgment in the patent lawsuit brought by Apex against the Company in the United States District Court for the Western District of Washington in early 1999. On February 24, 1999, the Company announced that, by the mutual agreement and stipulation of Apex and the Company, the patent lawsuit brought by Apex has been dismissed without prejudice. As a result and pursuant to the Stipulation and Agreed Order to Dismiss 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 Company has requested a patent interference proceeding in the United States Patent and Trademark Office seeking to invalidate the 5,721,842 patent (the patent asserted in the lawsuit) and claim ownership of the invention claimed by the 5,721,842 patent as a result of a prior patent, United States Patent No. 5,732,212, which was formerly owned by Fox prior to its acquisition by the Company in February 1999. 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 Patent and Trademark Office proceeding, the lawsuit can be re-filed upon the request of either party. With the voluntary dismissal of the lawsuit in February 1999, the PTO proceedings have now been dormant for more than a year, and it is anticipated that there will not be a final decision from the PTO for at least 20 months (which would likely be subject to further litigation in the courts). The lawsuit and the PTO proceedings have not had any meaningful impact on the Company since the voluntary dismissal of the litigation. The Company believes that, when the 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 new combined company, Aegean Sea.
In the future, the Company may file lawsuits against companies regarding the alleged infringement of its patents. Patent litigation, and any other litigation relating to the Company's intellectual property to which the Company becomes a party, is subject to numerous risks and uncertainties, and there can be no assurance that the Company will be successful in any such litigation. See "- Factors Affecting the Company's Business and Prospects - Limited Protection of Proprietary Rights; Risks of Third Party Infringement." There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of its technology or that the Company can use its intellectual property rights to successfully prevent competitors from commercializing technologies that are substantially equivalent or superior to the Company's technology. See "- Factors Affecting the Company's Business and Prospects - Limited Protection of Proprietary Rights; Risks of Third Party Infringement."
EMPLOYEES
As of April 30, 2000, the Company had 233 full-time employees working in the United States. Of the Company's domestic full-time employees, 66 were in marketing, sales and customer support; 39 were in engineering, research and development; 101 were in manufacturing and operations; and 27 were in administration.
As of April 30, 2000, there were 90 full-time employees working in the Shannon, Ireland facility; 27 full-time employees working in the Steinhagen, Germany facility; and 8 full-time employees working in Asia-Pacific. Of the Company's international full-time employees, 37 were in marketing, sales and customer support; 19 were in engineering, research and development; 45 were in manufacturing and operations; and 22 were in administration. None of the Company's employees are represented by a collective bargaining agreement, nor has the Company ever experienced any work stoppage. Management believes that the Company has a good relationship with its employees.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
The Company's business, operations and financial condition are subject to certain risks. Some of these risks are described below, and readers of this Annual Report on Form 10-K should take these risks into account in evaluating the Company or any investment decision involving the Company. This section does not describe all risks applicable to the Company, and it is intended only as a summary of certain material factors. More detailed information concerning the factors described below is contained in other sections of this Annual Report on Form 10-K.
Technological Changes; Need to Continue Developing New Products
The markets for the Company's products are characterized by rapidly changing technologies, evolving industry standards and continuing improvements. If technologies used in the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be adversely affected. Moreover, the introduction of products embodying superior or alternative technologies (such as switching software), the emergence of new industry standards, or changes in the market's pricing structure could adversely affect the Company's ability to sell its products. While the Company has competed favorably with its competitors by continually developing a high performance line of products utilizing leading technologies, competitors have developed products which offer similar features. Although historically the timing of the introduction of new products or enhancements to existing products by the Company has not had a material adverse effect on the business, financial condition, results of operations or cash flows of the Company, there can be no assurance that these circumstances will continue in the future. The Company expects that the continued development of comparable products by competitors will require that it develop new and/or enhanced products on an ongoing basis to meet the competitive demands of these markets. The Company's sales and profitability in the past have resulted to a significant extent from its ability to anticipate or react quickly to its customers' needs and to develop and introduce new and enhanced products. The Company's continued ability to adapt to customer needs and technological change will be a significant factor in maintaining or improving its competitive position and its prospects for growth. However, the Company's failure to respond on a timely basis to technological developments, changes in industry standards or customer requirements, software innovations or any significant delay in product development or introduction would have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Potential Fluctuations in Quarterly Results; Product Returns
Most of the Company's sales in each quarter result from orders booked in that quarter. The Company typically does not have firm commitments for the purchase of products to be delivered in the future. Furthermore, many purchasers typically require prompt delivery of products. This results in a limited backlog of orders for these products and requires the Company to maintain sufficient inventory levels to satisfy anticipated customer demand. If demand for the Company's products declines or if significant sales in any quarter do not occur as anticipated, the Company's financial results will be materially adversely affected. The Company's operating results are affected by a number of other factors, including: the timing of shipments; the timing of new product introductions and enhancements by the Company and its competitors; changes in product or distribution channel mixes; changes in pricing policies or price reductions by the Company; competition and price reductions by the Company's competitors; the availability and cost of supplies and components; sales and marketing expenses related to entering into new markets, introducing new products and retaining current customers; seasonal
customer demand; and fluctuations in sales of servers due to changes in economic conditions or capital spending levels.
The Company offers a 30-day unconditional money-back guarantee and a twelve to fifteen month limited warranty for all of its products and allows additional rights of return to certain customers. Additional rights of return generally extend the return period from 30 to 90 days. Although the Company's historical return experience has not been significant, such returns, should they occur, would have an adverse effect on sales and on the Company's net sales. Operating expenses are relatively fixed over the short term, and, therefore, a shortfall in quarterly revenues could impact the Company's financial results significantly in a quarter. Furthermore, maintaining sufficient inventory levels to assure prompt delivery of the Company's products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of such inventory may have a material adverse effect on the Company's business and operating results. The Company's operating results may also fluctuate as a result of a number of other factors, including increased competition, changes in customer order patterns, changes in product mix and announcements of new products by the Company or its competitors.
Current Dependence on Limited Product Lines; Technological Obsolescence
Almost all of the Company's net sales during the last three fiscal years have been derived from sales of the Company's KVM switch, extension, remote access and display products. Sales of these products accounted for approximately 99% of net sales in Fiscal Year 2000, 99% of net sales in Fiscal 1999 and 98% of net sales in Fiscal 1998 and Fiscal 1997. There can be no assurance that the Company's sales of its KVM switch and extension products will continue at this level or that new product releases will be successful. A significant decline in sales of KVM switch, extension, remote access and display products would have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. A principal feature of KVM switch products is their ability to emulate a computer's associated keyboard. Technology exists today that would allow computers to perform various functions and to be accessed without electronic impulses from an associated keyboard or keyboard emulation device. To date, this technology has not gained acceptance, but to the extent that widespread commercial acceptance of this technology occurred, it would have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Intense Competition
The markets for the Company's products are highly fragmented and intensely competitive. The Company's business is becoming increasingly sensitive to new product introductions, price changes and marketing efforts by its competitors. Accordingly, the Company's future success will be highly dependent upon timely completion and introduction of new products and product features at competitive price and performance levels which address the evolving needs of the Company's customers. The Company is currently experiencing increased price competition in the market for KVM switch, extension, remote access and display products and expects that pricing pressures will increase in the future. Increased competition could result in price reductions and loss of market share, which would adversely affect the Company's business, financial condition, results of operations and cash flows. In the market for KVM switch products, the Company competes with independent third parties such as Apex, Raritan Computer Inc., Rose Electronics, CCC Network Systems Ltd., Minicom Advanced Systems, Inc., Aten International Co., Ltd., CompuCable Mfg. Group, Belkin and StarTech Computer Accessories Ltd. The Company may in the future face competition from software providers who are able to offer a software solution to address many of the problems the Company's switching systems are designed to address.
The Company's current and potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than the Company. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties that enhance the ability of their products to address the needs of the Company's prospective customers. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressure faced by the Company will not have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Risks Relating to Expansion of International Distribution Network and International Sales
The Company's strategy contemplates additional development and expansion of its international distribution network through Cybex Computer Products International, Ltd. in an effort to increase international sales of its products. There can be no assurance that the Company will be successful in expanding its international distribution network or in increasing sales of its products in foreign markets. If the revenues generated by international sales are not adequate to recover the expense of establishing, expanding and maintaining an international distribution network, the Company's business, financial condition, results of operations and cash flows will be materially adversely affected. If international sales become a more significant component of the Company's net sales, the Company's business will become more vulnerable to the risks inherent in doing business on an international level, including difficulties in managing foreign distributors, longer payment cycles and problems in collecting accounts receivable, the effects of seasonal customer demand, changes in regulatory requirements, risks relating to intellectual property rights, export restrictions, tariffs and other trade barriers, fluctuations in currency exchange rates, potentially adverse tax consequences and political instability. The existence or occurrence of any one of these factors could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Dependence on Key Personnel
The Company is dependent in large part upon its ability to retain its key management and technical personnel, including Stephen F. Thornton, Chairman of the Board, President and Chief Executive Officer; Doyle C. Weeks, Executive Vice President of Group Operations and Business Development and Secretary; Douglas E. Pritchett, Senior Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary; Gary R. Johnson, Senior Vice President of Sales; Christopher L. Thomas, Senior Vice President - Engineering; R. Byron Driver, Senior Vice President and Chief Operating Officer; Victor Odryna, Senior Vice President - Corporate Strategic Marketing; and Kieran MacSweeney, Managing Director of International Operations. The future success of the Company will be highly dependent upon the personal efforts of these individuals and other key management and technical personnel, and the loss of services of any one of them could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. The Company has entered into employment agreements with all of the above named officers. The Company maintains "key man" life insurance on Mr. Thornton. The Company's success will also be dependent in part upon its ability to attract, retain and motivate highly skilled employees. Competition for employees with the skills required by the Company, particularly engineering and other technical personnel, is intense, and there can be no assurance that the Company will be able to attract and retain highly skilled employees in sufficient numbers to sustain its current business or to support future growth.
Management of Growth
In recent periods, the Company has experienced rapid revenue and customer growth and expansion in the number of its employees, its product offerings and the scope and complexity of its financial systems. This growth has placed significant strain on the Company's management, operational and financial resources and has resulted in new and increased responsibilities for management personnel. The Company's officers have had limited or no experience in managing companies larger than the Company. There can be no assurance that the Company's management, personnel, systems, procedures and controls will be adequate to support the Company's existing and future operations. The Company's ability to effectively manage its recent growth and any future growth will require the Company to continue to implement and improve its operational, financial and information systems and will likely require additional management personnel. In addition, the Company believes that it must develop greater engineering, marketing, sales and customer support capabilities in order to develop new products and product enhancements, secure new customers at a rate necessary to achieve desired growth and effectively serve the evolving needs of present and future customers. There can be no assurance that the Company will be successful in strengthening these capabilities. Without adequate management, engineering, product development, marketing and sales and customer support capabilities, the Company's ability to effectively manage its growth, expand and enhance its product line, further penetrate its existing markets and develop new markets will be
significantly limited. If the Company's management is unable to effectively manage the Company's growth, the business, financial condition, results of operations and cash flows of the Company will be materially adversely affected.
Dependence Upon Suppliers and Outsourced Manufacturing
The principal components of the Company's KVM switch products are power supplies, cable assemblies, line filters, enclosures, printed circuit boards and electronic components, all of which are purchased from outside vendors. The Company buys components under purchase orders and generally does not have long-term agreements with its suppliers. While the Company attempts to maintain multiple outside sources for all of the materials and components it purchases, there can be no assurance that the materials or components of any one or more of those sources could be promptly or adequately replaced. Any termination of or significant disruption in the Company's relationship with suppliers of its product components may prevent the Company from filling customer orders in a timely manner, as the Company generally does not maintain large inventories of its products or components.
