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EX-31.1 - SECTION 302 CEO CERTIFICATION - CYBEX INTERNATIONAL INCdex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - CYBEX INTERNATIONAL INCdex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - CYBEX INTERNATIONAL INCdex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - CYBEX INTERNATIONAL INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended March 27, 2010.

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from             to             .

Commission file number 0-4538

 

 

Cybex International, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

New York   11-1731581

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10 Trotter Drive, Medway, Massachusetts   02053
(Address of principal executive office)   (Zip Code)

(508) 533-4300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).    Yes  ¨    No  x

On May 3, 2010, the Registrant had outstanding 17,120,383 shares of Common Stock, par value $0.10 per share, which is the Registrant’s only class of Common Stock.

 

 

 


Table of Contents

CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

 

               Page
PART I.    FINANCIAL INFORMATION   
   Item 1.   

Financial Statements (unaudited)

  
     

Consolidated Statements of Operations— Three months ended March 27, 2010 and March 28, 2009.

   3
     

Consolidated Balance Sheets— March 27, 2010 and December 31, 2009

   4
     

Consolidated Statements of Cash Flows— Three months ended March 27, 2010 and March 28, 2009

   5
     

Notes to Consolidated Financial Statements

   6
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17
   Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   22
   Item 4T.   

Controls and Procedures

   22
PART II.    OTHER INFORMATION   
   Item 1.   

Legal Proceedings

   23
   Item 1A.   

Risk Factors

   23
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   23
   Item 3.   

Defaults Upon Senior Securities

   23
   Item 4.   

Reserved

   23
   Item 5.   

Other Information

   23
   Item 6.   

Exhibits

   23
Signatures    24

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended  
     March 27,
2010
    March 28,
2009
 

Net sales

   $ 26,116     $ 28,922  

Cost of sales

     16,650       21,023  
                

Gross profit

     9,466       7,899  

Selling, general and administrative expenses

     10,258       9,863  
                

Operating loss

     (792 )     (1,964 )

Interest expense, net

     322       277  
                

Loss before income taxes

     (1,114 )     (2,241 )

Income tax benefit

     (361 )     (834 )
                

Net loss

   $ (753 )   $ (1,407 )
                

Basic and diluted net loss per share

   $ (0.04 )   $ (0.08 )
                

See notes to consolidated financial statements.

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     March 27,
2010
    December 31,
2009
 
     (unaudited)        

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 6,832     $ 6,879  

Accounts receivable, net of allowance of $1,410 and $1,362

     12,961       16,815  

Inventories

     11,575       10,054  

Prepaid expenses and other

     1,157       1,216  

Deferred income taxes

     5,040       5,040  
                

Total current assets

     37,565       40,004  

Property, plant and equipment, net

     31,068       31,835  

Deferred income taxes

     9,113       8,815  

Other assets

     5,261       7,981  
                
   $ 83,007     $ 88,635  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Current portion of long-term debt

   $ 2,415     $ 2,415  

Accounts payable

     3,786       4,436  

Accrued liabilities

     11,082       12,046  
                

Total current liabilities

     17,283       18,897  

Long-term debt

     14,587       15,191  

Other liabilities

     8,772       11,438  
                

Total liabilities

     40,642       45,526  
                

Commitments (Notes 4 and 12)

    

Stockholders’ Equity:

    

Common stock, $.10 par value, 30,000 shares authorized, 17,860 shares issued

     1,786       1,786  

Additional paid-in capital

     68,719       68,661  

Treasury stock, at cost (740 shares)

     (2,955 )     (2,955 )

Accumulated deficit

     (23,000 )     (22,247 )

Accumulated other comprehensive loss

     (2,185 )     (2,136 )
                

Total stockholders’ equity

     42,365       43,109  
                
   $ 83,007     $ 88,635  
                

See notes to consolidated financial statements.

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended  
     March 27,
2010
    March 28,
2009
 

OPERATING ACTIVITIES:

    

Net loss

   $ (753 )   $ (1,407 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     1,171       1,432  

Amortization of deferred financing costs

     10       10  

Deferred income taxes

     (286 )     (733 )

Stock-based compensation

     57       44  

Provision for doubtful accounts

     62       69  

Change in fair value of interest rate swap

     (8 )     (8 )

Change in fair value of foreign currency contract

     —          189  

Changes in operating assets and liabilities:

    

Accounts receivable

     3,801       65  

Inventories

     (1,521 )     (1,425 )

Prepaid expenses and other

     94       210  

Accounts payable, accrued liabilities and other liabilities

     (1,671 )     (766 )
                

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     956       (2,320 )
                

INVESTING ACTIVITIES:

    

Purchases of property, plant and equipment

     (399 )     (98 )
                

NET CASH USED IN INVESTING ACTIVITIES

     (399 )     (98 )
                

FINANCING ACTIVITIES:

    

Repayments of term loans

     (604 )     (446 )

Borrowings under term loans

     —          1,000  

Borrowings under revolving loans

     —          1,675  

Purchase of common stock through repurchase program

     —          (428 )

Other financing activity payments

     —          (16 )
                

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (604 )     1,785  
                

DECREASE IN CASH AND CASH EQUIVALENTS

     (47 )     (633 )

CASH AND CASH EQUIVALENTS, beginning of period

     6,879       1,628  
                

CASH AND CASH EQUIVALENTS, end of period

   $ 6,832     $ 995  
                

SUPPLEMENTAL CASH FLOW DISCLOSURE

    

Cash paid for interest

   $ 341     $ 291  

Cash paid for income taxes, net

     10       8  

Common stock issued to directors earned in previous period (Note 5)

     —          60  

See notes to consolidated financial statements.

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 — BASIS OF PRESENTATION

Cybex International, Inc. (the “Company” or “Cybex”), a New York corporation, is a manufacturer of exercise equipment and develops, manufactures and markets strength and cardiovascular fitness equipment products for the commercial and, to a lesser extent, consumer markets. Most of the Company’s products are sold under the brand name “Cybex.” The Company operates in one business segment.

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 27, 2010 are not necessarily indicative of the results that may be expected for the entire year.

