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 March 31, 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 - 87,460,479 as of
May 2, 1995
This document consists of 14 pages
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
ASSETS
March 31, December
1995 31, 1994
(Unaudited)
Current assets:
Cash.......................................... $ 2,713 $ 1,555
Accounts and notes receivable, net............ 13,357 13,225
Inventories .................................. 5,936 5,464
Prepaid expenses ............................. 1,718 1,898
Total current assets ....................... 23,724 22,142
Trade notes receivable ......................... 86 100
Property and equipment, net .................... 3,698 3,646
Software development costs ..................... 2,362 2,520
Other assets ................................... 243 236
TOTAL ASSETS ................................... $ 30,113 $ 28,644
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........ $ 7,712 $ 6,974
Reserve for West Coast restructuring.......... 2,089 2,824
Deferred revenue.............................. 71 34
Capital lease obligations..................... 204 207
Convertible subordinated notes payable........ 100
Total current liabilities ................... 10,176 10,039
Notes payable................................... 4,500 4,500
Capital lease obligations....................... 257 229
Convertible subordinated notes payable.......... 100
Total liabilities........................... 14,933 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 -
87,460,479 shares in March 1995,
87,392,524 shares in December 1994........ 875 874
Additional paid-in capital ................... 19,558 19,035
Retained (deficit)............................ (5,253) (6,133)
Total shareholders' equity...................... 15,180 13,776
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $ 30,113 $ 28,644
See Notes to Consolidated Financial Statements
<PAGE>
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(In thousands except per share amounts)
(Unaudited)
1995 1994
Net sales..................................... $ 11,437 $ 9,811
Costs and expenses:
Manufacturing .............................. 5,075 4,501
Selling, general and administrative ........ 3,589 3,400
Research and development ................... 980 953
Management fee.............................. 232 294
Total costs and expenses ................... 9,876 9,148
Operating income ............................. 1,561 663
Interest expense, net......................... (153) (147)
Income before income taxes ................... 1,408 516
Income taxes/equivalent provision............. 528 193
Net income.................................... 880 323
Retained (deficit) earnings - beginning of
period...................................... (6,133) 2,861
Retained (deficit) earnings - end of period... (5,253) $ 3,184
Earnings per common share..................... $ .01 $ Nil
Weighted average number of common and common
equivalent shares outstanding............... 89,844 89,572
See Notes to Consolidated Financial Statements
<PAGE>
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(In Thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES 1995 1994
Net income $ 880 $ 323
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization ................... 442 522
Income tax equivalent provision.................. 516 175
Changes in operating assets and liabilities:
Accounts and trade notes receivable, net......... (118) 447
Inventories...................................... (472) (249)
Prepaid expenses ................................ 180 (3)
Accounts payable and accrued expenses ........... 738 (499)
Deferred revenue................................. 37
Reserve for West Coast restructuring............. (735)
Net cash provided by operating activities........... 1,468 716
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment............... (202) (217)
Capitalized software development ................... (46) (443)
Other assets........................................ (7) 8
Net cash (used in) investing activities............. (255) (652)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations............... (63)
Proceeds from exercise of common stock purchase
warrants, net...................................... 8 13
Payments of Chapter 11 claims and other
reorganization items............................... (21)
Net cash (used in) financing activities............. (55) (8)
Change in cash...................................... 1,158 56
Cash at beginning of period......................... 1,555 213
Cash at end of period............................... $ 2,713 $ 269
SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments................................... $ 122 $ 310
Income tax payments................................. $ 18 $ 51
See Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
CONTROL OF REGISTRANT
Pesa, Inc. ("Pesa"), a Delaware company, owns approximately 68%
of Chyron Corporation's issued and outstanding common stock.
Pesa is a 100% owned subsidiary of a Spanish company, Pesa
Electronica, S.A. ("Electronica"), which in turn was 99% owned
by the Spanish company, Amper, S.A. On June 24, 1994, Amper,
S.A. sold all of the issued and outstanding shares of stock of
Electronica to Sepa Technologies Ltd., Co. ("Sepa"). Sepa is
a Georgia limited liability company. Incidental to Sepa's
purchase of Electronica, Sepa obtained ultimate control of
Chyron Corporation (the "Company" or "Chyron"). Pesa currently
holds legal title to 59,414,732 shares of Chyron. On August 2,
1994, Sepa acquired from certain foreign shareholders
14,000,000 shares of Chyron common stock. Consequently, Sepa
directly, and indirectly through Pesa, currently is the
beneficial owner of 73,414,732 shares, resulting in an
aggregate 84.0% ownership interest.
