FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995 Commission File Number 1-
9014
Chyron Corporation
(Exact name of registrant as specified in its charter)
New York 11-2117385
(State or other jurisdiction of (I.R.S. Employer
Identification
incorporation or organization) Number)
5 Hub Drive, Melville, NY 11747
(Address of principal executive offices) (Zip Code)
(516) 845-2000
(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
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by a check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock $.01 Par Value - 89,079,909 as of
October 31, 1995
This document consists of 21 pages
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
(unaudited)
ASSETS
September 30,
December 31,
1995
1994
Current assets:
Cash and temporary investments................ $ 6,954 $
1,555
Accounts and notes receivable, net............ 14,770
13,225
Inventories .................................. 10,408
5,464
Prepaid expenses ............................. 1,312
1,898
Total current assets ....................... 33,444
22,142
Property and equipment, net .................... 3,436
3,646
Software development costs, net................. 2,095
2,520
Other assets ................................... 254
336
TOTAL ASSETS ................................... $ 39,229 $
28,644
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........ $ 12,383 $
7,008
Reserve for West Coast restructuring.......... 916
2,824
Capital lease obligations..................... 121
207
Convertible subordinated notes payable........ 100
Total current liabilities .................. 13,520
10,039
Notes payable................................... 6,128
4,500
Capital lease obligations....................... 246
229
Convertible subordinated notes payable..........
100
Total liabilities........................... 19,894
14,868
Shareholders' equity:
Preferred stock, par value without designation
Authorized - 1,000,000 shares, Issued - none
Common stock, par value $.01
Authorized - 150,000,000 shares
Issued and outstanding -
89,009,507 shares in September 1995,
87,392,524 shares in December 1994........ 890
874
Additional paid-in capital ................... 20,684
19,035
Retained (deficit)............................ (2,239)
(6,133)
Total shareholders' equity...................... 19,335
13,776
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $ 39,229 $
28,644
See Notes to Consolidated Financial Statements
<PAGE>
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In thousands except per share amounts)
(Unaudited)
1995
1994
Net sales......................................... $ 14,099 $
11,006
Costs and expenses:
Manufacturing .................................. 6,091
4,782
Selling, general and administrative ............ 4,637
4,305
Research and development ....................... 1,027
998
Management fee.................................. 232
243
West Coast restructuring (recapture) charge..... (552)
12,716
Total costs and expenses ....................... 11,435
23,044
Operating income (loss)........................... 2,664
(12,038)
Interest expense, net............................. 171
137
Income (loss) before income taxes................. 2,493
(12,175)
Income taxes/equivalent provision (benefit)....... 686
(390)
Net income (loss)................................. $ 1,807 $
(11,785)
Earnings (loss) per common share.................. $ .02 $
(.13)
Weighted average number of common and common
equivalent shares outstanding................... 91,408
89,622
See Notes to Consolidated Financial Statements
<PAGE>
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In thousands except per share amounts)
(Unaudited)
1995
1994
Net sales......................................... $ 38,596 $
31,385
Costs and expenses:
Manufacturing .................................. 16,920
14,278
Selling, general and administrative ............ 12,648
11,475
Research and development ....................... 3,065
2,769
Management fee.................................. 695
854
West Coast restructuring (recapture) charge..... (552)
12,716
Total costs and expenses ....................... 32,776
42,092
Operating income (loss)........................... 5,820
(10,707)
Interest expense, net............................. 449
426
Income (loss) before income taxes................. 5,371
(11,133)
Income taxes/equivalent provision................. 1,477
Net income (loss)................................. 3,894
(11,133)
Retained (deficit) earnings - beginning of period. (6,133)
2,861
Retained (deficit) - end of period................ $ (2,239) $
(8,272)
Earnings (loss) per common share.................. $ .04 $
(.12)
Weighted average number of common and common
equivalent shares outstanding................... 90,597
89,590
See Notes to Consolidated Financial Statements
<PAGE>
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In Thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1995
1994 Net income (loss) $
3,894 $(11,133)
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization ................... 1,481
1,605
Loss on abandonment of leasehold improvements....