It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and other information included in the Company’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued amended guidance addressing revenue arrangements with multiple deliverables. This new guidance establishes a new hierarchy for allocating revenues among multiple deliverables in a multi-element arrangement. In order of preference, revenues will be allocated based on vendor specific objective evidence (VSOE), third-party evidence, or estimated selling price. Additional disclosures are required to describe the effects of adoption, including changes in how arrangement consideration is allocated or in the pattern and timing of revenue recognition. This guidance is effective for fiscal years beginning on or after June 15, 2010, and the Company has elected to early adopt for new or materially modified arrangements entered into on or after January 1, 2009. Adoption did not materially impact the Company’s consolidated financial condition, results of operations or cash flows.

In January 2010, the FASB issued guidance to require new disclosures regarding (1) transfers in and out of Levels 1 and 2 fair value measurements and (2) activity in Level 3 fair value measurements. Additionally, this guidance clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this guidance on January 1, 2010 and included the appropriate disclosures in Note 9. The adoption of this guidance did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

 

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NOTE 3 — CONCENTRATION OF RISK AND GEOGRAPHIC SEGMENT DATA

Sales to one customer represented 14.1% and 14.9% of consolidated net sales for the three months ended March 27, 2010 and March 28, 2009, respectively. Accounts receivable from this customer were $913,000 and $1,025,000 at March 27, 2010 and December 31, 2009, respectively. Sales to another customer represented 7.9% and 10.0% of consolidated net sales for the three months ended March 27, 2010 and March 28, 2009, respectively. Accounts receivable from this customer were $673,000 and $2,364,000 at March 27, 2010 and December 31, 2009, respectively. No other single customer accounted for more than 10% of the Company’s net sales in these periods.

Sales outside of North America accounted for 32% and 28% of consolidated net sales for the three months ended March 27, 2010 and March 28, 2009, respectively. No single country besides the United States accounts for greater than 10% of consolidated net sales.

NOTE 4 — ACCOUNTING FOR GUARANTEES

The Company arranges equipment leases and other financings for certain of its customers. While most of these financings are without recourse, in certain cases the Company may offer a guarantee or other recourse provisions. In such situations, the Company ensures that the transaction between the independent leasing company and the end user customer represents a sales-type lease. The Company monitors the payment status of the lessee under these arrangements and provides a contingency reserve in situations when collection of the lease payments is not probable. At March 27, 2010, the maximum contingent liability under all recourse and guarantee provisions was approximately $6,446,000. A reserve for estimated losses under recourse provisions of $690,000 and $710,000 has been recorded based on historical experience and is included in accrued liabilities at March 27, 2010 and December 31, 2009, respectively.

The Company as guarantor will recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. The Company has recorded a net liability of $63,000 and $84,000 at March 27, 2010 and December 31, 2009, respectively, for the estimated fair value of the Company’s guarantees. The fair value of the guarantees was determined based on the estimated cost for a customer to obtain a letter of credit from a bank or similar institution. This liability is reduced on a straight-line basis over the term of each respective guarantee. In most cases, if the Company is required to fulfill its obligations under the guarantee, it has the right to repossess the equipment from the customer. It is not practicable to estimate the approximate amount of proceeds that would be generated from the sale of these assets in such situations.

Additionally, the Company provides a warranty on its products for labor of one year and for parts ranging from one to ten years depending on the part and type of equipment. The accrued warranty obligation is provided at the time of product sale based on management estimates, which are developed from historical information, and certain assumptions about future events are subject to change.

The following table sets forth the change in the liability for product warranties during the three months ended March 27, 2010:

 

Balance as of January 1, 2010

   $ 4,123,000  

Payments made under warranty

     (1,050,000 )

Accrual for product warranties issued

     654,000  
        

Balance as of March 27, 2010

   $ 3,727,000  
        

 

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NOTE 5 – STOCK-BASED COMPENSATION

The Company records stock-based compensation to recognize the cost of employee services received in exchange for an award of equity instruments, with such cost recognized over the period that the employee is required to perform services in exchange for the award. The Company measures the cost of employee services received in exchange for an award based on the grant date fair value of the award. For the three months ended March 27, 2010, the Company recorded stock-based compensation expense of $57,000, consisting of expenses related to stock options ($52,000) and stock issued to directors ($5,000). For the three months ended March 28, 2009, the Company recorded stock-based compensation expense of $44,000, consisting of expenses related to stock options ($41,000), and stock issued to a director ($3,000).

Cybex’s 2005 Omnibus Incentive Plan (“Omnibus Plan”) is designed to provide incentives that will attract and retain individuals key to the success of the Company through direct or indirect ownership of the Company’s common stock. The Omnibus Plan provides for the granting of stock options, stock appreciation rights, stock awards, performance awards and bonus stock purchase awards. The Company reserved 1,000,000 shares of common stock for issuance pursuant to the Omnibus Plan. A registration statement was filed for the Omnibus Plan and the Company provides newly-issued shares of registered common stock upon the exercise of options and upon stock grants under the Omnibus Plan.

The terms and conditions of each award are determined by a committee of the Board of Directors of the Company. Under the Omnibus Plan, the committee may grant either qualified or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price per share that the committee may determine (which in the case of incentive stock options may not be less than the fair market value of a share of the Company’s common stock on the date of grant). The options generally vest over a three to five year period (with some cliff vesting).

A summary of the status of the Company’s stock option plans as of March 27, 2010 is presented below:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
   Remaining
Contractual
Term
(years)
   Intrinsic
Value

Outstanding at January 1, 2010

   577,375     $ 2.57      

Granted

   228,000       1.17      

Exercised

   —          —        

Cancelled/Forfeited

   (8,250 )     2.48      
              

Outstanding at March 27, 2010

   797,125     $ 2.17    6.18    $ 197,000
                        

Options exercisable at March 27, 2010

   456,875     $ 2.24    4.14    $ 93,000
                        

Options vested and expected to vest at March 27, 2010

   765,629     $ 2.19    6.17    $ 186,000
                        

The intrinsic value of options exercised for the three months ended March 27, 2010 and March 28, 2009, was $0.

As of March 27, 2010, there was $458,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.6 years.