The Company purchases a number of the components for its KVM switch products from sole or a limited number of suppliers. The Company has occasionally experienced and may in the future experience delays in delivery of such components. Although alternate suppliers are available for most of the components and services needed to produce the Company's products, the number of suppliers of some components is limited, and qualifying a replacement supplier and receiving components from alternate suppliers could take several months. The Company depends upon its suppliers to deliver quality components that are cost competitive and in compliance with the Company's specifications. Disruption in supply, a significant increase in the cost of one or more components, failure of a third party supplier to remain competitive in price or the failure of a supplier to comply with any of the Company's procurement needs could delay or interrupt the Company's ability to manufacture and deliver its products to customers on a timely basis, thereby adversely affecting the Company's business, financial condition, results of operations and cash flows.
The Company relies on third party manufacturers for subassembly of the Company's products. These outsourcing arrangements and any future outsourcing arrangements involve numerous risks, including reduced control over product quality, delivery schedules, manufacturing yields and costs. Moreover, although arrangements with such manufacturers may contain provisions for warranty obligations on the part of such manufacturers, the Company remains primarily responsible to its customers for warranty obligations.
Reliance on PC/Server Market; Improving Network Reliability and Tools
The Company's business is largely dependent upon the continued acceptance of the PC/server model of network computing. Although distributed network computing utilizing PC/server architecture has gained increasing acceptance, there can be no assurance that use of this networking model will continue to grow or that it will not be replaced by new technologies for network computing, thereby rendering the Company's products obsolete. In addition, the market for the Company's products is driven in part by the inherent unreliability of networks. As networks continue to proliferate, however, PC/server manufacturers and software developers or providers may develop greater reliability and better tools for managing networks. To the extent that greater reliability and better network management tools are successfully developed, the Company's products could be rendered obsolete, which would have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Limited Protection of Proprietary Rights; Risks of Third Party Infringements
The Company's success is highly dependent on proprietary technology. The Company has been granted some patents, and applications for additional patents are pending. The Company also relies upon copyright, trademark and trade secret laws to establish its proprietary rights in its products. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus increase the
likelihood of piracy of the Company's technology and products. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of its technology or that the Company can use its intellectual property rights to successfully prevent competitors from commercializing technologies that are substantially equivalent or superior to the Company's technology.
There can be no assurance that any additional patents will issue from any of the Company's pending applications, that any patents will be issued in any additional countries where the Company's products can be sold, or that any claims allowed in the U.S. patents or in any pending patent applications will be of sufficient scope or strength for, or provide meaningful protection or any commercial advantage to, the Company. Moreover, competitors of the Company may challenge the validity of, or be able to design around, the U.S. patents or any other patents that may be issued to the Company. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus increase the likelihood of piracy of the Company's technology and products. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of its technology or that the Company can use its intellectual property rights to successfully prevent competitors from commercializing technologies that are substantially equivalent or superior to the Company's technology.
The Company seeks to protect its proprietary rights through a variety of means, including confidentiality agreements and, if necessary, litigation. The network server, electronics and related industries in which the Company competes are characterized by vigorous pursuit and protection of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. The Company has requested a patent interference proceeding in the United States Patent and Trademark Office seeking to invalidate the 5,721,842 patent (the patent asserted in the lawsuit) and claim ownership of the invention claimed by the 5,721,842 patent as a result of a prior patent, United States Patent No. 5,732,212, which was formerly owned by Fox prior to its acquisition by the Company in February 1999. 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 re-filed upon the request of either party. If the merger with Apex is completed (see "Recent Developments"), then the patent interference proceeding will be dismissed since both the Company's re-issue application and Apex's patents will be owned by the new combined company, Aegean Sea. See "Legal Proceedings."
If necessary or desirable, the Company may seek licenses under the intellectual property rights of third parties. However, there can be no assurance that licenses will be offered or that the terms of any offered license will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend or cease the manufacture of products requiring such technology.
Risks Relating to Expansion of Distribution Channels
The Company expects to rely increasingly on major distributors, value-added resellers, systems integrators and OEMs for the distribution and sale of its products, and the Company's strategy contemplates the expansion of its distribution channels both domestically and internationally. The Company's future success will depend in part on its ability to expand existing relationships and develop new relationships in these distribution channels. There can be no assurance that the Company will be successful in expanding its distribution channels. The Company will be required to invest significant additional resources in order to expand its distribution channels, and there can be no assurance that the cost of the Company's investment in further developing and expanding these channels will not exceed the revenues generated from such investment.
The Company provides and expects to continue providing discounts and other special pricing arrangements throughout its distribution channels, which may have an adverse impact on gross margins. The Company expects that as sales through these distribution channels increase, such arrangements could result in an increased risk of significant product returns. There can be no assurance that actual returns in the future will not have a material
adverse effect on the Company's business, financial condition, results of operations or cash flows. (See - "Potential Fluctuations in Quarterly Results; Product Returns").
The Company's distribution agreements generally are nonexclusive and may be terminated on short notice by either party without cause. Companies in these distribution channels are not within the control of the Company, are not obligated to purchase products from the Company and frequently offer products of several different manufacturers, including products competitive with the Company's products. There can be no assurance that companies in these distribution channels will not give higher priority to the sale of such other products. A reduction in sales efforts by the companies in these distribution channels could lead to reduced sales by the Company and could materially adversely affect the Company's business, financial condition, results of operations and cash flows.
Increased Demands on Customer Support Operations
Growth of the Company's sales, should it occur, is likely to be accompanied by increasing demands on the Company's customer support operations. As a result of the Company's commitment to a high level of customer support, the Company is likely to need to invest significant resources in the maintenance and improvement of its customer support resources. Any failure to maintain adequate customer support could cause customer dissatisfaction, result in reduced sales of the Company's products and, accordingly, materially adversely affect the Company's business, financial condition, results of operations and cash flows.
Control by Certain Shareholders
As of June 16, 2000, the executive officers and directors of the Company beneficially owned or controlled approximately 14.13% of the outstanding shares of common stock. Accordingly, such persons, if they were to act in concert, would likely control the Company's Board of Directors and, therefore, the business, policies and affairs of the Company. Furthermore, such control could preclude any unsolicited acquisition of the Company and, consequently, adversely affect the market price of the common stock.
Possible Volatility of Stock Price
There may be significant volatility in the market price for the common stock. Quarterly operating results of the Company or companies within the same or similar industry segments, changes in the general conditions of the economy, the financial markets, the technology industry, adverse press or news announcements or other developments affecting the Company or its competitors could cause the market price of the common stock to fluctuate substantially. Furthermore, the stock market may experience significant price and volume fluctuations which may affect the price of the Company's common stock for reasons unrelated to its operating performance.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's headquarters, occupying 126,000 square feet and containing administrative, sales, marketing, research and development, engineering, manufacturing and distribution facilities, are located in Huntsville, Alabama on an 18-acre tract of land owned by the Company in Cummings Research Park.
Cybex International is located in a 44,000 square foot, leased facility located in the Shannon Free Trade Zone in Shannon, Ireland, which houses administrative, sales, marketing, research and development, engineering, manufacturing and distribution operations. The lease with the Shannon Development Authority is for twenty years and provides for annual rent of approximately $230,000.
The PolyCon Companies' headquarters, containing sales and administrative facilities, are located on leased property in Steinhagen, Germany. The lease, which provides for annual rent of approximately $54,000, can be terminated in July 2002. During Fiscal 1999, the engineering and manufacturing operations of the PolyCon Companies were consolidated with the operations of Cybex International in Shannon, Ireland.
The Company also leases approximately 22,000 square feet for $14,675 per month in Acton, Massachusetts. This facility houses the engineering team responsible for visual display technology and products.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In early 1999, the Company filed multiple motions for partial summary judgment in the patent lawsuit brought by Apex against the Company in the United States District Court for the Western District of Washington. On February 24, 1999, the Company announced that, by the mutual agreement and stipulation of Apex and the Company, the patent lawsuit brought by Apex had been dismissed without prejudice. As a result and pursuant to the Stipulation and Agreed Order to Dismiss Without Prejudice, patent validity and ownership issues raised in connection with the District Court lawsuit will not be heard before the United States Patent and Trademark Office. The Company has requested a patent interference proceeding in the United States Patent and Trademark Office seeking to invalidate the 5,721,842 patent (the patent asserted in the lawsuit) and claim ownership of the invention claimed by the 5,732,212, which was formerly owned by Fox prior to its acquisition by the Company in February 1999. 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 Patent and Trademark Office proceeding, the lawsuit can be re-filed upon the request of either party.
With the voluntary dismissal of the lawsuit in February 1999, the PTO proceedings have now been dormant for more than a year, and it is anticipated that there will not be a final decision from the PTO for at least 20 months (which would likely be subject to further litigation in the courts). The lawsuit and the PTO proceedings have not had any meaningful impact on the Company since the voluntary dismissal of the litigation. The Company believes that, when the 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 new combined company, Aegean Sea.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its security holders during the fourth quarter of its fiscal year ended March 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Price Range of Common Stock; Record Holders
The Company's Common Stock is traded in the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol CBXC. The following table sets forth, for the fiscal periods indicated, the reported high and low sale prices and gives retroactive effect to the stock splits discussed herein:
On June 16, 2000, the closing sale price for the Company's Common Stock was $36.00 per share. At June 16, 2000, there were 262 holders of record of the Company's Common Stock.
Dividend Policy
The Company paid no cash dividends to its shareholders during the last two fiscal years. Future dividends will be dependent upon the Company's earnings, financial requirements and other relevant factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data as of and for each of the fiscal years in the five-year period ended March 31, 2000, has been derived from the audited financial statements of the Company.
This data should be read in conjunction with the Company's Consolidated Financial Statements, the notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition included elsewhere in this document.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
THE INFORMATION IN THIS ITEM 7 - "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."
The following discussion is intended to facilitate the understanding and assessment of significant changes and trends related to the consolidated results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report.
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 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.
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 pending consolidation 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-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%, 35%, and 26% of the Company's total sales in Fiscal 2000, Fiscal 1999, and Fiscal 1998, respectively.
STRATEGIC MERGERS
In March 2000 the Company announced a proposed merger with Apex, a provider of server console management and switching technology. The Company and Apex have entered into a merger agreement under which they have agreed to combine the two companies in a merger, resulting in a new combined corporation temporarily named Aegean Sea Inc. As of the date of this filing, the companies were awaiting the merger's final approval by the shareholders of the respective companies. Refer to the Form S-4 filed on March 31, 2000 and later amendments for additional discussion of the proposed merger. Merger expenses of over $900,000 were incurred during the year in relation to the anticipated merger with Apex. These costs related to legal, accounting and investment banking costs and are required to be expensed as incurred.
STRATEGIC ACQUISITIONS
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 workforce, 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 workforce 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 returns on beginning net working capital, assembled workforce, customer base, patents, other assets and developed technologies, along with a deduction for cash flow attributable to the assembled workforce, other assets, customer base, patents, 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.
On February 1, 1999, the Company acquired substantially all of the assets, including the related intellectual property and patents, of Fox Network Systems Corporation. The Company paid approximately $2.5 million at closing and may pay an additional amount of up to $2.5 million in future payments based on future sales of Fox's products over a maximum period of five years. Fox technology and products include remote access and power control products solutions for management of PCs and Servers. Fox's major development project was a Windows(TM)-based remote access device that allows control of servers over ordinary telephone lines and the Internet from a remote location ("Key-View(TM) II"). The acquisition, which was funded from available cash, was accounted for using the purchase method of accounting. In accordance with generally accepted accounting principles, costs totaling $26,000 were allocated to research and development assets with alternative future uses and were capitalized. The remaining $1.85 million of purchased research and development were expensed as a one-time charge during the fourth quarter of Fiscal 1999.
