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EX-10.3 - MODIFICATION AGREEMENT - CYBEX INTERNATIONAL INCdex103.htm
EX-32.2 - STATEMENT OF PRESIDENT, COO & CFO - CYBEX INTERNATIONAL INCdex322.htm
EX-10.2 - LEASE SCHEDULE NO. 001 - CYBEX INTERNATIONAL INCdex102.htm
EX-31.2 - CERTIFICATION OF PRESIDENT, COO AND CFO - CYBEX INTERNATIONAL INCdex312.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CEO - CYBEX INTERNATIONAL INCdex311.htm
EX-32.1 - STATEMENT OF CHAIRMAN AND CEO - CYBEX INTERNATIONAL INCdex321.htm
EX-10.1 - MASTER LEASE AGREEMENT - CYBEX INTERNATIONAL INCdex101.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 June 26, 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 (§232.405 of this chapter) 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 August 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 and six months ended June 26, 2010 and June 27, 2009    3
      Consolidated Balance Sheets— June 26, 2010 and December 31, 2009    4
      Consolidated Statements of Cash Flows–– Six months ended June 26, 2010 and June 27, 2009    5
      Notes to Condensed 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     Six Months Ended  
     June 26,
2010
    June 27,
2009
    June 26,
2010
    June 27,
2009
 

Net sales

   $ 27,672     $ 27,755     $ 53,788     $ 56,677  

Cost of sales

     18,167       20,610       34,816       41,633  
                                

Gross profit

     9,505       7,145       18,972       15,044  

Selling, general and administrative expenses

     9,530       9,072       19,789       18,935  
                                

Operating loss

     (25 )     (1,927 )     (817 )     (3,891 )

Interest expense, net

     381       322       703       600  
                                

Loss before income taxes

     (406 )     (2,249 )     (1,520 )     (4,491 )

Income tax benefit

     (50 )     (145 )     (411 )     (980 )
                                

Net loss

   $ (356 )   $ (2,104 )   $ (1,109 )   $ (3,511 )
                                

Basic and diluted net loss per share

   $ (0.02 )   $ (0.12 )   $ (0.06 )   $ (0.20 )
                                

See notes to consolidated financial statements.

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

 

     June 26,
2010
    December 31,
2009
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 3,819     $ 6,879  

Accounts receivable, net of allowance of $1,251 and $1,362

     14,597       16,815  

Inventories

     11,689       10,054  

Prepaid expenses and other

     1,261       1,216  

Deferred income taxes

     5,040       5,040  
                

Total current assets

     36,406       40,004  

Property, plant and equipment, net

     30,555       31,835  

Deferred income taxes

     9,369       8,815  

Other assets

     5,320       7,981  
                
   $ 81,650     $ 88,635  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Current portion of long-term debt

   $ 1,436     $ 2,415  

Accounts payable

     3,587       4,436  

Accrued liabilities

     10,700       12,046  
                

Total current liabilities

     15,723       18,897  

Long-term debt

     15,046       15,191  

Other liabilities

     8,885       11,438  
                

Total liabilities

     39,654       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

     68,774       68,661  

Treasury stock, at cost (740 shares)

     (2,955 )     (2,955 )

Accumulated deficit

     (23,356 )     (22,247 )

Accumulated other comprehensive loss

     (2,253 )     (2,136 )
                

Total stockholders’ equity

     41,996       43,109  
                
   $ 81,650     $ 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)

 

     Six Months Ended  
     June 26,
2010
    June 27,
2009
 

OPERATING ACTIVITIES:

    

Net loss

   $ (1,109 )   $ (3,511 )

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     2,337       2,863  

Amortization of deferred financing costs

     28       20  

Deferred income taxes

     (499 )     (980 )

Stock-based compensation

     113       88  

Provision for doubtful accounts

     (121 )     132  

Amortization of interest rate swap

     (16 )     (16 )

Change in fair value of foreign currency contract

     —          471  

Changes in operating assets and liabilities:

    