At March 27, 2010, there are 553,000 shares available for future issuance pursuant to the 2005 Omnibus Incentive Plan.

 

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The Company’s 2002 Stock Retainer Plan for Nonemployee Directors (“2002 Plan”) provided that each nonemployee director received 50% of his annual retainer in shares of common stock of the Company. Up to 150,000 shares of common stock could be issued under the 2002 Plan. The January 2009 issuance of shares under the 2002 Plan, which related to services performed in 2008, exhausted the authorized shares under the Plan, and the Board of Directors in February 2009 suspended its operation. The issuance of shares as partial payment of annual retainers results in expense based on the fair market value of such shares. At March 27, 2010, there are no shares available for future issuance pursuant to the 2002 Plan. During the quarter ended March 28, 2009, the Company issued 18,270 shares of common stock to the directors, which had a fair value of $60,000, related to director’s fees earned in 2008, which were included in accrued liabilities at December 31, 2008.

NOTE 6 — INVENTORIES

Inventories consist of the following:

 

     March 27,
2010
   December 31,
2009

Raw materials

   $ 5,668,000    $ 5,180,000

Work in process

     3,347,000      2,837,000

Finished goods

     2,560,000      2,037,000
             
   $ 11,575,000    $ 10,054,000
             

NOTE 7 — LONG-TERM DEBT

Long-term debt consists of the following:

 

     March 27,
2010
    December 31,
2009
 

Citizens revolving credit loan

   $ —        $ —     

Citizens real estate loan

     11,613,000       11,743,000  

Wells Fargo term loans

     5,389,000       5,863,000  
                
     17,002,000       17,606,000  

Less – current portion

     (2,415,000 )     (2,415,000 )
                
   $ 14,587,000     $ 15,191,000  
                

In June 2007, a $13,000,000 mortgage loan was advanced to the Company pursuant to the loan agreement dated as of October 17, 2006 (the “Citizens Loan Agreement”) with RBS Citizens, National Association (“Citizens”). The proceeds of this loan were used to finance a portion of the acquisition of an approximate 340,000 square foot manufacturing, office and warehouse facility located in Owatonna, Minnesota. The principal of the mortgage loan is to be retired by eighty three equal monthly payments of $43,000 along with a balloon payment of $9,403,000 at June 28, 2014. The loan is secured by the Owatonna real estate and is cross-collateralized by the Company’s accounts receivable and inventory.

In July 2007, the Company entered into a Loan Agreement (the “Wells Fargo Loan Agreement”) with Wells Fargo Bank, NA, formerly named Wachovia Bank, NA (“Wells Fargo”), which was supplemented and modified in March 2008, March 2009 and December 2009. The Wells Fargo Loan Agreement as supplemented and modified provides for three term loans, the proceeds of which have financed the acquisition of machinery and equipment. $5,000,000 was advanced pursuant to the initial term loan, $1,975,000 was advanced pursuant to the second term loan and $1,000,000 was advanced pursuant to the third term loan. The principal of the initial term loan is to be retired by sixty equal monthly principal payments that commenced March 1, 2008 with a maturity date of March 1, 2013, the principal of the second term loan is to be retired by sixty equal monthly principal payments which commenced January 1, 2009 with a maturity date of January 1, 2014 and the principal of the third term loan is to be retired by twenty four equal monthly principal payments which commenced January 1, 2010 with a maturity date of December 1, 2011. The Wells Fargo term loans are secured by the Company’s equipment.

 

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In July 2008, the Company entered into a credit agreement (the “Citizens Credit Agreement”) with Citizens, providing for a revolving line of credit of up to the lesser of a ceiling or an amount determined by reference to a borrowing base composed of designated percentages of the Company’s eligible accounts receivable and eligible inventory. Availability under the revolving loan fluctuates daily based on the borrowing base. At March 27, 2010, there was $3,640,000 unused availability under the revolving line of credit. The Company believes that the availability under the revolving line of credit together with the Company’s anticipated cash flows are sufficient to fund its general working capital and capital expenditure needs for at least the next 12 months. The revolving line of credit is available to July 1, 2011 and is secured by the Company’s accounts receivable and inventory.

The Citizens revolving line of credit prior to April 1, 2009 bore interest at a floating rate equal to LIBOR plus 1.25% or the prime rate minus 1%, from April 1, 2009 to June 30, 2009 bore interest at LIBOR plus 2.25%, and after such date bears interest at LIBOR plus 2.5% to 3.0% based on a performance grid. The Citizens real estate loan prior to April 1, 2009 bore interest at a floating rate equal to LIBOR plus 1.2% per annum, from April 1, 2009 to June 30, 2009 bore interest at LIBOR plus 2.25%, and after such date bears interest at LIBOR plus 2.5% to 3.0% based on a performance grid. The Wells Fargo initial and second term loans prior to April 1, 2009 bore interest at LIBOR plus 1.2% to 1.45% based on a performance grid and from April 1, 2009 to June 30, 2009 these loans bore interest at LIBOR plus 2.25%. The third Wells Fargo term loan prior to June 30, 2009 bore interest at LIBOR plus 2.25%. After June 30, 2009, each Wells Fargo term loan bears interest at LIBOR plus 3.5%. LIBOR was .25% at March 27, 2010.

The average outstanding revolving loan balance for the three months ended March 27, 2010 and March 28, 2009 was $0 and $1,199,000, respectively, and the weighted average interest rate for the three months ended March 28, 2009 was 1.72%. Interest expense, including an unused availability fee on the revolving loans, was $6,000 and $11,000 for the three months ended March 27, 2010 and March 28, 2009, respectively. Interest expense on the Wells Fargo term loans was $83,000 and $68,000 for the three months ended March 27, 2010 and March 28, 2009, respectively. Interest expense on the Citizens real estate loan was $252,000 and $214,000 for the three months ended March 27, 2010 and March 28, 2009, respectively.