The Company obtained an independent valuation of Fox and values were assigned to developed technology, in-process research and development, 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. The total value of in-process R&D was estimated to be approximately $1.85 million. All of the estimated in-process research and development was attributable to the development of Key-View(TM). The development of Key-View(TM) II was estimated to be 90% complete and was completed on time with initial shipments in the first quarter of Fiscal 2000.
In December 1997, the Company acquired the PolyCon Companies for a combined purchase price of $8.8 million including acquisition-related expenses. The acquisition of the PolyCon Companies included intellectual property that the Company is integrating with its research and development resources worldwide to expand the Company's high-end console switching products for mid- and large-scale networks.
The Company obtained an independent 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. The value of R&D with alternative future uses was determined to be $392,000. The total value of in-process R&D was estimated to be approximately $4.7 million. Approximately 90% of the estimated in-process research and development was attributable to the fiber-optics solution technology, the console switch technology and the digital switching technology. The development of the console switch technology was completed on time in Fiscal 1999 and is currently available to ship in certain PolyCon products. The development of fiber-optic solution technology was completed on time and began shipping in early Fiscal 2000. The development of the digital switching technology was expected to take a minimum of two years to complete. Some digital technology is included in certain products within the XP4000 series. This XP4000 series began shipping in the third quarter of Fiscal 2000. Additionally, a new digital switch solution was announced in May 2000 and product is expected to ship in Mid-Fiscal 2001.
RECENT STOCK SPLITS
On November 13, 1998, the Company announced a 3-for-2 stock split, effected as a 50% stock dividend. The additional shares were distributed to shareholders on December 15, 1998. All capital stock information included in the condensed consolidated financial statements and notes thereto gives retroactive effect to the splits.
On January 20, 2000, the Company announced a 3-for-2 stock split, effected as a 50% stock dividend. The additional shares were distributed to shareholders on February 18, 2000, for all shareholders of record as of January 31, 2000. All capital stock information included in the condensed consolidated financial statements and notes give retroactive effect to the splits.
RESULTS OF OPERATIONS
The following table presents selected financial information derived from the Company's statements of income expressed as a percentage of net sales for the fiscal years indicated:
The Company operates predominantly in one industry: the design, production, marketing, and selling of keyboard, video monitor and mouse switch, extension, remote access products and display products. The Company's method of internal reporting is disaggregated operationally, however. The two reportable segments, Cybex-U.S. and Cybex-International, are evaluated based on gross profit; therefore, selling, general and administrative costs, as well as research and development, interest income/expense, provision for taxes, is reported on an entity wide basis only. Reference is made to the information regarding operational distribution of the Company's revenues and gross margin, and to the operational distribution of the Company's identifiable assets, in Note 19 to the Consolidated Financial Statements set forth on pages 54 and 55 of this Annual Report on Form 10-K.
Fiscal 2000 Compared to Fiscal 1999
Net sales increased 46.5% to $120.4 million in Fiscal 2000 from $82.2 million in Fiscal 1999. Additionally, sales for the reportable segment Cybex-U.S. increased 55.2% from $56.1 million in Fiscal 1999 to $87.0 million in Fiscal 2000, while sales for the reportable segment Cybex-International increased 27.9% from $26.1 million in Fiscal 1999 to $33.4 million in Fiscal 2000. Approximately $8.9 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 included a large order that accounted for almost 38% of display product sales. As these large orders follow
a long sales cycle, quarter to quarter revenues are expected to fluctuate. The increased sales also resulted from increased sales of the Company's KVM switch, extension and remote access products. Sales of the KVM switch product family increased 32.9% to $97.5 million in Fiscal 2000 from $73.4 million in Fiscal 1999. Sales of the KVM extension product and remote access family increased 65.1% to $12.8 million in Fiscal 2000 from $7.7 million in Fiscal 1999. LongView(TM) and Key-View(TM) II, a remote access solution, accounted primarily for the growth in KVM extension and remote access product sales.
The Company's international sales volume (sales to locations outside the U.S) continued to increase in Fiscal 2000, causing international sales to increase 33.5% to $38.1 million in Fiscal 2000 from $28.5 million in Fiscal 1999. International sales as a percentage of net sales were 32% as compared to 35% in Fiscal 1999. European sales accounted for approximately $28.9 million, or 76% of international sales, and grew 34% from Fiscal 1999 to Fiscal 2000.
Gross profit is affected by many factors: 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 46.9% to $64.5 million in Fiscal 2000 from $43.9 million in Fiscal 1999. Gross profit for the reportable segment Cybex-U.S. increased 55.7% from $30.6 million in Fiscal 1999 to $47.4 million in Fiscal 2000, while the gross profit for Cybex-International increased 46.1% from $13.4 million in Fiscal 1999 to $17.1 million in Fiscal 2000. Gross profit as a percentage of net sales increased slightly to 53.5% in Fiscal 2000 from 53.4% in Fiscal 1999. The increase in gross profit benefited from product cost reductions in the year, offset significantly by the diluting effect of lower margin display product sales. Display product gross margin for Fiscal 2000 was 26.4% versus switch, extension and remote access product gross margin of 55.7%. The display product line operates on a different model than that of the Company's switch and extension business. The display product sales are typically for large installations sold directly to the financial services industry. The Company intends to de-emphasize the sale of flat panel display products as stand alone sales, and these sales should decline as a percentage of overall sales in future periods.
Selling, general and administrative expenses increased 34.8% to $27.2 million (22.6% of net sales) in Fiscal 2000 from $20.2 million (24.5% of net sales) in Fiscal 1999. This increase reflects increased expenditures in administration, sales, customer support, channel development and marketing activities required to support the Company's expanded sales base domestically and abroad, as well as additional costs from PixelVision. The increase was offset somewhat by a reduction in expenses incurred for legal costs associated with the defense of a patent infringement claim, which was dismissed without prejudice by mutual agreement of both parties in February 1999 (see Contingencies). The percentage of sales decline was primarily attributed to the volume of display product sales with the relatively low selling expenses. Management anticipates that the dollar amount of selling, general and administrative expense will continue to increase.
For Fiscal 2000, total costs for research and development were $7.0 million (5.8% of net sales) compared to $5.2 million (6.4 % of net sales), excluding one-time write-offs for purchased research and development expense and other acquisition expenses, in Fiscal 2000 and Fiscal 1999, representing a 34.4% increase. The Company anticipates that expenses for research and development will continue to increase slightly in dollars.
As a result of the factors discussed above, operating income before write-offs and acquisition costs of $3.4 million from the PixelVision acquisition and announced Apex merger in Fiscal 2000 and $1.85 million from the Fox acquisition in Fiscal 1999, each relating to purchased research and development and other expenses from the acquisitions, increased 63.7% to $30.3 million (25.1% of net sales) in Fiscal 2000 from $18.5 million (22.5% of net sales) in Fiscal 1999.
Interest and other income amounted to $1.6 million (1.3% of net sales), net, in Fiscal 2000 compared to $1.6 million (2.0% of net sales) in Fiscal 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. Other expense also includes foreign currency loss of almost $700,000 for Fiscal 2000 as compared to a foreign currency gain of over $200,000 in Fiscal 1999. This fluctuation is attributed to the weakening of the Euro against the
dollar during the period. Management intends to reduce the foreign currency risk by decreasing the amounts of foreign currency on hand.
As a result of the factors discussed above, income, before the one-time write-offs related to the acquisitions in Fiscal 2000 and Fiscal 1999, increased 56.1% to $21.3 million (17.6% of net sales) in Fiscal 2000 from $13.6 million (16.6% of net sales, 15.1% after the write-off) in Fiscal 1999. Net income increased 57.1% to $18.8 million (15.6% of net sales) in Fiscal 2000 from $12.4 million (15.1% of net sales) in Fiscal 1998.
Fiscal 1999 Compared to Fiscal 1998
Net sales increased 56.4% to $82.2 million in Fiscal 1999 from $52.6 million in Fiscal 1998. Additionally sales for the reportable segment Cybex-U.S. increased 32.6 % from $42.3 million in Fiscal 1998 to $56.1 in Fiscal 1999, while sales for the reportable segment Cybex-International increased 154.9% from $10.2 million in Fiscal 1998 to $26.1 million in Fiscal 1999. The increased sales resulted from increased sales of the Company's KVM Switch Products and from additional revenues provided from the acquisition of the PolyCon Companies at the end of the third quarter of Fiscal 1998. Sales of KVM Switch Products increased 62.1% to $73.4 million in Fiscal 1999 from $45.3 million in Fiscal 1998, primarily due to increased sales of the Company's mid- and high-end KVM Switch Products, as well as the entry-level KVM Switch Products. The mid- to high-end product sales grew approximately 49% from Fiscal 1998 to Fiscal 1999, while the entry-level product sales increased 55% from Fiscal 1998 to Fiscal 1999. The SwitchView(R) product, introduced in mid-Fiscal 1998, was a major contributor to the increase in the entry-level product sales. Sales from the acquired PolyCon Companies products accounted for approximately 10% of the Company's revenues in Fiscal 1999, up from 4% of revenues in Fiscal 1998.
The Company's international sales volume (sales to locations outside the U.S.) continued to increase in Fiscal 1999, causing international sales as a percentage of net sales to increase to 35% as compared to 26% in Fiscal 1998. International sales increased 111.9% to $28.5 million in Fiscal 1999 from $13.5 million in Fiscal 1998. European sales accounted for approximately $21.5 million, or 76% of international sales, and grew 157% from Fiscal 1998 to Fiscal 1999.
Gross profit is affected by many factors: 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 59.1% to $43.9 million in Fiscal 1999 from $27.6 million in Fiscal 1998. Gross profit for the reportable segment Cybex-U.S. increased 33.3% from $22.8 million in Fiscal 1998 to $30.3 million in Fiscal 1999, while the gross profit for Cybex-International increased over 180.8% from $4.8 million in Fiscal 1998 to $13.5 million in Fiscal 1999. The Company's gross profit as a percentage of net sales increased to 53.4% 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 by increases in warranty and inventory reserves. The increase in reserves was the result of the Company's evaluation of the composition of inventory and the increased level of sales to major distributors and OEMs.
Selling, general and administrative expenses increased 48.0% to $19.8 million (24.5% of net sales) in Fiscal 1999 from $13.4 million (25.5% of net sales) in Fiscal 1998. The increase in selling, general and administrative expenses reflects increased expenditures in administration, sales, customer support, channel development, and marketing activities required to support the Company's expanded sales base. The increase also reflects the added selling, general and administrative costs attributable to the PolyCon Companies acquisition at the end of the third quarter of Fiscal 1998. Management anticipates that the amount of selling, general and administrative expense will continue to increase; however, the anticipated expanding sales volume may cause the expenses to decline as a percentage of net sales.
For Fiscal 1999, total costs for research and development, exclusive of the one-time write-off of purchased research and development expenses, were $5.2 million (6.4% of net sales) compared to $3.3 million (6.3% of net sales), exclusive of a one-time write-off of purchased research and development expenses in Fiscal 1998, representing a 57.8% increase.
As a result of the factors discussed above, operating income before the one-time write-offs of $1.85 from the acquisition of Fox in Fiscal 1999 and $4.7 million from the acquisition of the PolyCon Companies in Fiscal 1998, each relating to purchased research and development expenses from the acquisitions, increased 69.9% to $18.5 million (22.5% of net sales) in Fiscal 1999, from $10.9 million (20.7% of net sales) in Fiscal 1998.