350
Income tax equivalent provision.................. 1,342
Changes in operating assets and liabilities:
Accounts and trade notes receivable, net......... (1,463)
3,109
Inventories...................................... (4,944)
1,092
Prepaid expenses ................................ 586
(1,502)
Accounts payable and accrued expenses ........... 5,345
(2,519)
Reserve for West Coast restructuring............. (1,908)
12,716
Net cash provided by operating activities........... 4,333
3,718
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment............... (656)
(780)
Capitalized software development costs.............. (190)
(1,286)
Other assets........................................ 82
34
Net cash (used in) investing activities............. (764)
(2,032)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations............... (69)
Capital lease obligations incurred..................
325
Payment of notes payable............................ (4,500)
(1,250)
Net proceeds from new credit facility............... 6,128
Proceeds from exercise of common stock purchase
warrants, net...................................... 323
43
Payments of Chapter 11 claims and other
reorganization items...............................
(80)
Other............................................... (52)
(47)
Net cash provided by (used in) financing activities. 1,830
(1,009)
Change in cash and temporary investments............ 5,399
677
Cash and temporary investments at
beginning of period............................... 1,555
213
Cash and temporary investments at end of period.....$ 6,954 $
890
SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments...................................$ 394 $
391
Income tax payments.................................$ 98 $
62
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
UNAUDITED
CONTROL OF REGISTRANT
On July 25, 1995, Pesa, Inc., a Delaware corporation
("Pesa") sold 49,414,732 shares of Chyron
Corporation ("Chyron") to the entities listed below
for an aggregate purchase price of $24,719,071.
Additionally, on July 25, 1995, Sepa Technologies,
Ltd., a Georgia limited liability company ("Sepa"),
and an affiliate of Pesa, sold 5,000,000 shares to
the entities listed below for an aggregate purchase
price of $2.6 million. On May 26 1995, Pesa sold
10,000,000 shares of Chyron to CC Acquisition
Company A, a Delaware limited liability company
("CCACA"), for an aggregate purchase price of
$5,000,000.
The sales were made pursuant to two agreements
entered into on May 26, 1995: (1) CCACA and CC
Acquisition Company B, a Delaware limited liability
company ("CCACB"), and an affiliate of CCACA,
entered into a stock purchase agreement with Pesa
(the "Pesa Agreement") pursuant to which (i) CCACA
acquired 10,000,000 shares of Chyron and (ii) CCACA
and CCACB agreed to acquire an additional 49,414,732
shares and (2) CCACA entered into a stock purchase
agreement with Sepa (the "Sepa Agreement") pursuant
to which CCACA agreed to acquire 5,000,000 shares of
Chyron, and the voting rights and right of first
refusal to an additional 9,000,000 shares. CCACA and
CCACB are collectively referred to herein as CCAC.
On July 25, 1995, CCACA entered into an
agreement(the "Leubert Agreement") with Alfred O.P.
Leubert Ltd., a New York corporation ("Leubert"),
pursuant to which CCACA was granted a right of first
refusal to acquire 300,000 shares of common stock,
which shares were acquired by Leubert from Sepa and
which reduced from 9,000,000 to 8,700,000 the right
of first refusal to acquire shares of common stock
as set forth in the Sepa Agreement.
On July 25, 1995, CCACA and CCACB entered into an
assignment and assumption agreement (the "Assignment
Agreement") by and among CCACA, CCACB, WPG Corporate
Development Associates IV, L.P., a Delaware limited
partnership ("CDA"), WPG Corporate Development
Associates IV (Overseas), L.P., a Cayman Islands
exempt limited partnership ("CDAO"), WPG Enterprise
Fund II, L.P., a Delaware limited partnership
("WPGII"), Weiss, Peck & Greer Venture Associates
III, L.P., a Delaware limited partnership
("WPGIII"), Westpool Investment Trust plc., a public
limited company organized under the laws of England
("WIT"), Lion Investments Limited, a limited company
organized under the laws of England ("Lion") and
Charles M. Diker (such individual together with CDA,
CDAO, WPGII, WPGIII, WIT and Lion, the "WPG/Westpool
Investor Group") and certain other persons (such
persons together with the WPG/Westpool Investor
Group, the "Assignees"), pursuant to which (i) CCACA
assigned to the Assignees its rights under the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
Pesa Agreement to acquire 20,000,000 shares, (ii)
CCACA assigned its rights under the Sepa Agreement
to acquire 5,000,000 shares of common stock, (iii)
CCACA assigned its right of first refusal to acquire
5,400,000 of the 9,000,000 shares of common stock as
set forth in the Sepa Agreement and the Leubert
Agreement described above, and (iv) CCACB assigned
its rights under the Pesa Agreement to acquire
17,648,839 shares of common stock.