On October 7, 1994, Electronica filed in Spain "Suspencion de
Pagos". The proceeding is roughly equivalent to a Chapter 11
reorganization under the U.S. bankruptcy laws. Chyron's
management believes that Electronica's filing will not
materially adversely affect the business or operations of
Chyron. See Other Information Note to the Consolidated
Financial Statements.
RELATED PARTY TRANSACTIONS
In December 1991, the Company entered into a Management
Agreement with Electronica, which was subsequently assigned to
Pesa to provide business and technical services to the Company.
In connection with Sepa's acquiring a controlling interest in
Electronica and, consequently, an indirect controlling interest
in Pesa, Pesa assigned its rights and obligations under the
Management Agreement to Sepa in July 1994. The Management
Agreement was subsequently amended and restated to extend its
expiration date to December 31, 1997, to reduce the annual
maximum management fee payable from 3% to 2.5% of consolidated
revenues (as defined therein) after December 31, 1994 and to
give the Company the option to prepay the management fee for
the period July 1, 1994 through December 31, 1995 at a 25%
discount off the aggregate estimated yearly fees. The Company
took advantage of this additional discount, saving an estimated
aggregate total of $486,250 in fees for the eighteen month
period ending December 31, 1995. Management fees for the three
months ended March 31, 1995 and 1994 amounted to $232,000 and
$294,000, respectively. The prepaid management fee to Sepa
amounted to $679,000 at March 31, 1995.
The Company shares certain trade show and facility costs with
Pesa and Electronica. Such services amounted to $4,000 and
$23,000 for the three months ended March 31, 1995 and 1994,
respectively, and were billed to these related parties under a
usage based allocation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
As of March 31, 1995 and December 31, 1994, the Company was
indebted to Sepa and its affiliates for $9,000 and $49,000,
respectively, representing the cost of services provided, the
management fee and interest accrued on the Convertible
Subordinated Notes. Also as of these dates, the Company had
outstanding receivables due from Sepa and its affiliates for
equipment and services amounting to $572,000 and $685,000,
respectively. In light of Electronica's filing "Suspencion de
Pagos" in Spain, $464,000 and $545,000 of these receivables
have been reserved for as of March 31, 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 months ended March 31, 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at March 31, 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 March 31, 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 March 31, 1995, a
total of 1,970,014 Common Stock Purchase Warrants have been
exercised.
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 additional
shares issuable upon the assumed exercise of outstanding Common
Stock Purchase Warrants. 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 $2,474,000 and $2,204,000 at March 31,
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 in, and dealers serving, the broadcast video industry
and non-broadcast display markets.
INVENTORIES
Inventories consist of the following:
03/31/95 12/31/94
(In thousands)
Finished goods $ 1,986 $ 1,811
Work-in-process 2,222 1,807
Raw material 1,728 1,846
$ 5,936 $ 5,464
NOTES PAYABLE
At March 31, 1995, the Company had $4,500,000 outstanding
under a secured revolving credit facility. On April 27,
1995, the Company entered into a new two year credit facility
for $10,000,000 with the CIT Group. This new facility is
secured by the Company's properties and assets. Borrowings
are limited to amounts computed under a formula for eligible
accounts receivable and inventory. Interest is payable
monthly at the prime rate plus 2% per annum. (10.5% at March
31, 1995).
As a result of obtaining the above described facility with the
CIT Group, the Notes Payable of $4.5 million have been
classified as long-term debt in accordance with Statement of
Financial Accounting Standards No. 6, "Classification of Short-
Term Obligations Expected to be Refinanced."