Interest and other income amounted to $1.6 million (2.0% of net sales), net, in Fiscal 1999 compared to $1.9 million (3.6% of net sales) in Fiscal 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.
As a result of the factors discussed above, income, before the one-time write-offs related to the acquisitions in Fiscal 1999 and Fiscal 1998, increased 64.5% to $13.6 million (16.6% of net sales) in Fiscal 1999, from $8.3 million (16.9% of net sales, 6.8% after the write-off) in Fiscal 1998. Net income increased 248.1% to 12.4 million (15.1% of net sales) in Fiscal 1999 from $3.6 million (6.8% of net sales) in Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations primarily through cash flow from operations and cash reserves as needed. As of March 31, 2000, the Company had an available line of credit of $7.5 million with no outstanding borrowings. A short-term note in the amount of $23.0 million was outstanding on March 31, 2000. The Company repaid the note during the first week of April 2000.
The Company's working capital position increased from $46.8 million as of March 31, 1999, to $62.2 million (adjusted to include $2.9 million and $8.0 million of long-term, equity investments, respectively) as of March 31, 2000. This increase in the Company's working capital position was due primarily to the increased earnings during Fiscal 2000. The increase was offset somewhat by the acquisition of PixelVision and the merger expenses related to Apex, discussed above.
Cash provided from operating activities increased from $10.9 million to $16.2 million for Fiscal 1999, and Fiscal 2000, respectively. This increase was caused primarily by an increase in net income. The increase in net income is attributed to an increase in sales. Additionally, increases in accounts payable attributed to the increase in net cash provided by operating activities. These increases to net operating cash were offset somewhat by increases in inventory and accounts receivable from Fiscal 1999 to Fiscal 2000. The increases in accounts receivable can be attributed to the general increase in sales and the addition of sales to PixelVision customers acquired in October 1999. The increase in inventory is also attributed to the addition of PixelVision . 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 $1.8 million in Fiscal 2000. These capital expenditures related to purchases of shop equipment and office furniture for the Company's Huntsville facility and purchases of equipment for the Company and its Subsidiaries. A minor portion of the computer purchases related to the Year 2000 readiness program (see Year 2000 Readiness Disclosure).
Additionally, in January 2000, the Company invested approximately $1.6 million to purchase its former headquarters building in Huntsville, Alabama. The Company also executed a five-year agreement to lease the building to an unrelated party. The lease agreement contains renewal options for up to two three-year extensions, subject to certain conditions. The lease agreement also provides for early termination at the option of the lessee after three or four years, subject to certain conditions, including termination fees.
The Company believes that its current financial position and existing cash and investments along with earnings and amounts available under its line of credit will be sufficient to meet the Company's 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 require 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.
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 were not Year 2000 compliant, they may have recognized a date using "00" as the Year 1900 rather than the Year 2000. This could have resulted 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 was adequately addressed, the Company 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. All phases of the Year 2000 compliance program were completed on time and within budget.
Costs. The total costs associated with becoming Year 2000 compliant were not expected to be material to the Company's financial position. The estimated total cost of the Year 2000 project was approximately $1.2 million. The total amount expended on the project through March 31, 2000, was almost $1.2 million, of which $900,000 related to the purchase and installation of the Enterprise Resource Planning System ("ERP") in Fiscal 1999, which has been capitalized. All remaining costs were 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. Funds for the ERP System purchase and installation were included in the Company's capital expenditure budget. The remaining costs were funded by cash flows from operations and were expensed as incurred.
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. However, as of the date of this filing there were no known reported failings as a result of the Year 2000, and there has been no material impact to the Company. The Year 2000 project did reduce the Company's level of uncertainty about the Year 2000 problem and about the Year 2000 readiness and compliance of its significant customers and suppliers.
THE ESTIMATES AND CONCLUSIONS CONTAINED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS, AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO COMPLETING THE PLAN INCLUDE THE AVAILABILITY OF RESOURCES, THE COMPANY'S ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON SPECIFIC FACILITIES, AND THE ABILITY OF CUSTOMERS, SUPPLIERS, VENDORS, AND SERVICE PROVIDERS TO BRING THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE.
CONTINGENCIES
The Company has certain contingent liabilities resulting from litigation initiated by Apex. 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.
ITEM 7A.
ITEM 7A. 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 March 31, 2000. The Company generally holds investments until maturity and carries the securities at amortized cost, which approximates fair market value.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CYBEX COMPUTER PRODUCTS CORPORATION
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
Report of Independent Accountants
To the Shareholders and Board of Directors Cybex Computer Products Corporation Huntsville, Alabama
In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, shareholders' equity, and cash flows present fairly, in all material respects, the consolidated financial position of Cybex Computer Products Corporation (the Company) as of March 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
May 4, 2000, except for Note 18, as to which the date is June 2, 2000
Cybex Computer Products Corporation Consolidated Balance Sheets March 31, 1999 and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Cybex Computer Products Corporation Consolidated Statements of Income For the Years Ended March 31, 1998, 1999, and 2000 - -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Cybex Computer Products Corporation Consolidated Statements of Shareholders' Equity For the Years Ended March 31, 1998, 1999, and 2000 - -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Cybex Computer Products Corporation Consolidated Statements of Cash Flows For the Years Ended March 31, 1998, 1999, and 2000 - -------------------------------------------------------------------------------
Noncash transactions: During the 1998, 1999, and 2000 fiscal years, the Company recorded $308,400, $(414,760), and $(288,533) of unrealized gains and losses, respectively, related to its available for sale investments. The unrealized gains losses were recorded as non-cash changes of long-term investments and shareholders' equity, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
1. Nature of Business
Cybex Computer Products Corporation (the Company) develops, produces and markets computer keyboard, video monitor and mouse switch, extension and remote access products. The Company sells its products to dealers, end-users and original equipment manufacturers in the United States, Canada, and Europe, as well as in other foreign markets. The Company has operating facilities located in Huntsville, Alabama; Shannon, Ireland; Steinhagen, Germany; and Acton, Massachusetts. In addition, the Company has a wholly owned subsidiary, Cybex International Corporation (CIC), to facilitate sales shipped from the Huntsville facility to certain overseas markets and obtain more favorable U.S. income tax treatment on those sales. International sales (sales outside of the U.S. principally to customers in European countries) accounted for approximately 26%, 35%, and 32% of the Company's net sales for the years ended March 31, 1998, 1999, and 2000, respectively. During 1999 and 2000, sales to one company amounted to approximately 17% and 18% of total sales, respectively. No customer amounted to more than 10% of sales in 1998.
2. Summary of Significant Accounting Policies
The principal accounting policies of the Company are as follows:
Principles of Consolidation - The Company's consolidated financial statements include the Company and its three wholly owned subsidiaries, CIC, Polycon Investment, Inc. (PII), and Cybex Computer Products International, Ltd. (Cybex International). All significant intercompany amounts and transactions have been eliminated in consolidation.
Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Inventories - Raw materials, work in process, and finished goods are recorded using the lower of standard cost, which approximates first-in first-out (FIFO), or market.
Financial Instruments - The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments.
Investments - The Company's investments consist of U.S. treasury bills, U.S. treasury notes, commercial paper, and common stock. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to- maturity securities or trading securities and that have readily determinable fair values are classified as available-for- sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Certain equity securities which are not publicly traded and do not have readily determinable fair values are carried at cost. The original cost of the investment is adjusted if there is an impairment in value that is deemed to be other than temporary. All of the Company's investments at March 31, 1999 and 2000 have been classified as available for sale (see Note 6).
Realized gains or losses on the Company's investments are computed using the specific identification method.
Property Held for Lease - Property held for lease is carried at cost, less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets. Rental income is recorded on a monthly basis in accordance with the lease terms. Initial direct costs are deferred and matched against rental income over the lives of the leases.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
Property, Plant and Equipment - Property, plant and equipment are carried at cost, less accumulated depreciation, and include expenditures that substantially increase the useful lives of existing assets. Maintenance and repairs are charged to current operations as incurred. Upon sale, retirement, or other disposition of these assets, the cost and related accumulated depreciation are removed from the respective accounts, and any gain or loss on the disposition is included in earnings.
Provisions for depreciation are computed using the straight-line method over the following estimated useful lives:
Description Useful Life ----------- ----------- Land improvements 30 Buildings 39 Computer software and equipment 3 - 5 Other equipment 5 - 7
The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying values. There were no such losses recognized during 1998, 1999, or 2000.
Intangible Assets - Intangible assets are being amortized on a straight-line basis over the following estimated useful lives:
Description Useful Life ----------- -----------
Trademarks 10 - 15 Patents 10 Goodwill 7 - 8 Licenses 3
At each balance sheet date, or as changes in circumstances arise, the Company evaluates the recoverability of intangible assets based upon utilization of related tangible assets and expectations of future cash flows. The Company believes that no impairment of remaining intangibles exists at March 31, 2000.
Liability For Sales And Warranty Returns - The Company's sales generally include a one-month unconditional return policy and a twelve-month warranty for product defects. 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 liability for sales returns totaled approximately $2,347,000 and $2,442,000 at March 31, 1999 and 2000, respectively. The Company accrues for warranty returns at cost to repair or replace products. The liability for warranty returns totaled approximately $813,000 and $915,000 at March 31, 1999 and 2000, respectively. These liabilities are included in other current liabilities in the consolidated balance sheets.
Income Taxes - The Company accounts for income taxes using the asset and liability method. The Company provides for income taxes currently payable and, in addition, provides deferred income taxes for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Temporary differences relate principally to the allowance for doubtful accounts, liability for sales and warranty returns, purchased research and development expenses, accrued vacation, accumulated depreciation, and inventory reserves. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Foreign Currency - The Company records transactions denominated in foreign currencies on a monthly basis using the average monthly exchange rate. Bank accounts denominated in foreign currencies are translated as of the ending balance sheet dates using the current exchange rates. Resulting translation adjustments are recorded as a separate
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
component of shareholders' equity. Approximately 55% of all bank accounts are denominated in United States currency.
Revenue Recognition - 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. Product shipments occur upon receipt of a purchase order from a customer. Shipping terms are evaluated, and revenue on products shipped FOB destination is recorded when the customer takes possession of the goods.
Government Grants - The Company records government grants received in connection with its Ireland operations (see Note 3) as reductions of the corresponding expense in the consolidated statements of income. Proceeds from the rent reduction grant are recognized as reductions to rent expense as the related rent expense is incurred. Proceeds from the employment grant, which are received in multiple installments, are amortized as reductions of expense over a twelve month period from the creation of the related job. Grants recognized during fiscal years 1998, 1999, and 2000 as a reduction of related expenses totaled approximately $545,000, $490,000, and $313,000, respectively. Accounts receivable of approximately $321,000 and $158,000 and deferred revenue of approximately $160,000 and $39,000 related to the grants were included in the consolidated balance sheets at March 31, 1999 and 2000, respectively.
Research and Development Expense - Research and development expenses for Company- sponsored projects are expensed as incurred.
The software development cost components of the Company's products incurred between achieving technological feasibility and the integration into the Company's products available for sale to customers have not been material to date. Such costs, if material, would be capitalized. Additionally, costs related to development of internal use software, other than those incurred during the application development stage, are expensed as incurred. Costs incurred during the application development stage have not been material to date.
Advertising Expense - Advertising costs are expensed as incurred. Advertising expense totaled approximately $2,865,000, $3,323,000, and $5,353,000 for the years ended March 31, 1998, 1999, and 2000, respectively.
Use of Estimates - The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Comprehensive Income - Comprehensive income includes all changes in equity (net assets) during a period from nonowner sources. Items included in comprehensive income include net income, foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities.