Accounts receivable

     2,349       2,583  

Inventories

     (1,635 )     617  

Prepaid expenses and other

     (69 )     859  

Accounts payable, accrued liabilities and other liabilities

     (2,262 )     (3,098 )
                

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (884 )     28  
                

INVESTING ACTIVITIES:

    

Purchases of property, plant and equipment

     (1,052 )     (139 )
                

NET CASH USED IN INVESTING ACTIVITIES

     (1,052 )     (139 )
                

FINANCING ACTIVITIES:

    

Repayments of term loans

     (6,123 )     (925 )

Borrowings under term loans

     4,999       1,000  

Repayments of revolving loan

     —          (2,475 )

Borrowings under revolving loan

     —          2,475  

Purchase of common stock through repurchase program

     —          (451 )

Other financing activity payments

     —          (22 )
                

NET CASH USED IN FINANCING ACTIVITIES

     (1,124 )     (398 )
                

DECREASE IN CASH AND CASH EQUIVALENTS

     (3,060 )     (509 )

CASH AND CASH EQUIVALENTS, beginning of period

     6,879       1,628  
                

CASH AND CASH EQUIVALENTS, end of period

   $ 3,819     $ 1,119  
                

SUPPLEMENTAL CASH FLOW DISCLOSURE

    

Cash paid for interest

   $ 759      $ 604   

Cash paid for income taxes, net

     42       42   

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

     —          60   

Settlement of interest rate swap

     71       —     

See notes to consolidated financial statements.

 

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CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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 and six months ended June 26, 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 Financial Accounting Standards Board (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. The 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.

NOTE 3 — CONCENTRATION OF RISK AND GEOGRAPHIC SEGMENT DATA

Sales to one customer represented 13.3% and 13.7% of consolidated net sales for the three and six months ended June 26, 2010 and 14.1% and 14.5% of consolidated net sales for the three and six months ended June 27, 2009, respectively. Accounts receivable from this customer were $1,154,000 and $1,025,000 at June 26, 2010 and December 31, 2009, respectively. Sales to another customer

 

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represented 12.0% and 10.0% of consolidated net sales for the three and six months ended June 26, 2010 and 9.6% and 9.9% of consolidated net sales for the three and six months ended June 27, 2009, respectively. Accounts receivable from this customer were $893,000 and $2,364,000 at June 26, 2010 and December 31, 2009, respectively. No other single customer accounted for more than 10% of the Company’s net sales in any of those periods.

Sales outside of North America represented 30% and 31% of consolidated net sales for the three and six months ended June 26, 2010 and 27% of consolidated net sales for the three and six months ended June 27, 2009, respectively. No single foreign 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 June 26, 2010, the maximum contingent liability under all recourse and guarantee provisions was approximately $5,819,000. A reserve for estimated losses under recourse provisions of $715,000 and $710,000 has been recorded based on historical experience, and is included in accrued liabilities at June 26, 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 $56,000 and $84,000 at June 26, 2010 and December 31, 2009, respectively, for the estimated fair value of the Company’s guarantees. The fair value of the guarantees is 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, which are subject to change.

The following table sets forth the change in the liability for product warranties during the six months ended June 26, 2010:

 

Balance as of January 1, 2010

   $ 3,988,000  

Payments made under product warranties

     (2,125,000 )

Accrual for product warranties issued

     1,737,000  
        

Balance as of June 26, 2010

   $ 3,600,000  
        

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 June 26, 2010, the Company recorded stock-based compensation expense of $56,000 consisting of expenses related to stock options ($53,000) and stock issued to directors

 

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($3,000). For the six months ended June 26, 2010, the Company recorded stock-based compensation expense of $113,000, consisting of expenses related to stock options ($105,000) and stock issued to directors ($8,000). For the three months ended June 27, 2009, the Company recorded stock-based compensation expense of $44,000, consisting of expenses related to stock options ($42,000) and stock issued to a director ($2,000). For the six months ended June 27, 2009, the Company recorded stock-based compensation expense of $88,000, consisting of expenses related to stock options ($83,000) and stock issued to a director ($5,000).