The Citizens and Wells Fargo credit facilities require the Company to maintain various financial covenants. The Company failed to meet certain of these covenants at the end of the first and second quarters of 2009, which failures were waived by the lenders. In connection with these waivers, the Company entered into amendments to its credit facilities. The Wells Fargo amendments increased the interest rate on the term loans, modified the financial covenants, and increased the collateral for the term loans to include all of the Company’s equipment. The Citizens amendments increased the interest rate on the credit facilities, cross-collateralized the two Citizens credit facilities, reduced the ceiling and modified the borrowing base calculation for the revolving line of credit, and amended the financial and certain other covenants contained in the credit facilities. The Company at March 27, 2010 was in compliance, and believes that it will remain in compliance for the foreseeable future, with each credit facility’s financial covenants.

The Company’s credit agreements contain cross default provisions to each other.

 

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At March 27, 2010 long-term debt maturities are as follows:

 

Remainder of 2010

   $ 1,811,000  

2011

     2,415,000  

2012

     1,915,000  

2013

     1,165,000  

2014

     9,696,000  
        
     17,002,000  

Less current portion of long-term debt

     (2,415,000 )
        
   $ 14,587,000  
        

NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses certain financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates and interest rates. The Company uses these derivative instruments to hedge exposures in the ordinary course of business and does not invest in derivative instruments for speculative purposes.

Foreign currency forward contracts are utilized to hedge the foreign currency exposure on sales made in the UK in British Sterling. The Company’s UK sales are denominated in British Sterling, while its purchases of inventory from the Company are paid in US dollars. These contracts are not designated as hedging instruments and accordingly changes in their fair value are recognized in selling, general and administrative expense in the consolidated statement of operations.

In November, 2007, the Company entered into a series of 13 monthly forward contracts that began on May 30, 2008, whereby the Company paid a bank 150,000 British Sterling and the bank paid the Company $309,000 each month. This agreement was extended in February 2009 whereby the Company entered into a series of 10 monthly forward contracts that began on March 31, 2009, whereby the Company paid a bank 130,000 British Sterling and the bank paid the Company $214,000 each month. This series of contracts ended on December 31, 2009.

In June 2006, the Company entered into a forward starting interest rate swap agreement with Citizens which commenced on June 29, 2007 to hedge the LIBOR-based Citizens real estate loan. The notional amount of the swap amortizes based on the same amortization schedule as the Citizens Loan Agreement and the hedged item (one-month LIBOR) is the same as the basis for the interest rate on the loan. The swap effectively converts the rate from a floating rate based on LIBOR to a fixed rate which prior to April 1, 2009 equaled 6.95%, from April 1, 2009 to June 30, 2009 equaled 8.00% and after June 30, 2009 throughout the duration of the loan, the rate equals 8.25% or 8.75% based on a performance grid. The swap and interest payments on the debt settle monthly. The real estate loan and the swap both mature on July 2, 2014. There was no initial cost of the interest rate swap. The Company designates the interest rate swap as a derivative hedging instrument and, accordingly, changes in the fair value of this swap are recorded as a component of accumulated other comprehensive loss.

 

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In November 2007, the Company entered into a forward starting interest rate swap agreement with Wells Fargo, which commenced on March 3, 2008, which is intended to hedge the initial LIBOR-based Wells Fargo term loan. The notional amount of the swap amortizes based on the same amortization schedule as the initial Wells Fargo term loan and the hedged item (one-month LIBOR) is the same as the basis for the interest rate on the loan. The swap effectively converts the rate from a floating rate based on LIBOR to a fixed rate which prior to April 1, 2009 equaled 5.76% or 6.01% based on a performance grid, from April 1, 2009 to June 30, 2009 equaled 6.81% and after June 30, 2009 equals 8.06% throughout the duration of the swap. The swap and interest payments on the debt settle monthly. The term loan matures March 1, 2013 and the swap matures on March 1, 2011. There was no initial cost of the interest rate swap. The Company determined the interest rate swap qualifies as a derivative hedging instrument and, accordingly, changes in the fair value of this swap are recorded as a component of accumulated other comprehensive loss.

The following table presents the fair values of derivatives included within the consolidated balance sheets:

 

     Asset Derivatives    Liability Derivatives
     Fair Value         Fair Value     
     March 27,
2010
   December 31,
2009
   Balance
Sheet
Location
   March 27,
2010
   December 31,
2009
   Balance
Sheet
Location

Derivatives designated as hedging instruments:

Interest rate swap agreements

                 
   $ —      $ —      —      $ 1,529,000    $ 1,505,000    Other
Liabilities

The following table presents the amounts affecting the consolidated statements of operations and accumulated other comprehensive loss for the three months ending March 27, 2010 and March 28, 2009:

 

Derivatives in Cash Flow Hedging Relationship

   Amount of Gain (Loss) Recognized in Other
Comprehensive Loss,  net of tax
 
   Three Months Ended  
   March 27, 2010     March 28, 2009  

Interest rate swap agreements

   $ (19,000 )   $ 128,000   

Derivatives in Cash Flow Hedging Relationship

   Amount of Gain (Loss) Reclassified from
Accumulated Other  Comprehensive Loss into

income
 
   Three Months Ended  
   March 27, 2010     March 28, 2009  

Interest rate swap agreements

   $ (196,000 )   $ (201,000

 

     Amount of Gain (Loss) Recognized in
Income on Derivatives
     

Derivatives Not Designated as Hedging Instruments

   Three Months Ended    

Location of Gain (Loss) Recognized in Income

On Derivatives

   March 27, 2010    March 28, 2009    

Foreign currency forward Contracts

   $ —      $ (189,000 )  

Selling, general and administrative expenses

See Note 9 – Fair Value of Financial Instruments for a description of how the above financial instruments are valued.

 

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The Company is exposed to credit-related losses in the event of non-performance by counterparties to these financial instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings, and although no assurances can be given, the Company does not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date, therefore, the Company had no exposure to its counterparties as of March 27, 2010.

For the cash flow hedges referred to above, the amounts in accumulated other comprehensive loss are reclassified into earnings as the underlying hedged items affects earnings. The amount expected to be reclassified into pre-tax earnings in the next 12 months is $329,000. The timing of actual amounts reclassified into earnings is dependent on future movement in interest rates.

NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, long-term debt and derivative instruments (discussed below). The carrying values of cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the short maturity of these instruments. Based on the terms of the Company’s debt instruments that are outstanding as of March 27, 2010 and December 31, 2009, respectively, the carrying values are considered to approximate their respective fair values. See Note 7 for the terms and carrying values of the Company’s various debt instruments.

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

     Fair Value Measurements at March 27, 2010
     Balance at
March 27, 2010
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)

Interest rate swap liabilities

   $ 1,529,000    —      $ 1,529,000    —  

The valuation of the interest rate swap agreements are based on quoted prices from the counterparties that value these instruments using proprietary models and market information at the date presented, as well as consideration of the impact of the risk of non-performance of the counterparty and the Company.

There were no non-financial assets or liabilities subject to measurement at fair value on a non-recurring basis at March 27, 2010.

NOTE 10 — STOCKHOLDERS’ EQUITY

Preferred Stock:

The Company’s Board has the ability to issue, without approval by the common shareholders, up to 500,000 shares of $1 par value preferred stock having rights and preferences as the Board may determine in its sole discretion.

 

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Common Stock:

On November 3, 2008, the Company’s Board of Directors authorized the repurchase of up to 1 million shares of its common stock, in open market transactions or through privately negotiated transactions, subject to market conditions and other factors. This stock repurchase program does not have an expiration date. Pursuant to its credit facilities, the Company is currently restricted in making further purchases of its shares. For the three months ended March 29, 2009, the Company purchased 404,000 shares for $428,000 pursuant to this program. Through March 27, 2010, 531,200 shares had been repurchased under this program with an aggregate cost of $703,000. This stock repurchase is recorded in treasury stock on the consolidated balance sheet.

At March 27, 2010, there are 1,350,125 shares of common stock reserved for future issuance pursuant to the exercise or issuance of stock options and warrants.

Comprehensive Income (loss):

Comprehensive income (loss) is the change in equity of a business enterprise from transactions and other events and circumstances from non-owner sources. Excluding net loss, the components of comprehensive income (loss) are from foreign currency translation adjustments and changes in the fair value of hedging instruments.

The following summarizes the components of comprehensive income (loss):

 

     Three Months Ended  
     March 27,
2010
    March 28,
2009
 

Net loss

   $ (753,000 )   $ (1,407,000 )

Other comprehensive income (loss):

    

Foreign currency translation adjustment

     (30,000 )     (33,000 )

Change in fair value of interest rate hedge (net of tax) (1)

     (19,000 )     128,000  
                

Comprehensive loss

   $ (802,000 )   $ (1,312,000 )
                

 

(1) Net of income tax expense (benefit) of ($12,000) and $84,000 for the three months ended March 27, 2010 and March 28, 2009, respectively.

The following summarizes the components of accumulated other comprehensive loss at March 27, 2010 and December 31, 2009:

 

     March 27,
2010
    December 31,
2009
 

Cumulative translation adjustment

   $ (1,327,000 )   $ (1,297,000 )

Change in fair value of interest rate hedge (net of tax) (2)

     (858,000 )     (839,000 )
                

Total

   $ (2,185,000 )   $ (2,136,000 )
                

 

(2) Net of deferred income tax asset of $538,000 and $526,000 at March 27, 2010 and December 31, 2009, respectively.

 

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NOTE 11 — NET LOSS PER SHARE

The table below sets forth the reconciliation of the basic and diluted net loss per share computations:

 

     Three Months Ended
     March 27,
2010
   March 28,
2009

Shares used in computing basic net loss per share

   17,120,000    17,424,000

Dilutive effect of options and warrants

   —      —  
         

Shares used in computing diluted net loss per share

   17,120,000    17,424,000
         

For the three months ended March 27, 2010, options to purchase 797,125 shares of common stock at exercise prices ranging from $1.17 to $7.37 per share were outstanding but were not included in the computation of diluted net loss per share as the result would be anti-dilutive. For the three months ended March 28, 2009, options to purchase 694,000 shares of common stock at exercise prices ranging from $1.22 to $7.37 per share were outstanding but were not included in the computation of diluted net loss per share as the result would be anti-dilutive.

NOTE 12 — CONTINGENCIES

Litigation

United Leasing, Inc. v. Cybex International, Inc., et al.

The Company on February 25, 2009 was served with an Amended Complaint which added the Company and its wholly owned subsidiary, Cybex Capital Corp. (collectively with the Company referred to herein as Cybex), as additional defendants in this action originally venued in the Circuit Court for Williamson County, State of Tennessee. The plaintiff, United Leasing, Inc., provided a series of lease financings for the sale of Cybex equipment to a purchaser/lessee which has since entered bankruptcy, many of which sales were made by an independent dealer, also a defendant in the action. The plaintiff alleges that it was induced to finance in excess of the purchase price for certain of the equipment based primarily upon alleged rebates to the purchaser/lessee made by the independent dealer. Cybex Capital assisted in the lease financing and the plaintiff now asserts that Cybex participated in the alleged scheme. The Amended Complaint included claims for breach of contract, conversion, intentional/fraudulent misrepresentation, fraudulent concealment and civil conspiracy. The plaintiff seeks from Cybex an unspecified amount of compensatory and punitive damages, including repurchase of the leases; damages in the amount of the alleged rebates, stated to be at least $350,000; payment of the lease guarantees, stated to be at least $365,000 plus one-half of the remaining balance of one lease; and interest, costs and counsel fees.

During March 2009, this action was removed to the United States District Court for the Middle District of Tennessee, and Cybex filed an Answer denying all material allegations of the Amended Complaint, other than admitting limited guarantees of certain of the leases at issue had been provided. While Cybex has asserted that the plaintiff’s acts and omissions have relieved Cybex of liability under the lease guarantees, a reserve for the estimated amount of the guarantee obligation is included in accrued liabilities at March 27, 2010, should it be determined that Cybex remains responsible thereunder.

The Company is involved in certain other legal actions, contingencies and claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Legal fees related to those matters are charged to expense as incurred.