The closing, as contemplated by the Pesa Agreement
and the Sepa Agreement, occurred on July 25, 1995.
Consequently, CCAC beneficially owns in the
aggregate 21,765,892 shares and the WPG/Westpool
Investor Group beneficially owns in the aggregate
41,905,896 shares. Beneficial ownership does not
include 9,000,000 shares for which the voting rights
have been assigned to CCAC and the WPG/Westpool
Investor Group.
Name of Owner Number of Shares Date of
Acquisition
CCACA 10,000,000 May
26, 1995
CCACB 11,765,892 July
25, 1995
CDA 17,770,615 July
25, 1995
CDAO 4,285,120 July
25, 1995
WPGII 4,415,557 July
25, 1995
WPGIII 3,671,545 July
25, 1995
WIT 6,984,311 July
25, 1995
Lion 3,308,366 July
25, 1995
C.M. Diker 1,470,382 July
25, 1995
Others 742,944 July
25, 1995
Pesa is a 100% owned subsidiary of a Spanish
Company, Pesa Electronica, S.A. ("Electronica"),
which in turn was 99% owned by a Spanish Company,
Amper, S.A. On June 24, 1994, Amper sold all of its
issued and outstanding shares of stock of
Electronica to Sepa. On August 2, 1994, Sepa
acquired 14,000,000 shares of Chyron common stock
from certain foreign shareholders. Consequently,
Sepa directly and indirectly through Pesa became the
beneficial owner of 73,414,732 shares of Chyron
common stock.
On October 5, 1994, Electronica filed for
receivership in Spain ("Suspension de Pagos"). The
proceedings are comparable to a Chapter 11
reorganization under the U.S. Bankruptcy laws. The
sale by Pesa of its Chyron common stock to CCAC, the
WPG/Westpool Investor Group and certain other
persons on July 25, 1995 was a direct result of
Electronica's filing for receivership in Spain.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
RELATED PARTY TRANSACTIONS
Sepa, prior to the above described change in
control, was the beneficial owner of 73,414,732
shares of Chyron common stock. Consequent to such
ownership, Sepa holds an amended and restated
management agreement with Chyron, whereby Chyron
agreed to pay management fees to Sepa at 2.5% of
consolidated revenues through December 31, 1997.
The management fees under this agreement are subject
to an annual limitation of $1.5 million.
In July 1994, Chyron took advantage of an option to
prepay the management fee at a 25% discount from
the aggregate estimated yearly fees for the period
July 1, 1994 through December 31, 1995, resulting in
estimated aggregate total savings of $486,250 in
fees for the eighteen month period ending December
31, 1995. Management fees for the nine months ended
September 30, 1995 and 1994 amounted to $695,000 and
$854,000, respectively, and for the three months
then ended amounted to $232,000 and $243,000,
respectively. The prepaid management fee to Sepa
was $215,600 at September 30, 1995.