Recently Issued Accounting Standards - 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 its existing accounting policies are consistent with the guidance provided in the SAB.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
Reclassifications - Certain reclassifications have been made to the 1998 and 1999 consolidated financial statements in order to conform to the 2000 presentation. These reclassifications had no effect on previously reported net income, operating cash flows, or total shareholders' equity.
3. Grants
On July 9, 1996, the Company formally established operations in Shannon, Ireland through its newly-formed subsidiary, Cybex International.
Cybex International executed an agreement with the Shannon Free Airport Development Company Limited (Shannon Development) under which Cybex International receives grant monies related to salary and rent expense. The maximum amount attainable under the agreement is approximately $1.6 million. The grant monies are repayable, in whole or in part, should (1) Cybex International fail to meet certain business related objectives established under the agreement which are to be achieved over a three-year implementation period and/or (2) the Company discontinue operations in Ireland prior to the termination of the agreement. The agreement terminates five years from the date the last claim is made by the Company for grant monies paid by Shannon Development.
4. Acquisitions
On December 31, 1997, the Company, through Cybex International, acquired Elsner Computertechnik GmbH and PolyCon Data Systems GmbH (collectively Polycon), both privately held companies in Steinhagen, Germany, for a combined purchase price of approximately $8.8 million, including acquisition related expenditures. The acquisition of Polycon was funded by Cybex International from its available cash. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets and liabilities of Polycon based on their fair values at the date of acquisition. Operating results of Polycon since December 31, 1997 are included in the Company's consolidated financial statements.
Costs allocated to research and development assets with alternative future uses totaling $392,000 were capitalized, and the remaining $4,705,000 of acquired in-process research and development costs were expensed on December 31, 1997. The research and development assets are included in goodwill and are being amortized over 8 years.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
The fair value of assets acquired and liabilities assumed in the acquisition is as follows:
Cash 153,000 Accounts receivable 634,000 Inventory 1,386,000 Other assets 37,973 Property and equipment 398,000 Trademarks 806,000 Acquired in-process research and development 4,705,000 Goodwill and other intangibles 2,914,027
Fair value of liabilities assumed: Accounts payable 1,524,000 Other liabilities 694,000 ---------- Cash paid $8,816,000 ==========
On January 29, 1999, the Company purchased certain assets of Fox Network Systems Corporation (Fox) for approximately $2.5 million. The acquisition was recorded under the purchase method of accounting, and the purchase price has been allocated to the assets acquired based on their fair values at the date of acquisition. Operating results of Fox since January 29, 1999 are included in the Company's consolidated financial statements.
Costs allocated to research and development assets with alternative future uses totaling $26,000 were capitalized and the remaining $1,850,000 of acquired in-process research and development costs were expensed during the year ended March 31, 1999. The research and development assets are included in goodwill and are being amortized over 8 years.
The fair value of assets acquired in the acquisition is as follows:
Cash $ 5,164 Accounts receivable 102,191 Inventory 136,541 Property and equipment 20,235 Acquired in-process research and development 1,850,000 Goodwill and other intangibles 372,980 ---------- $2,487,111 ==========
The purchase agreement provides for additional cash consideration of up to $2,500,000 in contingent future payments based on future sales of certain products over a maximum period of five years. At March 31, 2000, the Company had made payments totaling approximately $178,000 in relation to the contingent future payments.
On October 5, 1999, the Company acquired substantially all the assets, including the related intellectual property and patents, of PixelVision Technology, Inc. (PixelVision) for approximately $6.7 million, including transaction fees. The acquisition was recorded under the purchase method of accounting, and the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. Operating results of PixelVision since October 5, 1999 are included in the Company's consolidated financial statements. Costs allocated to research and development assets with alternative future uses totaling $370,000 were capitalized, and the remaining $2,190,000 of acquired in-process research and development costs were expensed during the year ended March 31, 2000. The research and development assets are included in goodwill and are being amortized over 7 years.
The fair value of assets acquired and liabilities assumed in the acquisition is as follows:
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
Cash $1,123,446 Accounts receivable, net 992,719 Inventory 1,577,244 Other assets 48,319 Property and equipment 134,009 Acquired in-process research and development 2,190,000 Goodwill and other intangibles 3,033,093
Fair value of liabilities assumed: Accounts payable 1,496,159 Accrued expenses and other 857,713 ---------- Cash paid $6,744,958 ==========
The following unaudited pro forma summary for the year ended March 31, 1999 presents the results of operations of the Company as if the acquisition of Fox and PixelVision had occurred at the beginning of the 1999 fiscal year. For the year ended March 31, 2000, the pro forma summary presents the results of operations of the Company as if the acquisition of PixelVision had occurred at the beginning of the 2000 fiscal year. Certain adjustments have been made to reflect the impact of the purchase transactions. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of the respective fiscal years, or of results which may occur in the future.
1999 2000 ------- -------- Net sales (in thousands) $90,013 $128,530 Net income (in thousands) $13,330 $ 19,673 Earnings per share - diluted $ .68 $ .96
Pro forma earnings per share for the years ended March 31, 1998, 1999, and 2000 is calculated by dividing pro forma net income by the weighted average shares outstanding of 18,918,057, 19,713,600 and 20,538,146, respectively.
5. Inventories
A summary of inventories at March 31, 1999 and 2000 is as follows:
1999 2000 ---------- ----------- Raw materials $5,672,650 $ 7,122,308 Work in process 490,090 471,043 Finished goods 1,284,512 3,647,284 --------- --------- $7,447,252 $11,240,635 ========== ===========
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
6. Investments
The cost and approximate market values of short-term investments and available-for-sale securities at March 31, 1999 and 2000 are as follows:
All debt instruments with fixed maturities at March 31, 1999 and 2000 are due in one year or less.
Gross realized gains on the sale of investments available for sale were approximately $704,000, $1,375,000 and $2,810,000 in 1998, 1999, and 2000, respectively. Gross realized losses were approximately $341,000, $1,111,000, and $2,075,000 in 1998, 1999, and 2000, respectively.
Investments which do not have a readily determinable fair value and which are carried at cost totaled $5,006,896 at March 31, 2000.
7. Property Held for Lease
In January 2000, the Company purchased its former headquarters building in Huntsville, Alabama and executed a five year agreement to lease the building to an unrelated party. The lease agreement contains renewal options for up to two three-year extensions, subject to certain conditions. The lease agreement also provides for early termination at the option of the lessee after three or four years, subject to certain conditions, including termination fees. Rental income totaled $12,000 for the year ended March 31, 2000. There was no rental income for the years ended March 31, 1998 and 1999.
A summary of property held for lease at March 31, 2000 is as follows:
Building $1,639,225 Accumulated depreciation (46,004) ----------- $1,593,221 ==========
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
Minimum future rentals on noncancelable operating leases are approximately as follows:
Year ending March 31: --------------------- 2001 $ 196,333 2002 221,200 2003 221,200 2004 221,200 2005 221,200 Thereafter 36,867 ---------- $1,118,000 ==========
8. Property, Plant and Equipment
Property, plant and equipment consists of the following at March 31, 1999 and 2000:
1999 2000 ----------- ----------- Land and land improvements $ 1,733,071 $ 1,735,171 Building 6,718,481 6,751,659 Computer software and equipment 2,896,437 3,466,859 Other equipment 3,729,948 4,736,462 Construction in progress 18,435 208,100 ----------- -----------
15,096,372 16,898,251 Less accumulated depreciation (2,544,260) (4,416,312) ----------- ----------- $12,552,112 $12,481,939 =========== ===========
9. Intangibles
Intangible assets as of March 31, 1999 and 2000 consist of the following:
10. Short-Term Borrowings
At March 31, 1999 and 2000, the Company had $16,000,000 and $23,000,000, respectively, outstanding under short-term notes payable bearing interest at the bank's prime rate (7.25% and 7.64% at March 31, 1999 and 2000, respectively). Corresponding amounts of U.S. treasury bills are pledged as collateral for the notes payable. The amounts outstanding at March 31, 1999 and 2000 were repaid on April 1, 1999 and April 3, 2000, respectively.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
The Company has a bank line of credit which provides for borrowings of up to $7,500,000. Interest on outstanding advances was payable monthly at LIBOR plus 2.5% at March 31, 1999 and 2000 (7.44% and 8.63% at March 31, 1999 and 2000, respectively). The line of credit is collateralized by the Company's accounts receivable, inventories, and certain intangible assets and is due on demand. The line of credit expires August 10, 2000. The Company had no amounts outstanding on the line of credit at March 31, 1999 or 2000.
11. Income Taxes
The provision (benefit) for income taxes for the years ended March 31, 1998, 1999, and 2000 is comprised of the following:
The provision for federal income taxes differs from the amount computed by applying the statutory rate to taxable income as follows:
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - --------------------------------------------------------------------------------
The components of the deferred income tax assets and liabilities at March 31, 1999 and 2000 are as follows:
As discussed in Note 4, the Company expensed $4,705,000 of acquired in process research and development costs during the year ended March 31, 1998 in connection with the acquisition of Polycon. For German tax purposes, the amount was capitalized as part of goodwill and will be amortized over 15 years. The Company has a full valuation allowance recorded against this asset at March 31, 1999 and 2000. The Company intends to fully reserve this asset until it is determined that it is more likely than not that the asset can be realized through future taxable income from its German operations.
12. Shareholders' Equity
Preferred Stock - The Company has 5,000,000 shares of $.001 per value preferred stock authorized and no shares issued and outstanding at March 31, 1999 or 2000.
Common Stock - The Company has 50 million shares of $.001 par value common stock authorized. The Company has repurchased shares of common stock from time-to-time under authorization from its Board of Directors. There is no active stock buy-back program at March 31, 2000.
The Company declared 3-for-2 stock splits on March 31, 1998, November 13, 1998, and January 18, 2000. All capital stock and stock option information included in the consolidated financial statements and notes thereto gives retroactive effect to the splits.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - ------------------------------------------------------------------------------- 13. Earnings Per Share
A summary of the calculation of basic and diluted earnings per share for the years ended March 31, 1998, 1999, and 2000 is as follows:
The following options were outstanding during the respective year but were not included in the computation of that year's diluted EPS because the options' exercise price was greater than the average market price of the common shares in the respective year:
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
14. Commitments
The Company leases buildings and certain equipment under various operating leases. Rent expense under these leases totaled approximately $401,000, $776,000, and $592,000 for the years ended March 31, 1998, 1999, and 2000, respectively. Minimum future rental payments under the noncancelable operating leases are approximately as follows:
Year ending March 31: 2001 $ 601,000 2002 452,000 2003 421,000 2004 361,000 2005 343,000 ---------- $2,178,000 ========== 15. Stock Options
On July 10, 1995, the Company's shareholders adopted the 1995 Employee Stock Option Plan (the 1995 Plan). Under the 1995 Plan, options vest and are exercisable in twenty percent increments beginning one year from the date of grant and expire ten years from the date of grant. The Company set aside 949,218 shares of common stock for the 1995 Plan. During 1998, the shareholders approved 1,012,500 additional shares of common stock to be set aside for the 1995 plan.
The Company's shareholders also approved options for 611,298 shares of common stock for the directors who are not employees of the Company under the Company's Directors' Compensation Equity Program (the Program). During 1995, the Company's shareholders approved changes to the Company's stock option plans whereby the Program was terminated and replaced by the 1995 Outside Directors Stock Option Plan (the 1995 Directors Plan). Under the 1995 Directors Plan, options vest and are immediately exercisable on date of grant. Options expire either (1) ninety days after the time the participant ceases to be a Director if the Director is terminated for cause or, (2) three years after the date of termination if such termination is due to retirement, permanent disability, or death. The Company has set aside 189,843 shares of common stock for the 1995 Directors Plan.