Cybex’s 2005 Omnibus Incentive Plan (the “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 has 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 June 26, 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

   (9,250 )     2.70      
              

Outstanding at June 26, 2010

   796,125     $ 2.17    5.94    $ 91,000
                        

Options exercisable at June 26, 2010

   458,375     $ 2.23    3.92    $ 40,000
                        

Options vested and expected to vest at June 26, 2010

   767,183     $ 2.19    5.94    $ 86,000
                        

As of June 26, 2010, there was $398,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.4 years.

At June 26, 2010, there are 560,000 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 June 26, 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:

 

     June 26,
2010
   December  31,
2009

Raw materials

   $ 5,844,000    $ 5,180,000

Work in process

     3,307,000      2,837,000

Finished goods

     2,538,000      2,037,000
             
   $ 11,689,000    $ 10,054,000
             

NOTE 7 — LONG-TERM DEBT

Long-term debt consists of the following:

 

     June 26,
2010
    December 31,
2009
 

Citizens revolving credit loan

   $ —        $ —     

Citizens real estate loan

     11,483,000       11,743,000  

Citizens equipment lease

     4,999,000       —     

Wells Fargo term loans

     —          5,863,000  
                
     16,482,000       17,606,000  

Less – current portion

     (1,436,000 )     (2,415,000 )
                
   $ 15,046,000     $ 15,191,000  
                

In June 2007, a $13,000,000 mortgage loan was advanced to the Company pursuant to the loan agreement (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 provided for three term loans, the proceeds of which 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 Wells Fargo term loans were prepaid in full in June 2010 with the proceeds of the Citizens Lease Facility. The Wells Fargo term loans were 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 June 26, 2010, there was $5,000,000 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.

In June 2010, the Company entered into a Master Lease Agreement (the “Citizens Lease Facility”) with an affiliate of Citizens, RBS Asset Finance, Inc. (referred to herein as “Citizens”), pursuant to which $4,999,000 of equipment lease financing was advanced. Proceeds of the advance were used to retire in full the Wells Fargo equipment term loans and related obligations. The Citizens Lease Facility will be retired by 60 equal monthly payments of fixed rent plus interest. While the documentation for this transaction is structured as a lease, the advances under the facility are treated for all purposes as a loan secured by designated equipment owned by the Company. Amounts outstanding under the Citizens Lease Facility are cross-collateralized 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 bore interest at LIBOR plus 3.5%. The Citizens Lease Facility bears interest at a floating rate equal to LIBOR plus 3%. LIBOR was .35% at June 26, 2010.

The average outstanding revolving loan balance for the six months ended June 26, 2010 and June 27, 2009 was $0 and $1,430,000, respectively, and the weighted average interest rate for the six months ended June 27, 2009 was 1.67%. Interest expense, including an unused availability fee on the revolving loans, was $6,000 and $22,000 for the three months ended June 26, 2010 and June 27, 2009, respectively, and $12,000 and $33,000 for the six months ended June 26, 2010 and June 27, 2009, respectively. Interest expense on the Wells Fargo term loans was $137,000 and $79,000 for the three months ended June 26, 2010 and June 27, 2009, respectively, and $219,000 and $147,000 for the six months ended June 26, 2010 and June 27, 2009, respectively. Interest expense on the Citizens real estate loan was $236,000 and $231,000 for the three months ended June 26, 2010 and June 27, 2009, respectively and $488,000 and $445,000 for the six months ended June 26, 2010 and June 27, 2009, respectively. Interest expense on the Citizens Lease Facility, which was advanced at the end of the second quarter 2010, was minimal for the six months ended June 26, 2010.

The Company’s 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 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. In June 2010, the Company, coincident with entering into the Citizens Lease Facility, entered into a further amendment with Citizens, modifying a financial covenant in the Citizens Loan Agreement and Credit Agreement. The Company at June 26, 2010 was in compliance, and believes that it will remain in compliance for the foreseeable future, with each outstanding credit facility’s financial covenants.