As of September 30, 1995 and December 31, 1994, the
Company was indebted to Sepa and its affiliates for
Nil and $49,000, respectively, representing the cost
of services provided and interest accrued on the
Convertible Subordinated Notes. Also as of these
dates, the Company had outstanding receivables due
from Electronica and its affiliates for equipment
and services amounting to $436,000 and $685,000,
respectively. In light of Electronica's filing
"Suspension de Pagos" in Spain, $403,000 and
$545,000 of these receivables have been reserved for
as of September 30, 1995 and December 31, 1994,
respectively.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial reporting. Accordingly, they do not
include all of the information and footnotes
required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered
necessary for a fair presentation have been
included. Operating results for the three and nine
months ended September 30, 1995 are not necessarily
indicative of the results that may be expected for
the year ending December 31, 1995. For further
information, refer to the consolidated financial
statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year
ended December 31, 1994.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at September
30, 1995 include the accounts of the Company and its
wholly owned subsidiary, Digital Services
Corporation (currently an inactive entity). All
significant intercompany transactions and accounts
are eliminated in consolidation.
COMMON STOCK EQUIVALENTS
In December 1991, the Company originally issued to
Pesa $5 million of Convertible Subordinated Notes
("Notes"). The Notes are convertible into shares of
Chyron common stock at a conversion rate of $.20 per
share. As of September 30, 1995, only $100,000 of
the Notes are outstanding. See Convertible
Subordinated Notes Payable Note to the Consolidated
Financial Statements.
In January 1992, shareholders of the Company, other
than Pesa, received one Common Stock Purchase
Warrant for every two shares of common stock. The
Company issued 5,795,555 of these warrants. Each
warrant entitles its holder to purchase one share of
the Company's common stock at $.20 per share. These
warrants expire on January 31, 1996. As of
September 30, 1995, a total of 3,543,780 Common
Stock Purchase Warrants have been exercised.
LONG-TERM INCENTIVE PLAN
In May 1995, the Company's shareholders approved the
Chyron Corporation Long-Term Incentive Plan ("the
Plan"). The Plan allows for a maximum of 5,000,000
shares of common stock to be available with respect
to the grant of awards under the Plan; any or all of
such common stock may be granted for awards of
Incentive Stock Options.
On July 25, 1995, the Board of Directors granted
Incentive Stock Options for the purchase of
3,005,000 of such shares. The purchase price per
option share is $1.625, the quoted market price at
the date of grant, and is payable in cash or in
common stock of Chyron. The options vest over three
years at 33 1/3% per annum and expire on July 25,
2000. At September 30, 1995, no options were
exercisable. On July 25, 1995, the Board of
Directors approved the amendment of the Plan to
provide that all Directors who are not officers of
the Company shall receive as a formula grant, on an
annual basis on the last trading date of each July,
stock options for 10,000 shares of the Company's
common stock, at an exercise price equal to the fair
market of the stock on the date of grant; provided
that this amendment is subject to shareholder
approval at the next annual meeting of shareholders.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
EARNINGS PER SHARE
Earnings per share is based on the weighted average
number of common shares outstanding during the
period plus, when dilutive, additional shares
issuable upon the assumed exercise of outstanding
Common Stock
Purchase Warrants and outstanding Incentive Stock
Options. Fully diluted earnings per share are not
presented since such presentation would not be
materially different from primary earnings per
share.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable are stated net of an
allowance for doubtful accounts of $2,663,000 and
$2,204,000 at September 30, 1995 and December 31,
1994, respectively. The Company periodically
evaluates the credit worthiness of its customers and
determines whether collateral (in
the form of letters of credit or liens on equipment
sold) should be taken or whether reduced credit
limits are necessary. Credit losses have
consistently been within management's expectations.
Accounts and notes receivable are principally due
from customers and dealers serving the broadcast
video industry and non-broadcast display markets.