In 1998, the Company adopted the Employee Stock Incentive Plan (the 1998 Plan), whereby the Board of Directors may, from time to time, grant stock options to officers and key employees of the Company. The Company set aside 1,687,500 shares of common stock for the 1998 Plan. Vesting is determined by the Board of Directors at the time of grant. Both incentive stock options and nonqualified options are allowed under the 1998 Plan.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------- Pertinent information regarding the plans is as follows:
The following table summarizes information about stock options outstanding at March 31, 2000:
The options above were issued with exercise prices which approximate fair value at the date of grant. At March 31, 2000, 969,263 shares are available for grant under the plans.
The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its stock plans. Accordingly, no compensation cost has been recognized related to stock options. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - -------------------------------------------------------------------------------
The pro forma amounts reflected above are not representative of the effects on reported net income in future years because, in general, the options granted typically do not vest for several years and additional awards are made each year. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
16. Retirement Plans
The Company has 401(k) savings and profit sharing plans covering substantially all employees. The Company will match 50% of an employee's contributions up to 6% of the employee's compensation. The Company's expense for matching contributions totaled approximately $91,000, $120,000, and $277,000 for the years ended March 31, 1998, 1999, and 2000, respectively. The Company may also elect to make discretionary contributions as determined by its Board of Directors. The Company did not make discretionary contributions during the fiscal years ended March 31, 1998, 1999, or 2000.
17. Contingencies
The Company has certain contingent liabilities resulting from litigation enacted by Apex PC Solutions, Inc. (Apex). Apex contends in a lawsuit filed against the Company in the U.S. 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 issues raised in connection with the District Court lawsuit will now be heard before the U.S. Patent and Trademark Office. The parties jointly requested the District Court to urge accelerated consideration of these issues by the U.S. Patent and Trademark Office. At the conclusion of the U.S. 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 that 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 also been involved from time to time in litigation in the normal course of its business. In the opinion of management, the Company is not aware of any other pending or threatened litigation matter that will have a material adverse effect on the Company's business, operations, financial condition, or cash flows.
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - --------------------------------------------------------------------------------
18. Proposed 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") have 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. 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 are awaiting final approval of the merger by the shareholders of the respective companies.
19. 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 to the extent such policies affect the reported segment information. The operational distributions of the Company's revenues and gross margin for its reportable segments for the years ended March 31, 1998, 1999, and 2000 are summarized as follows:
1998 1999 2000 ------- ------- -------- (In Thousands) Net sales: Cybex - U.S. $43,040 $56,921 $ 89,112 Cybex International 10,235 26,471 34,809 Less inter-company sales (712) (1,197) (3,482) ------- ------- -------- $52,563 $82,195 $120,439 ======= ======= ========
Gross profit: Cybex - U.S. $22,720 $30,426 $ 47,121 Cybex International 4,824 13,546 17,350 Eliminations 40 (79) 14 ------- ------- -------- $27,584 $43,893 $ 64,485 ======= ======= ========
Cybex Computer Products Corporation Notes to Consolidated Financial Statements March 31, 1999 and 2000 - --------------------------------------------------------------------------------
The operational distribution of the Company's identifiable assets as of March 31, 1999 and 2000 are as follows:
1999 2000 -------- -------- (In Thousands) Assets: Cybex - U.S. $ 88,815 $122,039 Cybex International 16,678 21,510 -------- -------- Total identifiable assets 105,493 143,549
Eliminations (12,643) (16,254) -------- -------- Total assets $ 92,850 $127,295 ======== ========
20. Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of the Company's last eight fiscal quarters. This information has been prepared by the Company on a basis consistent with the Company's audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the data.
(1) The net income per share for each quarter within a fiscal year does not necessarily equal the net income per share for the particular fiscal year due to variations in the estimated value of Company's common stock during the year and the effect these variations had on the shares outstanding calculation.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Directors
The following table sets forth certain information with respect to the Company's Directors.
Stephen F. Thornton has been Chairman of the Board of the Company since 1987 and President and Chief Executive Officer of the Company since 1984. From 1981 to 1984, Mr. Thornton was President of Schiller Industries, an ultra precision machining, specialty cable and laser scanning company in the aerospace industry. Mr. Thornton also serves as a director of First Commercial Bank of Huntsville.
Remigius G. Shatas served as Executive Vice President of Special Projects and Secretary of the Company from April 1999 to May 2000. Effective May 2000, Mr. Shatas resigned as a director of the Company to serve as Chief Executive Officer of CyCom LLC. Mr. Shatas will remain a Director of the Company. See "Recent Developments." Mr. Shatas served as Executive Vice President - Technology and Acquisitions and Secretary of the Company from April 1997 to April 1999, as Senior Vice President, Chief Technical Officer and Secretary of the Company from 1995 to 1997 and as Chief Technical Officer, Secretary and Treasurer of the Company from 1984 to 1995.
Doyle C. Weeks has been Executive Vice President - Group Operations and Business Development of the Company since August 1998. Mr. Weeks served as Senior Vice President - Finance, Chief Financial Officer, and Treasurer of the Company from 1995 to August 1998 and as Assistant Secretary of the Company during 1998. Prior to joining the Company, Mr. Weeks served as Vice President - Finance, Chief Financial Officer and Treasurer of Phoenix Microsystems, Inc. from 1985 to 1994 and a member of the Board of Phoenix Microsystems, Inc. during 1994.
Douglas E. Pritchett has been Senior Vice President - Finance, Chief Financial Officer, Treasurer and Assistant Secretary of the Company since September 1998. Prior to joining the Company as an executive officer, Mr. Pritchett was Chief Financial Officer of Barber Dairies, Inc. from 1992 to 1998 and a Partner with Coopers & Lybrand L.L.P. (predecessor of PricewaterhouseCoopers LLP) from 1987 to 1992.
David S. Butler has served as President of Electronic Manufacturer's Agents, a manufacturer's representative, since 1974.
John R. Cooper has been Vice President - Finance and Chief Financial Officer of ADTRAN, Inc., a company that designs, develops, manufactures, markets and services a broad range of high-speed digital transmission products utilized by telephone companies and corporate end-users to implement advanced digital data services over existing telephone networks, since 1996. Mr. Cooper was President of Sauty Group from 1995 to 1996 and a Partner with Coopers & Lybrand L.L.P. (predecessor of PricewaterhouseCoopers LLP) from 1991 to 1995.
Executive Officers
The following table sets forth certain information with respect to the Company's executive officers:
(1) Mr. Shatas resigned as an officer of the Company effective May 2000. See "Business - Recent Developments."
Biographical information for Messrs. Thornton, Shatas, Weeks and Pritchett is set forth above under this Item, "Directors and Executive Officers of the Registrant -- Directors."
R. Byron Driver has been employed by the Company since 1992 and was elected Senior Vice President -- Operations and Chief Operating Officer in 1995. From 1985 to 1992, he was Vice President of Astrocom Corporation, a data communications company. From 1982 to 1985, Mr. Driver was vice president of Complexx Systems, Inc., which was acquired by Astrocom Corporation in 1985.
Christopher L. Thomas served as the Company's Engineering Product Manager from February 1995 to March 1996, Vice President of Engineering from March 1996 to April 1997 and currently serves as Senior Vice President of Engineering. Prior to joining the Company, Mr. Thomas served from 1993 to 1995 as Vice President of Technology for Max Vision, a company specializing in medical imaging systems. Mr. Thomas was employed by Intergraph, a graphics workstations company, from 1978 to 1993.
Gary R. Johnson has been Senior Vice President of Sales since April 1997, was formerly Vice President of Sales Channel Development from March 1996 to March 1997. From May 1986 to February 1996, he was the owner of Sales and Marketing Solutions, Inc.
Victor Odryna was appointed Senior Vice President of Corporate Strategic Marketing for Cybex in March 2000. Mr. Odryna was founder and Chief Executive Officer of PixelVision Technology Inc. from 1991 until October 1999 when PixelVision was acquired by Cybex. From 1989 to 1991, Mr. Odryna served as a Senior Consulting Engineer for Graphics and Display Technology at Hewlett-Packard Corporation, a developer and producer of engineering workstations. From 1983 to 1989 he was employed by Apollo Computer, which was acquired by Hewlett-Packard. As Senior Consulting Engineer for Graphics and Display Technology, Mr. Odryna received a BSEE degree and MSCS degree from the University of Connecticut.
Kieran MacSweeney has been Managing Director of International Operations since joining the Company in 1996. From January 1992 to October 1996, Mr. MacSweeney was general manager of the European distribution facility of Maidenform International Ltd., a maker of women's apparel.
General
A Board of Directors consisting of no less than three and no more than 15 persons is authorized by the Company's Bylaws. The present Directors were elected to the Board of Directors of the Company during Fiscal 2000 by the shareholders. Oscar L. Pierce served on the Board of Directors until the end of the second quarter. Executive officers of the Company are elected annually by, and serve at the discretion of, the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Common Stock. The executive officers, directors and greater than 10% stockholders of the Company are required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file. There are specific due dates for these reports, and the Company is required to report any failure to file reports as required during Fiscal 2000. Based upon a review of these filings, the Company believes that the reporting and filing requirements relating to ownership of Common Stock were complied with during all of Fiscal 2000.
Item 11.
Item 11. Executive Compensation.
Executive Compensation - General
The following table sets forth compensation paid or awarded to the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company (the "Named Executive Officers") for all services rendered to the Company and its subsidiaries in 1998, 1999 and 2000.
(1) The amounts listed in this column represent the number of securities underlying options after taking into account the 3- for-2 stock splits effected by the Company on April 28, 1998, December 15, 1998 and February 18, 2000, as a 50% stock dividend. (2) The amounts listed in this column represent for 2000, 1999 and 1998, respectively: (i) employer contributions to the Company's 401(k) Retirement Plan: Stephen F. Thornton, $2889, $2,723 and $1,843; Doyle C. Weeks, $5,242, $2,422 and $2,728; Douglas E. Pritchett, $3,719, $935 and 0; Remigius G. Shatas, $5,037, $2,833 and, $2,502; and Gary R. Johnson, $2,758, $2,585 and $1,184; and (ii) life insurance premiums: Stephen F. Thornton, $3,340, $3,036 and $2,638; Doyle C. Weeks, $684, $638 and $524; Douglas E. Pritchett, $684 and $154 and 0; Remigius G. Shatas, $684, $636 and $636; and Gary R. Johnson, $620, $511 and $456; and (iii) disability insurance premiums: Stephen F. Thornton, $544, $544 and $574; Doyle C. Weeks, $544, $544 and $574; Douglas E. Pritchett, $544 and $136 and 0; Remigius G. Shatas, $544, $544 and $574; and Gary R. Johnson, $544, $544 and $574.
Option Grants in Fiscal 2000
The following table sets forth certain information concerning individual grants of stock options made during Fiscal 2000 to certain of the Named Executive Officers:
(1) The amounts listed in this column represent the number of securities underlying options after taking into account the Stock Split. All options outstanding were issued under the Company's 1998 Employee Stock Incentive Plan. Options are exercisable 25% per year commencing on the grant date, with the exception of Stephen F. Thornton. All options granted to Stephen F. Thornton under the 1998 Stock Incentive Plan became immediately exercisable on the date of grant.
(2) Based upon the market price on the date of grant and an annual appreciation at the rate stated of such market price through the expiration date of such options. The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the Company's stock price. The Company did not use an alternative formula for a grant date valuation, as the Company is not aware of any formula which will determine with reasonable accuracy a present value based on future unknown or volatile factors.
Option Exercises and Year-End Values
The following table sets forth certain information concerning the exercise of stock options during Fiscal 2000 by each of the Named Executive Officers and the fiscal year-end value of unexercised options.