 

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

At June 26, 2010 long-term debt maturities are as follows:

 

Remainder of 2010

   $ 676,000  

2011

     1,520,000  

2012

     1,520,000  

2013

     1,520,000  

2014

     10,663,000  

Thereafter

     583,000  
        
     16,482,000  

Less current portion of long-term debt

     (1,436,000 )
        
   $ 15,046,000  
        

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 at times 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. No foreign exchange forward contracts were outstanding during 2010.

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 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.

In November 2007, the Company entered into a forward starting interest rate swap agreement with Wells Fargo which commenced on March 3, 2008, intended to hedge the initial LIBOR-based Wells Fargo term loan. The notional amount of the swap amortized 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 converted 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,

 

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from April 1, 2009 to June 30, 2009 equaled 6.81% and after June 30, 2009 equaled 8.06%. The Company determined the interest rate swap qualified 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 interest rate swap was terminated in June 2010 in connection with the prepayment of the Wells Fargo term loans. There was no initial cost of the interest rate swap, and upon termination the Company paid $71,000 in settlement of the interest rate swap.

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

 

     Asset Derivatives    Liability Derivatives
     Fair Value         Fair Value     
     June 26,
2010
   December 31,
2009
   Balance
Sheet
Location
   June 26,
2010
   December 31,
2009
   Balance
Sheet
Location

Derivatives designated as hedging instruments:

Interest rate swap agreements

                 
   $ —      $ —      —      $ 1,631,000    $ 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 and six months ended June 26, 2010 and June 27, 2009, respectively:

 

Derivatives in Cash Flow Hedging Relationship

   Amount of Gain (Loss) Recognized in Other
Comprehensive Loss, net of tax
 
   Three Months Ended     Six Months Ended  
   June 26, 2010     June 27, 2009     June 26, 2010     June 27, 2009  

Interest rate swap agreements

   $ (68,000 )   $ 190,000     $ (87,000 )   $ 318,000  

Derivatives in Cash Flow Hedging Relationship

   Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Loss into
Income
 
   Three Months Ended     Six Months Ended  
   June 26, 2010     June 27, 2009     June 26, 2010     June 27, 2009  

Interest rate swap agreements

   $ (243,000 )   $ (201,000 )   $ (439,000 )   $ (402,000 )

 

Derivatives Not Designated as Hedging Instruments

   Amount of Gain (Loss) Recognized in
Income on Derivatives
    
   Three Months Ended     Six Months Ended     
   June 26,
2010
   June 27,
2009
    June 26,
2010
   June 27,
2009
  

Location of Gain (Loss) Recognized In Income

on Derivatives

Foreign currency forward contracts

   $ —      $ (282,000 )   $ —      $ 471,000   

Selling, general and administrative expenses

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

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 June 26, 2010.

For the cash flow hedges referred to above, the amounts in accumulated other comprehensive loss are reclassified into earnings as the underlying hedged item affects earnings. The amount expected to be reclassified into pre-tax earnings in the next 12 months is $377,000. The timing of actual amounts reclassified into earnings is dependent on future movement in interest rates.

 

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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 and 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 June 26, 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 June 26, 2010
     Balance at
June 26, 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

   $ 1,631,000    —      $ 1,631,000    —  

The valuation of the foreign currency forward contracts and 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 June 26, 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.

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 six months ended June 27, 2009, the Company purchased 411,200 shares for $448,000 pursuant to this program. Through June 26, 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 June 26, 2010, there are 1,356,125 shares of common stock reserved for future issuance pursuant to the exercise or issuance of stock options.

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 income (loss), the components of comprehensive income (loss) are from foreign currency translation adjustments and changes in the fair value of hedging instruments.