INVENTORIES
Inventories consist of the following:
09/30/95 12/31/94
(In thousands)
Finished goods $ 1,854 $ 1,811
Work-in-process 4,500 1,807
Raw material 4,054 1,846
$10,408 $ 5,464
NOTES PAYABLE
On April 27, 1995, the Company entered into a two
year credit facility for $10,000,000 with the CIT
Group. This facility is secured by substantially
all the Company's accounts receivable and
inventories. Borrowings are limited to amounts
computed under a formula for eligible accounts
receivable and inventory. Interest is payable
monthly at the prime rate (8.75% at September 30,
1995) plus 2% per annum. At September 30, 1995, the
Company had $6,128,000 outstanding under such
facility.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
CONVERTIBLE SUBORDINATED NOTES PAYABLE
The 4-year Notes (originally issued on December 27,
1991 and aggregating $5.0 million) mature January 31,
1996, bear interest (payable annually in arrears) at
the prime rate (8.5% at December 31, 1994), adjusted
annually
each December. The Notes were originally convertible
into 25,000,000 shares
of common stock of the Company at a conversion rate of
20 cents per share. When the Notes were originally
issued to Pesa it was anticipated that the Notes would
be resold by Pesa at face value in a private placement
to various investors, including certain current and
past members of management of the Company.
Through December 27, 1993, Pesa had converted $4.8
million in aggregate principal amount of the Notes
into 24 million shares of Chyron common stock. The
effect of these conversions was to increase
shareholders' equity by $4.8
million and reduce future years interest expense. On
December 31, 1993, Pesa sold 14 million of these
shares to two non-US residents, and on August 2, 1994,
Sepa acquired these 14 million shares. See Control of
Registrant Note to the Consolidated Financial
Statements.
During May and September 1994, Pesa sold its remaining
$200,000 in aggregate principal amount of the Notes to
various current and past members of the Company's
management at face value.
As of September 30, 1995, all but $100,000 of the
original aggregate principal amount of the Notes have
been converted into shares of common stock of the
Company.
INCOME TAXES
In connection with Chyron's emergence from its
reorganization proceeding under Chapter 11 of the
United States Bankruptcy Code on December 27, 1991,
the Company adopted "Fresh Start Accounting" in
accordance with AICPA Statement of Position,
"Financial Reporting by Entities in Reorganization
under the Bankruptcy Code."
Fresh Start Accounting requires that the Company
report an income tax equivalent provision when there
is book taxable income and a pre-
reorganization net operating loss carryforward. This
requirement applies despite the fact that the
Company's pre-reorganization net operating loss
carryforward would eliminate (or reduce) the related
income tax payable.
The current and future year benefit related to the
carryforward is not reflected in Net Income, but
instead is recorded as a direct increase to Additional
Paid-in Capital. During the nine months ended
September 30, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
and 1994, the income tax equivalent provision and the
associated increase in Additional Paid-in Capital each
amounted to $1,342,000 and Nil, respectively. The
income tax equivalent provision does not affect the
Company's tax liability.
WEST COAST RESTRUCTURING
During the third quarter of 1994, as the result of
continuing significant operating losses by the
Company's West Coast Operations and its inability to
meet revenue and operating targets, management
determined that
it would be in the Company's best interest to
implement a restructuring plan to eliminate a
substantial number of the CMX and Aurora product lines
and consolidate certain remaining products into the
Company's Graphic Operations, with only certain
product engineering capabilities remaining on the West
Coast. As a result, the Company recorded a $12.7
million charge to operations during the third quarter
of 1994, resulting from headcount reductions,
consolidation costs, write-downs of assets related to
discontinued product lines and accrual of estimated
operating losses anticipated during the disposition
period. For the nine months ended September 30, 1995,
operating losses of $1,552,000 related to the
discontinued product lines were charged against the
reserve for West Coast restructuring.
During August 1995, the Company entered into an
agreement to sublease a portion of the office space
for the West Coast Operations. The subleasing served
to decrease future rent commitments and, as a result,
the Company reversed $356,000 of the original $12.7
million charge to account for the decrease in
projected rent expense.
Additionally, during the three months ended September
30, 1995, the Company sold certain inventory that had
been fully reserved for in the original $12.7 million
charge. The Company realized a gain of $196,000
related to this inventory.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Overview
This discussion should be read in conjunction with the
Consolidated Financial Statements including the Notes
thereto:
Comparison of the Three Months Ended September 30,
1995 and 1994
Sales increased 28% primarily as a result of
improvement in sales of the Company's graphic and
character generator products, which reflects strong
sales of the upper line products with particular
increases coming from the Infinit!, Max>! and Maxine.