401(k) Retirement Plan
The Company maintains a retirement plan pursuant to Section 401(k) of the Code, which requires, subject to certain limited exceptions, three months of service and a minimum of 1,000 hours worked annually to become a participant in the plan. The Company will match 50% of an employee's contributions up to 6% of the employee's compensation. The Company's expense for matching contributions totaled $58,088, $86,834, and $201,128 for Fiscal 1998 Fiscal 1999, and Fiscal 2000, respectively.
The Company may make discretionary contributions to the plan in an amount determined annually by the Board of Directors. The Company elected to make no discretionary contributions to the plan for Fiscal 1998, Fiscal 1999 and Fiscal 2000. Company contributions are allocated to each participant on the basis of compensation. Participants may make contributions to the plan on a payroll deduction basis, and the Company may make matching contributions on behalf of each participant. A separate salary reduction account and matching employer contribution account are maintained for each participant. All accounts are vested at retirement, death, or disability. Upon any other termination of employment, matching and discretionary contributions are vested after the fifth year of service. Subject to certain restrictions and tax penalties, participants may make early withdrawals from their salary reduction accounts.
The Company also maintains a defined contribution plan for employees of its wholly owned subsidiary, Cybex International. The contribution plan provides for employer contributions of 5% of employee base salary and permits voluntary employee contributions of 5% of base salary. All employee contributions vest immediately upon contribution, and employer contributions vest ratably over five years. For Fiscal 1999 and Fiscal 2000, the Company contributed $33,204 and $75,399, respectively, to the contribution plan.
Employment and Confidentiality Agreements
Employment Agreements
Each of the Named Executive Officers of the Company is a party to an Employment and Noncompetition Agreement. Each Employment Agreement is effective as of July 1, 1999, and has a five-year term. Under each Employment Agreement, the employee receives an annual base salary, subject to annual increases at the discretion of the Compensation Committee (not less than the annual cost of living increase percentage), and is entitled to receive an annual bonus at the discretion of the Compensation Committee and to participate in the
Company's stock option plans and all other benefit programs generally available to executive officers of the Company.
Under the terms of the Employment Agreements, Mr. Thornton and Mr. Shatas have each agreed that during the term of his employment with the Company and for a term of 18 months thereafter, he will not compete, without the prior written consent of the Company, with the Company by engaging in any capacity in any business which is competitive with the business of the Company. Messrs. Weeks, Pritchett and Driver have agreed not to compete with the Company for a period of 12 months after termination of employment with the Company.
Under the terms of the Employment Agreements, the Company may terminate an executive's employment for "cause," which includes acts of (i) willful dishonesty, fraud, or deliberate injury or attempted injury to the Company or (ii) the executive's willful material breach of the Employment Agreement which has resulted in material injury to the Company, in which event, the executive shall receive salary, bonus, and other benefits through the date of termination. Under the terms of the Employment Agreements, if a participating executive is terminated by the Company without cause, he is entitled to receive his accrued salary, earned bonus and other benefits through the date of termination. In addition, Messrs. Thornton and Shatas would each receive severance compensation equal to his base salary for a period of 18 months following the date of termination and an amount equal to his average annual bonus during the two years immediately preceding his termination. Messrs. Weeks, Pritchett and Driver would each receive severance compensation equal to his base salary for a period of 12 months following the date of termination and an amount equal to the average annual bonus received during the two years immediately preceding his termination. At the executive officer's election, he may receive a lump sum severance amount equal to the present value of such severance payments (using a discount rate equal to the 90-day Treasury bill interest rate in effect on the date of delivery of such election notice). The executive officers are also entitled to accelerated vesting of any award granted under stock option plans upon termination without cause.
If a "change-in-control" occurs, each executive officer may terminate his Employment Agreement and receive the severance compensation described above.
The Company has agreed to indemnify each executive officer under his Employment Agreement for certain liabilities arising from actions taken by the executive officer within the scope of his employment.
Confidentiality Agreements
All key employees of the Company, including the executive officers, have signed nondisclosure agreements pursuant to which each has agreed not to disclose any of the Company's confidential information and to assign to the Company any rights he or she may have in any design, invention, software, process, trade secret, or intellectual property that relates to or resulted from work performed at the Company.
Compensation Committee Report
Introduction. This report of the Compensation Committee of the Board of Directors discusses the compensation policies and the basis for the compensation paid to the Company's executive officers and to Stephen F. Thornton, the Company's President, Chief Executive Officer and Chairman of the Board, during the fiscal year ended March 31, 2000.
The Company's policy with respect to executive compensation has been designed to (i) adequately and fairly compensate executive officers in relation to their responsibilities, capabilities and contributions to the Company, (ii) reward executive officers for the achievement of short-term operating goals and for the enhancement of the long-term shareholder value of the Company; and (iii) align the interest of executive officers with those of the Company's shareholders with respect to short-term operating results and long-term increases in the price of the Company's Common Stock.
The components of compensation paid to executive officers consist of (i) base salary, (ii) incentive compensation in the form of an annual bonus, (iii) long-term incentive compensation in the form of options awarded by the Company under the 1995 Employee Stock Option Plan, (iv) long-term incentive compensation in the form of options or shares of restricted stock awarded by the Company under the 1998 Employee Stock Incentive Plan, (v) amounts paid on behalf of executives under the Company's 401(k) Plan and (vi) certain other benefits provided to executive officers.
The Compensation Committee establishes the general compensation policy for the Company and has the responsibility for approving cash compensation and increases in compensation paid to executive officers of the Company. The Compensation Committee also administers the Company's 1995 Employee Stock Option Plan and the 1998 Employee Stock Incentive Plan (collectively, the "Incentive Plans"). The Compensation Committee selects the individuals who will receive awards under the Incentive Plans and determines the timing, pricing and amounts of options or shares of restricted stock granted under the Incentive Plans, each in accordance with the terms of the respective Incentive Plan. The Compensation Committee consists of three non-employee directors of the Company. The Board of Directors of the Company is responsible for determining annual contributions by the Company under the Company's 401(k) Plan.
The Company's executive compensation program has historically emphasized the use of incentive based compensation to reward members of senior management for the achievement of short-term operating goals and for increasing the long-term shareholder value of the Company, and the Compensation Committee intends to continue that policy. Annual bonus payments are discretionary and are related primarily to the operating performance of the Company, in general, and the executive, in particular. The Company believes that its compensation policies reward management when the Company and its shareholders have benefited from short-term operating results and long-term increases in the price of the Company's Common Stock.
Executive officers are rewarded based upon corporate performance, business unit performance and individual performance. Corporate performance and business unit performance are evaluated by reviewing the extent to which strategic and business plan goals are met, including such factors as profitability, performance relative to competitors, timely product enhancements, new product introductions and new product acquisitions. Individual performance is evaluated by reviewing organizational and management development progress against set objectives and the degree to which teamwork and Company values are fostered.
Compensation Vehicles. The Company has had a long and successful history of using a simple total compensation program that consists of cash-based and equity-based compensation. Having a compensation program that allows the Company to successfully attract and retain key employees permits it to provide useful products and services to customers, enhance shareholder value, motivate technological innovation, foster teamwork, and adequately reward employees.
Base Salary. Each year, the Compensation Committee reviews and approves the base salaries paid by the Company to the executive officers. All of the Named Executive Officers executed employment agreements with the Company. These employment agreements provide for a base salary for each executive officer. At its meeting on May 2, 2000, the Compensation Committee reviewed base salaries of executive officers and the performance of the executive officers and the Company against the targets and expectations set for the year. The Compensation Committee approved increases in the base salaries of all executive officers of the Company for Fiscal 2001 in amounts that the Compensation Committee believed would provide base salaries commensurate with executive officers performing comparable services for comparable companies based on the results achieved in Fiscal 2000. The Compensation Committee believes that base salaries earned by the Company's executive officers have historically been reasonable in relation to the Company's performance.
Annual Bonus. The compensation plan for the Company's executive officers contemplates consideration of discretionary annual bonuses. The annual bonus is designed to reward the achievement of short-term operating goals and long-term increases in shareholder value. The Compensation Committee adopted a bonus program for senior executive officers of the Company designed to award bonuses to the senior executives based upon the
achievement of certain financial goals. The bonus program is divided into two elements. The first element is based on the achievement of certain sales and net income goals. In particular, the bonus program awards a 10% bonus if a specific revenue target is achieved and an additional 10% bonus if a specific earnings per share target is achieved, excluding mergers, acquisitions and reorganizations during the fiscal year. Both of these targets were achieved in Fiscal 2000.
The second element is determined by comparing the closing stock price on the last day of the prior year to the highest sustained closing price during the year (determined by selecting the highest closing price which was equaled or exceeded for twenty consecutive trading days during the fiscal year). The change in stock price is measured by selecting the highest of the lowest reported closing prices for the Common Stock for each twenty day trading period during the fiscal year. A cash bonus equal to two percent (2%) of base salary is paid to each executive officer of the Company for each five percent (5%) increase in the market price of the Common Stock at March 31 of the current fiscal year, as compared to the market price of the Common Stock at March 31 of the prior fiscal year. Similarly, a reduction in the market price of the Common Stock reduces the bonus under the first element by an amount equal to two percent (2%) of base salary for each five percent (5%) decrease in the market price of the Common Stock. Under this formula, the price of the Common Stock appreciated 230.31% from March 31, 1999 to March 31, 2000. The Compensation Committee contemplates that this portion of the bonus for Fiscal 2001 will be calculated by comparing the highest sustained closing price during Fiscal 2000 to the highest sustained closing price during Fiscal 2001.
If the total bonus earned in the fiscal year via the two elements described is less than 30%, the executive officers can earn additional bonuses up to a maximum total bonus of 30% if the Company's earnings per share ("EPS") exceeds the specific earnings per share target. For each 1% that actual EPS exceeds targeted EPS, an additional 2% bonus is earned.
On May 2, 2000, the Compensation Committee authorized the payment of bonuses to its executive officers and staff employees based upon their respective performance and contribution toward the attainment of the goals of the Company for Fiscal 2000. During Fiscal 2000, the goals of the Company were to increase net sales and net income, introduce new products, introduce enhancements to existing products, expand the Company's customer base, expand its manufacturing, marketing and distribution facilities in Europe, increase international sales, and increase the coverage of the Company by analysts. Substantially all of its goals for Fiscal 2000 were achieved, including the specific revenue and earnings per share targets. The Compensation Committee evaluated the performance of each executive officer and concluded that the successful performance of the Company during Fiscal 2000 was due largely to the efforts of all of the executive officers. The amount of the bonuses for the executive officers was based on the achievement of the financial goals by the Company in Fiscal 2000 as set out in the bonus program and bonuses for other employees were based upon a subjective assessment of the performance of the Company during Fiscal 2000 and the individual performance of such employees as compared with the Company's and the employee's goals for the year.
Because both targets set under the first element of the executive bonus plan were achieved, the Compensation Committee approved a 20% bonus to the Named Executive Officers under the first element of the plan. The increase in the price of the Common Stock during Fiscal 2000 resulted in a bonus for the Named Executive Officers for Fiscal 2000 under the second element of the plan of 92%. Therefore, the total bonus percentage for all elements under the plan was 112% for Fiscal 2000. The Compensation Committee approved the payment of bonuses to all Named Executive Officers.
In addition, the Compensation Committee had established a bonus goal for certain executive officers of 5% for each qualified analyst that begins to follow the Company. The definition of who constitutes a qualified analyst is made by the Compensation Committee. Based upon the results achieved during Fiscal 2000, the Compensation Committee awarded additional bonuses of 15% of base salary to each of Stephen F. Thornton, Doyle C. Weeks and Douglas E. Pritchett and 5% of base salary to Gary R. Johnson.