 

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Product Liability

As of March 27, 2010 and December 31, 2009, the Company accrued $4,950,000 and $7,627,000, respectively, for product liability claims and a corresponding receivable for the liability claims estimated to be recoverable under the Company’s insurance policies. On a quarterly basis, the Company reviews and adjusts each product liability claim and corresponding receivable. The change in the accrual for product liability claims and the corresponding receivable from December 31, 2009 to March 27, 2010 primarily relates to the insured settlement of a product liability claim during the first quarter of 2010. This accrual was included as a component of other liabilities and the insurance recoverable was included as a component of other assets at March 27, 2010 and December 31, 2009.

NOTE 13 — INCOME TAXES

For the three months ended March 27, 2010 and March 28, 2009, an income tax benefit of (32.4%) and (37.2%) of loss before taxes was recorded, totaling ($361,000) and ($834,000), respectively.

At December 31, 2009, U.S. federal net operating loss carryforwards of approximately $17,488,000 were available to offset future taxable income and, as of such date, the Company had foreign net operating loss carryforwards of $5,111,000, which have an unlimited life, federal alternative minimum tax credit carryforwards of $666,000, which do not expire, and federal research and development tax credit carryforwards of $277,000, which begin to expire in 2021 and various net operating loss and credit carryforwards for state tax purposes. The U.S. federal operating loss carryforwards begin to expire in 2020.

Approximately $36,000,000 of income before income taxes is needed to fully realize the Company’s recorded net deferred tax asset and $40,000,000 of future taxable income is needed to fully realize the Company’s deferred tax assets. The difference between this figure and the net operating loss carryforwards and credits is primarily cumulative book versus tax differences related to various expenses.

The net deferred tax asset balance of $14,153,000 at March 27, 2010 represents the amount of the Company’s deferred tax assets that management believes is more-likely-than-not to be realized, and the valuation allowance against its deferred tax assets at March 27, 2010 is $1,486,000. To the extent that the Company does not generate profits before income taxes during 2010, an increase in the valuation allowance may be required. Management will continue to assess the need for the valuation allowance in future periods.

The Company files income tax returns in the U.S. federal jurisdiction, the United Kingdom and various state jurisdictions. The Company is no longer subject to U.S. federal, United Kingdom and state income tax examinations by tax authorities for years before 2004.

The Company has evaluated any uncertain tax positions in its federal income tax return, United Kingdom return and the state tax returns it is currently filing. The Company has also made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. Based on this analysis, there has been no change during the quarter in the balance of unrecognized tax liability of $290,000 as of December 31, 2009.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made below. These include, but are not limited to, competitive factors, technological and product developments, market demand, economic conditions, the resolution of litigation involving us, and our ability to comply with the terms of our credit facilities. Further information on these and other factors which could affect our financial results can be found in our reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K, including Part I thereof, our Current Reports on Form 8-K, this Form 10-Q and the proxy statement dated March 25, 2010.

OVERVIEW AND OUTLOOK

We develop, manufacture and market high performance, professional quality exercise equipment products for the commercial market and, to a lesser extent, the premium segment of the consumer market.

We estimate that commercial sales represent more than 90% of our total net sales. Our financial performance can be affected when, in times of economic uncertainty, our commercial customers, particularly fitness clubs, become cautious in making expansion and other capital investments and reduce their expenditures for items such as the fitness equipment offered by us.

Commencing with the fourth quarter of 2008, our net sales have declined compared to the corresponding period of the prior year, with net sales in 2009 and the first quarter of 2010 approximately 19% and 10%, respectively, below net sales in the corresponding prior year period. We believe that this sales decline largely reflects our commercial customers, particularly fitness clubs, being cautious in making capital investments due to economic conditions, both generally and in the fitness industry.

While we cannot be certain how long these conditions will persist or the extent that these conditions will affect our financial performance, we expect sales to continue to be negatively impacted by the economy. We further expect that sales will rebound as the economy recovers.

We have taken various steps to reduce expenses in response to the decline in our sales. These steps have included a first quarter 2009 work force reduction of about 5% and a wage reduction of 3% or 5% for all employees in effect from the second quarter 2009 to December 31, 2009. In addition, at the request of our outside Board members, a 5% reduction in director fees was in effect during the period of the employee wage reduction. We intend to monitor general economic conditions and our sales performance and, if warranted, may effect further cost saving measures during 2010.

The foregoing statements are based on current expectations. These statements are forward-looking and actual results may differ materially. In particular, the continued uncertainties in U.S. and global economic conditions and in the fitness industry make it particularly difficult to predict product demand and other related matters and may preclude us from achieving expected results.

 

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RESULTS OF OPERATIONS

NET SALES

Our net sales decreased $2,806,000, or 10%, to $26,116,000 for the first quarter of 2010 from $28,922,000 for the first quarter of 2009. The 2010 first quarter decrease was attributable to a decrease of sales of cardiovascular products of $930,000, or 6%, to $14,300,000, and decreased sales of strength training products of $1,298,000, or 13%, to $8,963,000, along with decreased freight, parts and other sales of $578,000, or 17%, to $2,853,000. The sales decline was generally throughout our product offerings and we believe was reflective of economic conditions, both generally and in the fitness industry.

GROSS MARGIN

Gross margin increased to 36.2% in the first quarter of 2010 from 27.3% in the first quarter of 2009. Margins improved due to lower material costs as a percentage of sales (7.0%), primarily as a result of lower steel costs, cost reductions in the 750 treadmill series, higher selling prices and product mix; lower warranty costs (1.6%); improved labor efficiencies (0.7%); and lower freight costs (0.4%). These favorable adjustments offset unfavorable overhead absorption (0.8%) caused by lower production volumes.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased by $395,000, or 4%, to $10,258,000 in the first quarter of 2010 compared to $9,863,000 in the first quarter of 2009, predominantly due to increased costs for marketing and selling initiatives directed to new markets. Selling, general and administrative expenses represented 39% of sales for the first quarter of 2010, compared to 34% of sales for the comparable 2009 period.

NET INTEREST EXPENSE

Net interest expense increased by $45,000, or 16%, in 2010 to $322,000 compared to a decrease of $70,000, or 20%, in 2009. The 2010 increase relates to increases in the applicable interest rate resulting from 2009 debt modifications, offset by lower average borrowings. The decrease in 2009 relates primarily to lower rates.