 

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

 

     Three Months Ended     Six Months Ended  
     June 26,
2010
    June 27,
2009
    June 26,
2010
    June 27,
2009
 

Net loss

   $ (356,000 )   $ (2,104,000 )   $ (1,109,000 )   $ (3,511,000 )

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     —          (214,000 )     (30,000 )     (247,000 )

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

     (68,000 )     190,000       (87,000 )     318,000  
                                

Comprehensive loss

   $ (424,000 )   $ (2,128,000 )   $ (1,226,000 )   $ (3,440,000 )
                                

 

(1) Net of income tax expense (benefit) of $(43,000) and $123,000 for the three months ended June 26, 2010 and June 27, 2009, respectively, and $(55,000) and $207,000 for the six months ended June 26, 2010 and June 27, 2009, respectively.

The following summarizes the components of accumulated other comprehensive loss at June 26, 2010 and December 31, 2009:

 

     June 26,
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)

     (926,000 )     (839,000 )
                

Total

   $ (2,253,000 )   $ (2,136,000 )
                

 

(2) Net of deferred income tax asset of $581,000 and $526,000 at June 26, 2010 and December 31, 2009, respectively.

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    Six Months Ended
     June 26,
2010
   June 27,
2009
   June 26,
2010
   June 27,
2009

Shares used in computing basic net loss per share

   17,120,000    17,093,000    17,120,000    17,255,000

Dilutive effect of options

   —      —      —      —  
                   

Shares used in computing diluted net loss per share

   17,120,000    17,093,000    17,120,000    17,255,000
                   

For the three and six months ended June 26, 2010, options to purchase 796,125 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 and six months ended June 27, 2009, options to purchase 704,375 shares of common stock at exercise prices ranging from $1.20 to $7.37 per share were outstanding but were not included in the calculation of diluted net loss per share as the result would be anti-dilutive.

 

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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 June 26, 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 other 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.

Product Liability

As a manufacturer of fitness products, the Company is inherently subject to the hazards and uncertainties of product liability litigation. The Company has maintained, and expects to continue to maintain, product liability insurance, and it includes reserves for self insured retention in accrued liabilities in the consolidated balance sheets. While the Company believes that its insurance coverage is adequate to protect against the risks of product liability awards, the Company is subject to product liability claims which assert damages exceeding the limits of its insurance coverage. It is possible that the Company could in the future be subject to a product liability judgment or agree to a settlement which materially exceeds the available insurance coverage and related reserves.

In addition to reserves for self insured retention, the Company also accrued $4,970,000 and $7,627,000, as of June 26, 2010 and December 31, 2009, 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 June 26, 2010 primarily relates to the insured settlement of a product liability claim during the first quarter of 2010. The product liability claims accrual was included as a component of other liabilities and the insurance recoverable was included as a component of other assets at June 26, 2010 and December 31, 2009.

 

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NOTE 13 — INCOME TAXES

For the six months ended June 26, 2010 and June 27, 2009, an income tax benefit of (27.0%) and (21.8%) of loss before taxes was recorded, totaling ($411,000) and ($980,000), 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 $37,000,000 of income before income taxes is needed to fully realize the Company’s recorded net deferred tax asset and $41,000,000 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 $14,409,000 at June 26, 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 deferred tax assets at June 26, 2010 is $1,486,000, primarily related to foreign deferred tax assets. 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 an increase of $55,000 in the balance of unrecognized tax liability, which is $345,000 as of June 26, 2010.

 

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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.

Our net sales began to decline commencing with the fourth quarter of 2008. Net sales in 2009 were approximately 19% below 2008 net sales and, while our net sales in the second quarter 2010 were essentially flat compared to net sales for the second quarter 2009, net sales for the first six months of 2010 were approximately 5% 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 remained essentially flat at $27,672,000 for the second quarter of 2010 versus $27,755,000 for the second quarter of 2009. For the six months ended June 26, 2010, net sales decreased $2,889,000, or 5%, to $53,788,000 from $56,677,000 compared to the same period in 2009. For the second quarter of 2010, sales of cardiovascular, strength and freight, parts and other were essentially flat compared to the same period in 2009. For the six months ended June 26, 2010, sales of cardiovascular products decreased $1,028,000, or 3%, to $30,039,000 and sales of strength products decreased $1,373,000, or 7%, to $18,187,000 along with decreased freight, parts and other sales of $488,000 or 8%, to $5,562,000 compared to the same period in 2009. The sales decline for the six month period was generally throughout our product offerings and we believe was reflective of economic conditions, generally and in the fitness industry.

