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Cybex Settles Barnhard Product Liability Lawsuit for $19.5 Million

Cybex International Inc., Medway, MA, reached a $19.5 million settlement in the Barnhard v. Cybex International Inc. product liability lawsuit, the company announced Monday.

“We are financially strong. We were able to withstand this,” Art Hicks, COO of Cybex, tells Club Industry.

In December 2010, a jury found Cybex 75 percent liable for a $66 million judgment in a case involving Natalie Barnhard, an employee at Amherst Orthopedic Physical Therapy, Buffalo, NY, who was stretching on a 25-year-old Cybex 4106 ZR Classic leg extension machine when it fell on her, rendering her a quadriplegic. Cybex has spent the past year appealing the decision.

“Though we remain convinced that Cybex was in no way responsible for this tragic accident, we believe it is in the company’s best interest to resolve the lawsuit at this time,” Cybex Chairman and CEO John Aglialoro said in a memo to shareholders and supporters.

The settlement calls for Cybex to pay the plaintiff, net of insurance, approximately $19.5 million, of which approximately $18.5 million will be paid at the consummation of the settlement, which is expected in mid-March, Hicks says, after execution of a definitive settlement agreement by Cybex, the plaintiff and the third-party defendant, Amherst Orthopedic Physical Therapy.

Cybex will secure the $18.5 million through available cash, its existing line of credit and from its principal bank, Hicks says, adding that the loans would be paid back over time. The remaining $1 million will be paid to Barnhard over seven years.

As part of the settlement, Cybex is released of all further liability with respect to the litigation, which will be dismissed with prejudice, meaning the case cannot be brought back to the courts.

Cybex decided to settle after much deliberation, Hicks says. The Fourth District Appellate Court of New York had revised the verdict amount down to $44 million. Cybex had appealed the case further to the Court of Appeals of the State of New York, which could have revised down the amount even further or reversed the decision, but the court also could have chosen not to hear the case at all.

Beyond that, legal costs were mounting for Cybex. Hicks would not disclose how much Cybex spent in legal fees for the case and the appeals process other than to say it was “significant.” And those costs did not include the business the company lost during the process.

“We have certainly lost sales from it,” Hicks says. “That went into some of the thinking of the settlement. There are business implications involved.”

The lawsuit also was partly to blame for issues related to Cybex’s listing on the NASDAQ Stock Market, which has been in jeopardy because Cybex was unable to comply with NASDAQ’s requirements to have a minimum stockholders’ equity of $10 million, a minimum bid price for its common stock of $1 per share and a minimum market value of publicly held shares of $5 million.

In December 2011, NASDAQ extended the deadlines for Cybex to meet those requirements. Cybex now has until April 2, 2012, to comply with the requirement to have a minimum stockholders’ equity of $10 million or more. NASDAQ also extended the deadline to March 12, 2012, for Cybex to have a closing bid price above $1 for a minimum of 10 consecutive trading days. Cybex’s stock price had not closed at $1 or higher since May 4, 2011, until Monday when the settlement announcement was made. Since then, the stock price has closed over $1 for two consecutive days.

“We just need eight days more,” Hicks says.

He says that the $10 million minimum requirement in stockholders’ equity will be satisfied after the settlement.

Cybex is analyzing how the settlement will affect its financial statements, which are due out around Feb. 16.

“As we move past this lawsuit, Cybex remains a healthy business and a leader in the fitness industry,” Aglialoro said in a statement about the settlement. “We are confident of our future as we move forward with our Cybex team.”

Despite the issues with the Barnhard case and the delisting threats, Cybex had sales growth for the first three quarters of 2011.

Hicks says that the Barnhard case did not affect operations of the company other than being a distraction to management and the sales staff. The company continued to function, increased funding for research and development and the Cybex Institute, and hired more sales staff.

The case also led Aglialoro to rally other manufacturers to come together to fight litigation. A group of executives from some of the largest manufacturers in the industry plan to meet at the International Health, Racquet and Sportsclub Association trade show next month in Los Angeles to talk about litigation issues, Hicks says.

“This isn’t just about Cybex,” Hicks says. “This could have happened to anyone. I think people realize this is a great threat to our industry.”

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