INCOME TAXES

We recorded an income tax benefit of ($361,000) and ($834,000) for the three months ended March 27, 2010 and March 28, 2009, respectively. The effective tax benefit rate was (32.4%) and (37.2%) for the three months ended March 27, 2010 and March 28, 2009, respectively. The low tax benefit rate is primarily due to non-deductible foreign losses in both periods. Actual cash outlays for taxes continue to be reduced by the available operating loss carryforwards.

As of December 31, 2009 U.S. federal operating loss carryforwards of approximately $17,488,000 were available to us to offset future taxable income and, as of such date, we also had foreign net operating loss carryforwards of $5,111,000, federal alternative minimum tax credit carryforwards of $666,000 and federal research and development tax credit carryforwards of $277,000. The net deferred tax asset balance of $14,153,000 at March 27, 2010 represents the amount of our deferred tax assets that we believe is more-likely-than-not to be realized, and the valuation allowance against our deferred tax assets at March 27, 2010 is $1,486,000. If the estimates and related assumptions relating to the likely utilization of the deferred tax asset change in the future, the valuation allowance may change accordingly. The ability to consider future income before income taxes as a source of recoverability of deferred income taxes is dependent upon the Company generating cumulative profits before income taxes during recent periods. To the extent that the Company does not generate profits before income taxes during 2010, an increase in the valuation allowance may be required. Approximately $36,000,000 of income before taxes is needed to fully realize the Company’s recorded net deferred tax asset.

 

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of March 27, 2010, we had working capital of $20,282,000 compared to $21,107,000 at December 31, 2009. The net decrease in working capital is primarily due to the paydown of term loans of $604,000 and $399,000 of capital expenditures.

For the three months ended March 27, 2010, we generated $956,000 of cash flow from operating activities compared to using $2,320,000 of cash for the three months ended March 28, 2009. The increase in cash provided by operating activities is primarily due to the decrease in accounts receivable due to cash collections and a lower net loss.

Cash used in investing activities of $399,000 during the three months ended March 27, 2010 consisted of purchases of computer hardware and infrastructure of $302,000 and purchases of manufacturing tooling and equipment of $97,000, primarily for the manufacture of new products. Cash used in investing activities of $98,000 during the three months ended March 28, 2009 consisted of purchases of computer hardware and infrastructure of $67,000 and purchase of manufacturing tooling and equipment of $31,000, primarily for the manufacture of new products. While capital expenditures for the balance of 2010 are expected to be approximately $3,100,000, the timing and amount of these expenditures will depend on economic conditions and results of our operations.

Cash used in financing activities was $604,000 for the three months ended March 27, 2010, consisting entirely of term loan repayments. Cash provided by financing activities was $1,785,000 for the three months ended March 28, 2009, consisting primarily of $1,675,000 of borrowings under the Citizens revolving credit loan and the $1,000,000 Wells Fargo third term loan, offset by $446,000 of term loan repayments and $428,000 for purchases of treasury stock through a repurchase program.

We have credit facilities with RBS Citizens, National Association (“Citizens”) and Wells Fargo Bank, NA, formerly named Wachovia Bank, N.A. (“Wells Fargo”). Our Citizens Credit Agreement provides a revolving line of credit of up to the lesser of a ceiling or an amount determined by reference to a borrowing base. Our Citizens Loan Agreement provided for a $13,000,000 real estate loan which was advanced in 2007 to finance the acquisition of our Owatonna facility. We entered into the Well Fargo Loan Agreement in 2007, providing for a term loan to finance the acquisition of machinery and equipment. The Wells Fargo Loan Agreement was supplemented in 2008 and 2009 to provide additional term loans to finance the acquisition of machinery and equipment. A total of $5,000,000, $1,975,000, and $1,000,000, respectively, was advanced under the initial, second and third Wells Fargo term loans. The Citizens revolving line of credit is secured by our accounts receivable and inventory, and matures July 1, 2011. The Citizens real estate loan is secured by a mortgage on the Owatonna facility, is cross-collateralized by our accounts receivable and inventory and matures on July 2, 2014. The Wells Fargo loans are secured by our equipment. The first Wells Fargo term loan matures on March 1, 2013, the second term loan matures on January 1, 2014 and the third term loan matures on December 1, 2011.

At March 27, 2010, there were no outstanding revolving credit loans, a $11,613,000 real estate loan and $5,389,000 in term loans. Availability under the revolving loan fluctuates daily. At March 27, 2010, there was $3,640,000 in unused availability under the revolving loan facility.

Our credit facilities include financial covenants. At March 27, 2010, we were in compliance with each credit facility’s financial covenants and we believe that we will remain in compliance with these financial covenants for the foreseeable future.

 

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In November 2008, we announced that our Board of Directors had authorized a stock repurchase program of up to one million shares of our common stock. There is no requirement that any level of purchases up to the maximum be made under this program, and the timing, amount and cost of any purchase depends upon various factors, including our stock price and market conditions. Pursuant to our credit facilities, we are currently restricted in making further purchases of our shares. Through March 27, 2010, 531,200 shares had been repurchased under this program with an aggregate cost to us of $703,000.

We rely upon cash flows from our operations and borrowings under our credit facilities to fund our working capital and capital expenditure requirements. A decline in sales or margins or a failure to remain in compliance with the terms of our credit facilities could result in having insufficient funds for such purposes. We believe that our expected cash flows and the availability under our credit facilities are sufficient to fund our general working capital and capital expenditure needs for at least the next 12 months.

As of December 31, 2009, we had approximately $22,599,000 in net operating loss carry forwards, substantially all of which will be available to offset future taxable income.

CONTRACTUAL OBLIGATIONS

The following is an aggregated summary of the Company’s obligations and commitments to make future payments under various agreements:

 

     TOTAL    Less Than One
Year
   One to Three
Years
   Four to Five
Years
   After Five
Years

Contractual obligations:

              

Debt

   $ 17,002,000    $ 2,415,000    $ 4,205,000    $ 10,382,000    $ —  

Interest due including impact of interest rate swaps (a)

     4,540,000      1,309,000      2,095,000      1,136,000      —  

Operating lease commitments

     915,000      484,000      414,000      17,000      —  

Purchase obligations

     18,329,000      13,671,000      3,708,000      950,000      —  
                                  
   $ 40,786,000    $ 17,879,000    $ 10,422,000    $ 12,485,000    $ —  
                                  

 

(a) This includes fixed rates of 8.25% and 8.75% based on a performance grid and 8.06% per the interest rate swap agreements.