GROSS MARGIN

Gross margin for the second quarter of 2010 increased by 8.7% to 34.4% from 25.7%, for the same period in 2009. The increase was caused primarily by lower material cost (6.4%), mainly due to lower steel costs and initiatives yielding component cost savings on 750 Series treadmill products, improved selling prices (1.3%) and lower warranty provision (1.0%).

Gross margin for the six months ended June 26, 2010 increased by 8.8% to 35.3% from 26.5% for the same period in 2009. The increase was caused primarily by lower material costs (6.8%), mainly due to lower steel costs and initiatives yielding component cost savings on 750 Series treadmill products, lower warranty provision (1.3%) and improved labor efficiency (0.7%).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $458,000, or 5%, to $9,530,000 in the second quarter of 2010 compared to $9,072,000 in the second quarter of 2009. For the six months ended June 26, 2010, selling, general and administrative expenses increased by $854,000, or 5%, to $19,789,000 compared to $18,935,000 for the comparable period in 2009. The increase was predominantly due to higher sales and marketing costs including initiatives directed to new markets, higher sales compensation and advertising costs. Selling, general and administrative expenses represented 34% and 37% of sales for the three and six months ended June 26, 2010 and 33% of sales for the three and six months ended June 27, 2009, respectively.

NET INTEREST EXPENSE

Net interest expense increased by $59,000 in the second quarter of 2010 compared to the corresponding period of 2009 due to the settlement payment with respect to the termination of the Wells Fargo interest rate swap offset by lower average borrowings. For the six months ended June 26, 2010, net interest expense increased by $103,000 primarily due to the settlement payment of the Wells Fargo interest rate swap as well as increases in the applicable interest rate resulting from 2009 debt modifications offset by lower average borrowings.

INCOME TAXES

We recorded an income tax benefit of ($50,000) and ($411,000) for the three and six months ended June 26, 2010 and ($145,000) and ($980,000) for the three and six months ended June 27, 2009, respectively. The effective tax benefit rate was (27.0%) and (21.8%) for the six months ended June 26, 2010 and June 27, 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.

 

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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 $14,409,000 at June 26, 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 June 26, 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 $37,000,000 of income before taxes is needed to fully realize the Company’s recorded net deferred tax asset.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of June 26, 2010, we had working capital of $ 20,683,000 compared to $21,107,000 at December 31, 2009. The net decrease in working capital is primarily due to the use of cash for capital expenditures ($1,052) and to pay down the long-term portion of debt ($145), partially offset by an increase in cash due to net income before depreciation and amortization and deferred income taxes ($729).

For the six months ended June 26, 2010, we used $884,000 of cash flow for operating activities compared to generating $28,000 of cash from operations for the six months ended June 27, 2009. The increase in cash used in operating activities for the six months ended June 26, 2010 compared to the six months ended June 27, 2009 is primarily due to a use of cash for increased inventory during the six months ended June 26, 2010 versus the comparable period, as well as other working capital changes, partially offset by a smaller net loss.

Cash used in investing activities of $1,052,000 during the six months ended June 26, 2010 consisted of purchases of manufacturing tooling and equipment of $632,000, primarily for the manufacture of new products, and purchases of computer hardware and infrastructure of $420,000. Cash used in investing activities of $139,000 during the six months ended June 27, 2009 consisted of purchases of manufacturing tooling and equipment of $70,000, primarily for the manufacture of new products, and computer hardware and infrastructure of $69,000. While capital expenditures for the balance of 2010 are expected to be approximately $1,700,000, the timing and amount of these expenditures will depend on economic conditions and results of our operations.