Gross margin increased to $8.0 million as a result of
the 28% increase in sales. Gross margins as a
percentage of sales increased to 57% in 1995 compared
to 56% in 1994, which is a direct result of the
increased sales volume and enhanced efficiencies in
the factory.
Selling, general and administrative expenses increased
by $332,000 or 8% over the comparable period,
primarily due to the accrual of severance payments due
to former management in the amount of $390,000. The
increase can also be attributed to increased selling
and marketing costs related to higher sales volume.
This increase is net of benefits of the West Coast
restructuring and other efforts by management to
decrease overall selling, general and administrative
expenses as a percentage of sales.
Research and development expenses for the three month
period ended September 30, 1995 increased by 3% over
the comparable 1994 period. This increase is due to
additional expenditures for new product development to
address emerging markets targeted by the Company, as
well as the development of new features for the
Company's existing product line. This increase is net
of decreases in capitalization and amortization on
certain projects included in the 1994 period that were
discontinued and written off in connection with the
West Coast Restructuring.
During September 1994, the Company restructured its
West Coast operations, which resulted in a $12.7
million charge. During the three month period ending
September 30, 1995 $552,000 of the original charge was
recaptured by the Company. See further discussion of
the related charges below in the West Coast
Restructuring section.
Net interest expense increased $34,000 or 25% due to
increases in the average outstanding loan balance and
increases in the interest rates over the comparable
prior year period.
Income before income taxes increased substantially to
$2.5 million in 1995 from a loss of ($12.2) million in
1994. The loss in 1994 includes the West Coast
Restructuring Charge of $12.7 million which was
recorded during September. When comparing income
before income taxes for the periods exclusive of the
West Coast Restructuring Charge in 1994 and recapture
of such charge in 1995, 1995 amounts rose $1.4 million
or 259% due primarily to increases in sales volume and
gross margin coupled with cost savings measures
instituted by the Company that decreased selling,
general and administrative expenses as a percentage of
sales as described above.
Comparison of the Nine Months Ended September 30, 1995
and 1994
Sales increased 23% primarily as a result of
improvement in sales of the Company's graphic and
character generator products, which reflects strong
sales of the upper line products with particular
increases coming from the Infinit!, Max>! and Maxine.
Gross margin increased to $21.7 million as a result of
the increase in sales. Gross margins as a percentage
of sales were 56% in 1995 compared to 55% in 1994.
The increase in the gross margin percentage is a
result of the increased sales volume for the upperline
products, increased sales volume for software products
and enhanced efficiency in the factory.
Selling, general and administrative expenses increased
by $1.2 million or 10%. This increase is due to the
increase in commission expense on increased sales,
increased international travel costs as well as new
marketing initiatives. The increase is also
attributable to legal and investment banking fees
amounting to $443,000 incurred with respect to the
undertakings of the Special Transaction Committee of
the Board of Directors, which had been appointed in
connection with the potential change of control of
Chyron if Pesa sold its shares. Additional increases
are due to the accrual of severance payments as
described in the three month comparison above.
Research and development ("R&D") expenses for the nine
months ended September 30, 1995 increased by 11% as
compared to the same period in 1994. This increase is
due to additional expenditures for new product
development as well as expenditure for development of
new features on the Company's existing product lines.
This increase is offset by decreases attributable to
the West Coast Restructuring and the related
discontinuance of certain R&D operations.
Net interest expense increased $23,000 due to
increases in the average outstanding loan balance for
the period and increases in the average interest rates
in effect for the period.
Income before income taxes, exclusive of the West
Coast Restructuring Charge in 1994 and recapture in
1995, increased $3.2 million or 204% due to the
increase in sales and respective gross margins,
coupled with decreases in selling, general and
administrative as a percentage of sales. See the
three month comparison above for further discussion.
The income taxes/equivalent provision has been
decreased to reflect a reduction in the effective tax
rate from 37.5% to 27.5%, cumulatively, as a result of
book versus tax differences arising primarily from the
West Coast Restructuring charge.