We have agreements with our named executive officers that provide for severance payments to the officer in the event the employee is terminated without cause or, in certain situations, the officer resigns after a change of control. The maximum cash exposure under these agreements, assuming the employment of the officers terminated effective as of December 31, 2009, was $2,795,000. The actual amounts to be paid can only be determined at the time of the executive officer’s separation from the Company.

OFF-BALANCE SHEET ARRANGEMENTS

We have a lease financing program whereby we arrange equipment leases and other financing for certain commercial customers for selected products. These leases are sales-type leases and are generally for terms of three to five years, at which time title transfers to the lessee. While most of these financings are without recourse, in certain cases we may offer a guarantee or other recourse provisions. At March 27, 2010, the maximum contingent liability under all recourse provisions was approximately $6,446,000. A reserve for estimated losses under recourse provisions of $690,000 has been recorded based upon historical experience, and is included in accrued liabilities at March 27, 2010.

 

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to the allowance for doubtful accounts, realizability of inventory, reserves for warranty obligations, reserves for legal matters and product liability, and valuation of deferred tax assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, which could materially impact the Company’s results of operations and financial position. These critical accounting policies and estimates have been discussed with the Company’s audit committee.

Allowance for doubtful accounts. Management performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. Management continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. If the financial condition of a specific customer or the Company’s general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Realizability of inventory. The Company values inventory at the lower of cost or market. Management regularly reviews inventory quantities on-hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and historical usage, after considering the impact of new products. If actual market conditions and product demand are less favorable than projected, additional inventory write-downs may be required.

Warranty reserve. All products are warranted for one year of labor and up to ten years for structural frames. Warranty periods for parts range from one to ten years depending on the part and the type of equipment. A warranty liability is recorded at the time of product sale based on estimates that are developed from historical information and certain assumptions about future events. Future warranty obligations are affected by product failure rates, usage and service costs incurred in addressing warranty claims. These factors are impacted by the level of new product introductions and the mix of equipment sold to the commercial and consumer markets. If actual warranty costs differ from management’s estimates, adjustments to the warranty liability would be required.

Legal matters. The Company will record a reserve related to certain legal matters for which it is probable that a loss has been incurred and the range of such loss can be determined. With respect to other matters, management has concluded that a loss is only possible or remote and, therefore, no loss is recorded. As additional information becomes available, the Company will continue to assess whether losses from legal matters are probable, possible, or remote, and the adequacy of accruals for probable loss contingencies.

Product liability reserve. Due to the nature of its products, the Company is involved in certain pending product liability claims and lawsuits. The Company maintains product liability insurance coverage subject to deductibles. Reserves for self-insured retention, including claims incurred but not yet reported, are included in accrued liabilities in the accompanying consolidated balance sheets, based on management’s review of outstanding claims and claims history and consultation with its third-party claims administrators. If actual results vary from management’s estimates, adjustments to the reserve would be required.

 

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As of March 27, 2010 and December 31, 2009, the Company accrued $4,950,000 and $7,627,000, respectively, for product liability claims and a corresponding receivable for the liability claims estimated to be recoverable under the Company’s insurance policies. On a quarterly basis, the Company reviews and adjusts each product liability claim and corresponding receivable. The change in the accrual for product liability claims and the corresponding receivable from December 31, 2009 to March 27, 2010 primarily relates to the insured settlement of a product liability claim during the first quarter of 2010. This accrual was included as a component of other liabilities and the insurance recoverable was included as a component of other assets at March 27, 2010 and December 31, 2009.

Valuation of deferred tax assets. The net deferred tax asset balance of $14,153,000 at March 27, 2010 represents the amount of the Company’s deferred tax assets that management believes is more-likely-than-not to be realized and the valuation allowance against the deferred tax assets at March 27, 2010 is $1,486,000. Management will continue to assess the need for this valuation allowance on a quarterly basis. Approximately $36,000,000 of income before income taxes is needed to fully realize the Company’s recorded net deferred tax asset and $40,000,000 of future taxable income is needed to fully realize the Company’s deferred tax assets. The difference between total deferred tax assets and the net operating loss carryforwards and credits is primarily book versus tax differences of various expenses. If the estimates and related assumptions relating to the likely utilization of the deferred tax asset change in the future, the valuation allowance may change accordingly.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks from the disclosure within the Company’s Report on Form 10-K for the year ended December 31, 2009.

 

ITEM 4T. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company (including its consolidated subsidiaries) in its periodic filings with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

  ITEM 1. LEGAL PROCEEDINGS

United Leasing, Inc. v. Cybex International, Inc., et al.

See Part I Item 3 of the Company’s Report on Form 10-K for the year ended December 31, 2009 for a description of these proceedings.

 

  ITEM 1A. RISK FACTORS

There are no material changes to the risk factors previously disclosed in Item 1A, Part I of the Company’s Report on Form 10-K for the year ended December 31, 2009.

 

  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

  ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

  ITEM 4. RESERVED

 

  ITEM 5. OTHER INFORMATION

None

 

  ITEM 6. EXHIBITS

 

Exhibit 31.1 –

  Certification of Chairman and Chief Executive Officer.

Exhibit 31.2 –

  Certification of President, Chief Operating Officer and Chief Financial Officer.

Exhibit 32.1 –

  Statement of Chairman and Chief Executive Officer.

Exhibit 32.2 –

  Statement of President, Chief Operating Officer and Chief Financial Officer.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

Cybex International, Inc.

    By:  

/s/ John Aglialoro

May 3, 2010

     

John Aglialoro

Chairman and Chief Executive Officer

    By:  

/s/ Arthur W. Hicks, Jr.

May 3, 2010

     

Arthur W. Hicks, Jr.

President, Chief Operating Officer and

Chief Financial Officer

 

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