Cash used in financing activities was $1,124,000 for the six months ended June 26, 2010, consisting primarily of $5,863,000 in repayment of the Wells Fargo Bank, NA (“Wells Fargo”) term loans and $260,000 of repayments of the Citizens real estate loan, offset by $4,999,000 advanced under the Citizens equipment lease facility. Cash used in financing activities was $398,000 for the six months ended June 27, 2009, consisting primarily of $925,000 of term loan repayments and $451,000 for purchases of treasury stock through a repurchase program, offset by the $1,000,000 Wells Fargo third term loan.

We have credit facilities with RBS Citizens, National Association and RBS Asset Finance, Inc. (collectively, “Citizens”). 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. Our Citizens equipment lease facility has provided $4,999,000 of equipment lease financing, the proceeds of which were used in June 2010 to retire equipment term loans and related obligations to Wells Fargo. 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 Citizens equipment lease facility is secured by our equipment, is cross-collateralized by our accounts receivable and inventory and matures on July 1, 2015.

 

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At June 26, 2010 there were no outstanding revolving credit loans, a $11,483,000 real estate loan and $4,999,000 outstanding under the Citizens equipment lease facility. Availability under the revolving loan fluctuates daily. At June 26, 2010, there was $5,000,000 in unused availability under the revolving loan facility.

Our credit facilities include financial covenants. At June 26, 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.

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 June 26, 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 federal and foreign 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 agreements:

 

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

Contractual obligations:

              

Debt

   $ 16,482,000    $ 1,436,000    $ 3,040,000    $ 12,006,000    $ —  

Interest due including impact of interest rate swap (a)

     4,168,000      1,137,000      2,046,000      985,000      —  

Capital lease obligations (b)

     35,000      12,000      23,000      —        —  

Operating lease commitments

     912,000      474,000      415,000      23,000      —  

Purchase obligations

     19,938,000      15,644,000      3,444,000      850,000      —  
                                  
   $ 41,535,000    $ 18,703,000    $ 8,968,000    $ 13,864,000    $ —  
                                  

 

(a) This includes a fixed rate of 8.75% per the interest rate swap agreement.
(b) Includes future interest obligation.

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 estimated 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.

 

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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 June 26, 2010, the maximum contingent liability under all recourse provisions was approximately $5,819,000. A reserve for estimated losses under recourse provisions of $715,000 has been recorded based upon historical experience, and is included in accrued liabilities at June 26, 2010.

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 when 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.

 

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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 condensed 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.

In addition to reserves for self-insured retention, the Company accrued $4,970,000 and $7,627,000, as of June 26, 2010 and December 31, 2009, 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 June 26, 2010 primarily relates to the insured settlement of a product liability claim during the first quarter of 2010. The product liability claims accrual was included as a component of other liabilities and the insurance recoverable was included as a component of other assets at June 26, 2010 and December 31, 2009.

Valuation of deferred tax assets. The net deferred tax asset balance of $14,409,000 at June 26, 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 June 26, 2010 is $1,486,000. Management will continue to assess the need for this valuation allowance on a quarterly basis. Approximately $37,000,000 of income before income taxes is needed to fully realize the Company’s recorded net deferred tax asset and $41,000,000 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 10.1 – Master Lease Agreement dated as of June 24, 2010, between RBS Asset Finance, Inc. and Cybex    International, Inc.

Exhibit 10.2 – Lease Schedule No. 001 dated as of June 24, 2010, pursuant to the Master Lease Agreement between    RBS Asset Finance, Inc. and Cybex International, Inc.

Exhibit 10.3 – Modification Agreement dated June 24, 2010 between RBS Citizens, National Association and    Cybex International, Inc.

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

August 3, 2010

   

John Aglialoro

Chairman and Chief Executive Officer

 

    By:  

/s/ Arthur W. Hicks, Jr.

August 3, 2010

   

Arthur W. Hicks, Jr.

President, Chief Operating Officer and

Chief Financial Officer

 

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