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 March 31, 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 three months ended March 31, 1995 and 1994, the
income tax equivalent provision and the associated increase in
Additional Paid-in Capital each amounted to $516,000 and
$175,000, respectively. The income tax equivalent provision
does not affect the Company's tax liability.<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
OTHER INFORMATION
In January 1995, the Company was advised that Pesa and/or
Electronica had received proposals from certain parties
interested in acquiring the shares of Chyron held by Pesa. The
Company, in reviewing its options to protect the interests of
all of its shareholders in the event of such a sale, decided to
explore the possibilities of certain strategic and financial
transactions including a sale of all, or a substantial portion,
of its common stock through a sale, merger or recapitalization
transaction. In connection therewith, the Company has engaged
in discussions with several parties. At the time of this
writing, no final determination had been made with respect to
the sale of the Company or any alternative transactions, and
there can be no assurance that any such transaction will be
consummated. Although the Company recognizes that Pesa retains
the right to dispose of its shares in Chyron, in accordance
with United States and New York State law, Chyron would only
support any such transaction to the extent that it is fair to
and in the best interests of all shareholders.
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 three months ended March 31, 1995, operating
losses of $735,000 related to the discontinued product lines
were charged against the reserve for West Coast restructuring.
See Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional discussion of
the restructuring.
<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 March 31, 1995 and 1994
Sales increased 17% as a result of a 28% 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. Overall sales performance was limited by the
discontinuation of unprofitable product lines. See West Coast
Restructuring Note to the Consolidated Financial Statements.
Gross margin increased to $6.4 million as a result of the 17%
increase in sales. Gross margins as a percentage of sales
increased to 55.6% in 1995, compared to 54.1% in 1994 which is
a direct result of management's efforts to enhance
productivity in the factory and the benefits of the West Coast
restructuring.
Selling, general and administrative expenses increased by
$189,000 or 6%, which was primarily due to legal fees related
to a potential acquisition, which has since been terminated,
and to the Company's exploration of strategic and financial
transactions related to the potential sale of all or some of
its common stock as outlined in the Other Information Note to
the Consolidated Financial Statements. The increase can also
be attributed to increased selling 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 costs as is evident in the reduction of
selling, general and administrative expenses as a percentage
of sales from 35% in 1994 to 31% in 1995.
Research and Development ("R&D") expenses, including the
amortization of capitalized software and development,
increased $27,000 due to strategic initiatives to improve the
Company's profitable product lines. This increase was offset
by a $48,000 decrease in the amortization of software and
development costs net of amounts capitalized, which was a
result of the write-offs related to the discontinuation of
unprofitable product lines. See West Coast Restructuring Note
to the Consolidated Financial Statements.
Net interest expense increased $6,000 or 4% due to increases
in interest rates over the prior period, which was partially
offset by decreases in the outstanding loan balance. The
increase in net interest expense was also due to a decrease in
interest income, which was caused by a decrease from the prior
period in the outstanding notes receivable.
Income before income taxes improved $892,000 or 173% due to
the increases in sales volume and gross margins coupled with
cost savings measures instituted by the Company that decreased
selling, general and administrative expense as a percentage of
sales as described above. The increase in income before
income taxes is also due to decreases in the management fee
paid to Sepa, which resulted from the earlier prepayment by
the Company of such fee at a discounted rate. See Related
Party Transaction Note to the Consolidated Financial
Statements.
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.
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 will be funded
by the Company's profitable product lines. Cash outlays for
the restructuring period will include accrued operating
losses, accrued severance and other costs totaling $3,773,000.
Cash outlays through March 31, 1995 amounted to $1,750,000.
The loss on the lease will be funded over the remaining lease
term of 31 months subsequent to the restructuring period. The
Company's graphics division has been funding the operating
losses of CMX and Aurora out of its working capital since CMX
and Aurora began their trend of unprofitability.
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.
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. As a result of
obtaining the $10 million facility, the Note Payable under the
Company's existing credit facility in the amount of $4.5
million due April 30, 1995 has been classified as long-term
debt.
The Company's current ratio is 2.33 to 1.00 at March 31, 1995.
This calculation includes the classification of the above
described Note Payable as a long-term debt and includes the
West Coast restructuring reserve as a current liability.
At March 31, 1995, the Company's commitments consisted of
$2,000,000 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 $4.6 million of which $886,000 of the
capital resource commitments are payable within one year. See
Notes Payable Note to the Consolidated Financial Statements.
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1., 2., 3., 4. AND 5. Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Not applicable.
(b) Reports on Form 8-K:
Not applicable.
<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)
May 12, 1995 Mark C. Gray
(Date) Mark C. Gray
President, Chairman of the Board
of Directors and
Chief Executive Officer
May 12, 1995 Patricia Lampe
(Date) Patricia Lampe
Chief Financial Officer
and Treasurer
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