Incentive Compensation. The purpose of the Company's Incentive Plans is to provide additional incentives to employees to work to maximize shareholder value. The Company also recognizes that a stock incentive program is a necessary element of a competitive compensation package for its employees. The Plan utilizes vesting periods to encourage key employees to continue in the employ of the Company and thereby acts as a retention device for key employees. The Company believes that the program encourages employees to maintain a long-term perspective. The Company grants stock options annually to a broad-based group of the total employee population. For Fiscal 2000, the Company granted options to purchase 240,000 shares of Common Stock to certain key employees, of which options to purchase shares were granted to the Named Executive Officers as follows: 45,000 to Stephen F. Thornton, 37,500 to Doyle C. Weeks, 22,500 to Douglas C. Pritchett, 15,000 to Remigius Shatas and 15,000 to Gary R. Johnson.
In determining the size of an option award for an executive officer, the Compensation Committee's primary considerations are the "grant value" of the award and the performance of the officer measured against the same performance criteria described above under "Introduction" which is used to determine salary. In addition to considering the grant value and the officer's performance, the Committee also considers the number of outstanding unvested options which the officer holds and the size of previous option awards to that officer. The Company does not assign specific weights to these items. Options to purchase shares of the Company's Common Stock are generally at the fair market value of such shares as reported by the NASDAQ Stock Market on the date of grant. Under the terms of the Incentive Plans, the Compensation Committee has sole authority, within the terms of the Incentive Plans, to select the employees who will be granted options under the Incentive Plans and to determine the timing, pricing and amount of options awarded. The Compensation Committee has adopted guidelines with respect to the granting of options under the Plan to employees upon their promotion to important managerial or supervisory classifications. These guidelines, which were developed over a number of years, are designed to reward employees upon promotion to important positions and to provide such employees with the opportunity to share in increases in the long-term shareholder value of the Company in amounts that are consistent with their managerial responsibilities. The Compensation Committee believes that stock options granted under the Incentive Plans reward executive officers only to the extent that shareholders have benefitted from increases in the value of the Company's Common Stock.
CEO Compensation. Stephen F. Thornton has been President and Chief Executive Officer of the Company since 1984 and Chairman of the Board since 1987. The Compensation Committee used the same compensation policy described above for all employees to determine Mr. Thornton's Fiscal 2000 compensation. In setting Mr. Thornton's compensation, the Compensation Committee made an overall assessment of Mr. Thornton's leadership in achieving the Company's long-term strategic and business goals. Mr. Thornton's base salary reflects a consideration of both the Company's performance and Mr. Thornton's individual performance. The Company does not assign specific weights to these categories.
In May 2000, the Compensation Committee increased Mr. Thornton's base salary from $250,000 to $275,000 and approved a bonus to Mr. Thornton of $317,650 for Fiscal 2000, which was approximately 127% of base salary and in accordance with the Company's bonus program for senior executive officers adopted by the Compensation Committee.
Members of the Compensation Committee:
David S. Butler John R. Cooper
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information with respect to ownership of shares of the Company's Common Stock as of June 16, 2000, by (i) each of the Company's directors; (ii) the Company's chief executive officer ("CEO") and the Named Executive Officers, (iii) each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of the Common Stock, and (iv) all directors and Named Executive Officers of the Company as a group. Unless otherwise indicated, each of the shareholders listed below has sole voting and investment power with respect to the shares beneficially owned.
(*) Less than 1%
(1) The number of shares set forth in the table reflects the 3-for-2 stock splits effected by the Company on April 28, 1998, December 15, 1998 and February 18, 2000, as a 50% stock dividend.
(2) Includes (i) 718,971 shares owned directly by Stephen F. Thornton (of which 114,027 shares are represented by exercisable options); (ii) 231,139 shares owned by Judy Thornton, his wife; and (iii) 239,250 shares held by the Thornton Family Limited Partnership, of which Mr. Thornton is a general partner and as to which he may be deemed to share voting and investment power.
(3) Includes (i) 533,781 shares owned directly by Remigius G. Shatas; (ii) 7,593 shares owned by his wife; (iii) 75,937 shares held by Mr. Shatas's minor child, and (iv)337,500 shares held by Shatas Partners, Ltd., of which Mr. Shatas is a general partner and as to which he may be deemed to share voting and investment power.
(4) All of the reported 114,375 shares are owned directly by Gary R. Johnson (of which 41,250 shares are represented by exercisable options).
(5) Includes (i) 196,738 shares owned directly by David S. Butler (of which 24,374 shares are represented by exercisable options); (ii) 7,498 shares held by him in his 401(k) Plan; (iii) 225 shares held by him in his IRA; and (iv) 27,000 shares owned by his wife.
(6) Includes (i) 62,052 shares owned directly by R. Byron Driver (of which 31,500 shares are represented by exercisable options); and (ii) 168 shares owned by his wife.
(7) All of the reported 71,319 shares are represented by exercisable options.
(8) Includes (i) 25,200 shares owned directly by Douglas E. Pritchett (of which 22,500 shares are represented by exercisable options); (ii) 6,975 shares held by him in his IRA; and (iii) 150 shares held by Mr. Pritchett's minor child.
(9) Includes (i)13,125 shares represented by exercisable options; and (ii) 1,500 shares held by him in his IRA.
(10) All of the reported 95,250 shares are represented by exercisable options.
(11) All of the reported 44,112 shares are owned directly by Kieran MacSweeney (of which 44,000 shares are represented by exercisable options).
(12) Includes 457,345 shares represented by exercisable options.
Item 13.
Item 13. Certain Relationships and Related Transactions.
There were no such transactions in Fiscal 2000.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements
The consolidated financial statements of the Company and its subsidiaries are filed as a part of this Annual Report on Form 10-K are listed in Item 8 of this Annual Report on Form 10-K, which listing is hereby incorporated by reference.
2. Schedules to Financial Statements
The financial statement schedules required by Regulation S-X are filed under Item 14(d) of this Annual Report on Form 10-K, as listed below:
Schedules Supporting the Financial Statements
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
Exhibit Number Description ------- -----------
2.1 Purchase and Sale Agreement by and between the Company, Cybex International and Edgar and Stephanie Elsner effective December 31, 1997 incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No.2.1(b) to the Company's Current Report on Form 8-K filed January 14, 1998.
2.2 Agreement and Plan of Reorganization by and between Apex Inc., Aegean Sea Inc. and the Company, dated March 8, 2000.
3.1 Amended and Restated Articles of Incorporation of the Company, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 3.1 to Amendment No. 1 to Registration Statement No. 33-93124.
3.2 Amended and Restated By-Laws of the Company, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 3.2 to Amendment No. 1 to Registration Statement No. 33-93124.
4.1 Specimen of Common Stock Certificate of the Company, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 4 to Amendment No. 1 to Registration Statement No. 33-93124.
10.1 Restated 1989 Employee Incentive Stock Option Plan, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 10.2 to Registration Statement No. 33- 93124, and Amendment to 1989 Employee Incentive Stock Option Plan, incorporated by reference (pursuant to the provisions of Rule 12(b)- 32) to Exhibit No. 10.13 to Amendment No. 1 to Registration Statement No. 33- 93124.
10.2 1995 Employee Stock Option Plan, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 10.3 to Registration Statement No. 33-93124.
10.3 1995 Outside Directors Stock Option Plan, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit No. 10.4 to Registration Statement No. 33-93124.
10.4 1998 Employee Stock Incentive Plan, incorporated by reference to Exhibit No. 10.7 (pursuant to the provisions of Rule 12(b)-32) to the Company's Annual Report on Form 10- K filed June 26, 1998.
10.5 Smith Barney Shearson Flexible Prototype Nonstandardized 401(k) Plan Adoption Agreement #007 and Smith Barney Shearson Prototype Defined Contribution Plan Document #005 and Trust Agreement, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.6 of the Company's Form 10-K for the fiscal year ended March 31, 1997.
10.6 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company, and Stephen F. Thornton, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q as filed on February 14, 2000
10.7 Amendment to Employment and Noncompetition Agreement dated as of March 7, 2000 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., Cybex Computer Products Corporation, and Stephen F. Thornton, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.8 to Registration Statement on Form S-4 No. 333-33768
10.8 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company and Doyle C. Weeks, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.2 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
10.9 Amendment to Employment and Noncompetition Agreement dated as of March 7, 2000 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., Cybex Computer Products Corporation, and Doyle C. Weeks, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.10 to Registration Statement on Form S-4 No. 333-33768
10.10 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company, and Douglas E. Pritchett, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.3 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
10.11 Amendment to Employment and Noncompetition Agreement dated as of March 7, 2000 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., Cybex Computer Products Corporation, and Douglas E. Pritchett, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.8 to Registration Statement on Form S-4 No. 333-33768
10.12 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company, and R. Byron Driver, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.4 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
10.13 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company, and Gary R. Johnson, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.5 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
10.14 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among PolyCon Investments, Inc., a Texas corporation d/b/a Cybex Employment Services Co., the Company, and Christopher Thomas, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.6 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
10.15 Employment and Noncompetition Agreement dated as of July 1, 1999 by and among the Company and Kieran MacSweeney, incorporated by reference (pursuant to the provisions of Rule 12(b)-32) to Exhibit 10.7 of the Company's Form 10-Q for the quarterly period ended December 31, 1999.
21(*) List of Subsidiaries of the Company.
23(*) Consent of PricewaterhouseCoopers LLP
27(*) Financial Data Schedule for current period (for SEC use only).
99 Registration Statement on Form S-4 No. 333-33768, as filed on March 31, 2000, and subsequent Amendment No. 1 to Registration Statement on Form S-4, as filed on May 11, 2000; Amendment No. 2 to Registration Statement on Form S-4, as filed on May 30, 2000; and Amendment No. 3 to Registration Statement on Form S-4, as filed on June 1, 2000.
(*) As filed herewith.
THE COMPANY WILL FURNISH TO EACH SHAREHOLDER, UPON WRITTEN REQUEST, COPIES OF THE EXHIBITS REFERRED TO ABOVE AT A COST OF TEN CENTS PER PAGE. REQUESTS SHOULD BE ADDRESSED TO: DOUGLAS E. PRITCHETT, SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER, CYBEX COMPUTER PRODUCTS CORPORATION, 4991 CORPORATE DRIVE, HUNTSVILLE, ALABAMA 35805.
(b) Current Reports on Form 8-K:
Current Report on Form 8-K, filed May 26, 2000, reporting the press release announcing the results of operations for the fourth fiscal quarter and year ended March 31, 2000.
(c) Exhibits. See Item 14(a)(3) above and the separate Exhibit Index attached hereto.
(d) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
Report of Independent Accountants
To the Board of Directors Cybex Computer Products Corporation Huntsville, Alabama
Our audit of the consolidated financial statements referred to in our report dated May 4, 2000, except for Note 18, as to which the date is June 2, 2000 appearing in this Form 10-K of Cybex Computer Products Corporation also included an audit of the financial statement schedule listed in item 14(d) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Birmingham, Alabama May 4, 2000
Schedule II Valuation and Qualifying Accounts For the years ended March 31, 1998, 1999, and 2000
(1) Deductions consist of specific accounts receivable written off against the allowance for doubtful accounts
(2) Other consists of beginning balances from acquisitions
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cybex Computer Products Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBEX COMPUTER PRODUCTS CORPORATION
Dated: June 22, 2000 By: /s/ Stephen F. Thornton ---------------------------------- Stephen F. Thornton, Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Cybex Computer Products Corporation and in the capacities and on the dates indicated.
EXHIBIT INDEX
(*) As filed herewith.