<PAGE>
Under Fresh Start Accounting, the Company is required
to report an income tax equivalent provision where
there is book taxable income and pre-reorganization
net operating loss carryforwards.
West Coast Restructuring
As of September 30, 1994, Chyron's West Coast
operations, CMX and Aurora, reflected a continuing
trend of poor operating performance. Due to these
disappointing results, the lack of certain products in
the high growth sector of the market and the strategic
decision by Chyron's management to redirect its
product lines to a broader base market and to
reengineer its R&D focus, the Company's management
initiated a plan to restructure the West Coast
operations.
Consequently, as a major step in increasing the
Company's profitability as a whole, the Company's
management decided to eliminate unprofitable product
lines such as CMX 6000, Cinema, Gemini, LSI and the
3500 and 3600 series product lines, reduce the
workforce by 30% or 12 employees, write-down certain
assets directly attributable to the unprofitable
product lines to estimated net realizable value,
write-off software costs that the Company felt no
longer fit its strategic initiative and focus, dispose
of certain assets, accrue losses for the restructuring
period originally estimated to be from October 1, 1994
through March 31, 1995, subsequently revised to be
from October 1, 1994 through June 30, 1995, and
downsize the Company's Santa Clara, California
facility.
<PAGE>
The result of these measures was a restructuring
charge of $12.7 million for the West Coast operations
during the year ended December 31, 1994. The specific
components of the restructuring charge broken-out
between asset write downs and cash outlays are as
follows:
Asset write downs:
Write down of assets to estimated
net realizable value $
6,952
Write-off of software development
costs
1,991
Total non cash charges
8,943
Cash Outlays:
Accrued operating losses through
date of disposition
2,500
Loss on lease commitment
700
Accrued severance for reduction in
workforce
300
Other
273
$12,716
The cash outlays required by the restructuring are
being funded by the Company's profitable product
lines. Cash outlays for the restructuring period,
which include accrued operating losses, accrued
severance and other costs, were estimated to be
$3,773,000. Cash outlays through September 30, 1995
amounted to $2,228,000. The estimated loss on lease
commitment was revised in August 1995 as the Company
began to sublease a portion of the office space for
the West Coast Operations. The Company recaptured
$356,000 of the lease commitment accrual to account
for the decrease in future rent payments that was
realized. The loss on the lease will be funded over
the remaining lease term of 31 months subsequent to
the restructuring period.
During the three months ended September 30, 1995, the
Company sold inventory which was fully reserved for in
the restructuring charge. The Company recaptured
$196,000 related to the cost of this inventory.
Operating results as a result of the West Coast
restructuring are projected to benefit by a savings of
over $2 million for the year ending December 31, 1995,
principally due to a reduction in annual salaries and
employees benefits of $750,000, a decrease in
depreciation and
amortization expense of $200,000 per year, a reduction
of overhead costs of approximately $200,000 per year,
and a reduction in losses on unprofitable product
lines of approximately $850,000 per year.
<PAGE>
OTHER INFORMATION
In connection with the change in control as described
in the Notes to the Consolidated Financial Statements,
effective July 25, 1995 the Company increased the
Board of Directors from seven members to nine members,
including five newly elected directors. The Board
elected Michael Wellesley-Wesley Chairman and Chief
Executive Officer, succeeding John A. Servizio, who
remains a director of the Company.
Liquidity and Capital Resources
On April 27, 1995, the Company entered into a
$10,000,000, two-year, secured credit facility with
the CIT Group. This facility replaced the $4.5
million secured credit facility which was to expire on
April 30, 1995. See Notes Payable Note to the
Consolidated Financial Statements.
The Company's current ratio is 2.47 to 1.00 at
September 30, 1995.
At September 30, 1995, the Company's commitments
consisted of $1,250,000 for the license and
distribution rights of a software product payable
through December 31, 1995 and capital resource
commitments for leases of equipment and factory office
space totaling $3.9 million of which $699,000 of the
capital resource commitments are payable within one
year. <PAGE>
PART II. OTHER INFORMATION
ITEMS 1., 2., 3., AND 4. Not applicable.
