Cybex mentions the "S" word: Sale

Buried in the first-quarter financial announcement by Cybex International last week was one short phrase that was missed by many: that the company was looking at alternatives to its financial "challenges" -- "including a sale of the company."

Buried in the first-quarter financial announcement by Cybex International last week was one short phrase that was missed by many: that the company was looking at alternatives to its financial "challenges" -- "including a sale of the company."

According to the statement: "In light of the uncertainties related to the company's credit arrangements and cash needs, the company has directed its investment banker, Legg Mason, to investigate all alternatives available to the company to retire its bank debt, including a sale of the company."

Cybex officials were in meetings and unable to explain further, other than to say that SEC regulations prohibited additional comments. A board and shareholders' meeting is scheduled for May 20.

The statement also reported that the company has entered into a forbearance agreement with its lenders, and the lenders have agreed "not to exercise their rights with respect to certain financial covenant defaults under its credit agreement during a forbearance period that runs through June 30, 2003, subject to extension to Aug. 30, 2003, if certain conditions are met." No details were available on the conditions.

In addition, Cybex (AMEX: CYB) has been pursuing a refinancing of the credit agreement prior to the current agreement's maturity date of Dec. 31. It has been pursuing that refinancing since the first of the year, and SNEWS has been told the company not only expects that to come through during the second quarter of 2003, which could mean any day, but is "fully optimistic" it will come through.

The statement itself shows net sales for the first quarter ended March 29 of $20,608,000, an increase of 9 percent over the first quarter a year ago with $18,913,000. But gross margin was down significantly, showing 32.5 percent compared to 38.3 percent a year ago. This resulted in a net loss for the quarter of $1.78 million compared to a net income a year ago of $59,000, with an operating loss of $827,000 this just-concluded quarter compared to $711,000 in operating income a year earlier. The company said in its statement that the 2003 sales increase was "offset by unfavorable margins due to a change in product mix, manufacturing cost variances, inventory write-offs and increased warranty, selling and legal costs."

"We have achieved market acceptance of our new products, especially the ArcTrainer, and have shown the ability to produce three consecutive quarters of increased sales. The historic debt structure of the company continues to present challenges for us," John Aglialoro, chairman and CEO, said in an official statement. "We remain optimistic in the availability of one or more alternatives which will result in the retirement of our existing bank debt."

On May 13, the day of the first quarter financial announcement, prices stayed up with a close that day of 1.75, but they began their slow descent the next day: The company on May 19 closed at 1.10, down 24.14 percent from last weeks' close on May 16 of 1.45. The May 19 low of 1.00 is edging close to the company's 52-week low of 0.98, which it hit just a few weeks ago on May 3. (Its 52-week high of 2.19 was reached last August.)

SNEWS View: Despite rumors about sales that SNEWS has addressed in the past number of months, Cybex has maintained it is not for sale and will not sell. We do know that CEO Aglialoro has a deep and enduring passion for the company and for fitness, but perhaps passion only goes so far. An interesting note is that Cybex's investment banker, Legg Mason, has what is so correctly called a "workout group," or a group that specializes in bankruptcy. You see, Legg Mason is one financial services company that works with companies that have -- how do we say this? -- "special needs." Now, whether that means something, or not, in this case is up to you to decide. Although the company's ArcTrainer is selling well and has met with a resounding success, as has its outstanding revamped Eagle strength line, the first quarter statement unfortunately still isn't reflecting those advancements. That will take time, of course, but maybe that's not something the company has a lot of. Combine the decreased gross margin, with the higher selling, general and administrative expenses ($7,527,000 compared to $6,532,000 a year ago) and the picture gets cloudier when it comes to Cybex's future. We hope the company can make it over this hurdle and not just become another consolidation baby since in name alone it means so much to the fitness industry's heritage AND has great product to boot.


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