ITEM 5. OTHER INFORMATION
Effective July 25, 1995, the Company increased the
size of the Board of Directors from seven members to
nine members, including five newly elected directors.
Additionally, On August 29, 1995, Steven N. Hutchinson
resigned from the Board of Directors and on September
12, 1995, Charles M. Diker was appointed a Board of
Director of Chyron. The directors constituting the
Board effective September 12, 1995 are as follows:
Director Director
Since
Frederick D. Brown 1971
Sheldon D. Camhy July 25,
1995
Charles M. Diker September 12,
1995
Alan J. Hirschfield July 25,
1995
Wesley W. Lang, Jr. July 25,
1995
Robert E. Mulcahy 1987
John A. Servizio 1991
Eugene M. Weber July 25,
1995
Michael Wellesley-Wesley May 26,
1995
Effective July 25, 1995, the Board of Directors
elected Michael Wellesley-Wesley Chairman and Chief
Executive Officer succeeding John A. Servizio, who
remains a director of the Company.
Effective July 25, 1995, Daniel DeWolf was appointed
Secretary of the Company, replacing Peter J. Lance.
On July 26, 1995, Mark C. Gray, President and Chief
Operating Officer severed his employment with Chyron.
On July 27, 1995, Isaac Hersly was appointed President
and Chief Operating Officer. Previously Mr. Hersly
held the position of Executive Vice President.
Effective August 4, 1995, Chyron severed the
employment of Peter J. Lance, Chief Administrative
Officer.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
a(4) Registration Rights Agreement dated July 25,
1995 by and between Chyron Corporation and CC
Acquisition Company A, L.L.C., CC Acquisition Company
B., L.L.C., WPG Corporate Development Associates, IV,
L.P., WPG Corporate Development Associates IV
(Overseas), L.P., WPG Enterprises Fund II, L.P.,
Weiss, Peck & Greer Venture Associates, III, L.P.,
Westpool Investment Trust PLC, Lion Investments
Limited, Charles Diker, Mint House Nominees Limited,
Pine Street Ventures, L.L.C., Isaac Hersly, Alan I.
Annex, Ilan Kaufthal, Z Four Partners L.L.C. and
A.J.L. Beare.
(b) Reports on Form 8-K
b(1) Filed May 30, 1995 - Item 1 (Change in Control of
Registrant). Pesa, Inc. ("Pesa"), abd Sepa
Technologies, Ltd., Co ("Sepa") executed agreements in
principle on May 11, 1995 and May 12, 1995,
respectively, pursuant to which Pesa would sell to the
MWW Group or affiliates thereof 59,414,732 shares of
common stock, and Sepa would sell to the MWW Group or
an affiliate thereof 5,000,000 shares of common stock.
b(2) Filed June 9, 1995 (Change in Control of
Registrant). Pursuant to the agreements in principle
executed by Pesa and Sepa with the MWW Group on May
11, and May 12, 1995, Pesa and Sepa each separately
executed on May 26, 1995, a Stock Purchase Agreement.
Additionally, on May 26, 1995 Pesa sold 10,000,000
shares of common stock.
b(3) Filed August 8, 1995 (Change in Control of
Registrant). On July 25, 1995, Pesa, Inc. sold
49,414,732 shares of common stock of Chyron
Corporation to a group of entities. Additionally, on
July 25, 1995 Sepa Technologies, Ltd. sold 5,000,000
shares to the same group of entities.
b(4) Filed October 25, 1995 (Change in Registrant's
Certifying Accountants). On October 19, 1995, the
Company dismissed Ernst & Young, LLP as its principal
accountants to audit its financial statements and
engaged Price Waterhouse LLP as its new independent
accountants to audit its financial statements.
<PAGE>
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.
CHYRON
CORPORATION
(Registrant)
November 7, 1995 Michael Wellesley-
Wesley
(Date) Michael Wellesley-
Wesley
Chief Executive
Officer
and Chairman of
the
Board of
Directors
November 7, 1995 Patricia
Lampe
(Date) Patricia
Lampe
Chief Financial
Officer
and
Treasurer
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