FORM 10-Q
U.S. 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, 1998
Commission File Number 1-9014
Chyron Corporation
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of Incorporation or organization)
11-2117385
(IRS Employer Identification No.)
5 Hub Drive, Melville, New York
(Address of principal executive offices)
11747
(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
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 - 32,072,372 as of
November 9, 1998
This document consists of 14 pages
CHYRON CORPORATION
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997 3
Consolidated Statements of Operations (unaudited) for the Three
Months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations (unaudited) for the Nine
Months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Information 13
Item 6(a)Exhibits 13
Item 6(b)Reports on Form 8-K 13
Signatures 14
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
ASSETS
(Unaudited)
September 30,December 31,
1998 1997
Current assets:
Cash and cash equivalents $ 2,857 $ 2,968
Accounts receivable 16,980 21,125
Inventories 19,080 26,540
Deferred tax asset 6,423 4,301
Prepaid expenses and other current assets 1,991 2,180
Total current assets 47,331 57,114
Property and equipment 12,879 12,373
Excess of purchase price over net tangible
assets acquired 5,237 6,779
Investments 2,328 2,161
Software development costs 4,113 5,224
Deferred tax asset 7,081 7,070
Other assets 4,106 3,359
TOTAL ASSETS $83,075 $94,080
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $12,224 $14,164
Current portion of long-term debt 2,503 2,318
Deferred revenue 251 1,327
Capital lease obligations 187 350
Total current liabilities 15,165 18,159
Long-term debt 12,561 17,774
Capital lease obligations 643 317
Other liabilities 3,928 3,868
Total liabilities 32,297 40,118
Commitments and contingencies
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 -
32,072,372 at September 30, 1998 and
32,605,705 at December 31, 1997 321 326
Additional paid-in capital 44,021 44,016
Retained earnings 5,760 9,237
Cumulative translation adjustment 676 383
Total shareholders' equity 50,778 53,962
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $83,075 $94,080
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except per share amounts)
(Unaudited)
1998 1997
Net sales $22,062 $23,523
Cost of products sold 11,612 12,586
Gross profit 10,450 10,937
Operating Expenses:
Selling, general and administrative 7,268 6,901
Research and development 2,599 1,655
Total operating expenses 9,867 8,556
Operating income 583 2,381
Gain on sale of Trilogy Broadcast, Limited 1,194
Interest and other expense, net (569) ( 411)
Income before provision for income taxes 1,208 1,970
(Benefit) provision for income taxes (113) 734
Net income $1,321 $ 1,236
Net income per common share - basic and diluted $ .04 $ .04
Weighted average shares used in computing net
income per common share - basic and diluted 32,072 32,583
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except per share amounts)
(Unaudited)
1998 1997
Net sales $64,683 $63,621
Cost of products sold 33,831 34,617
Gross profit 30,852 29,004
Operating Expenses:
Selling, general and administrative 23,953 21,606
Research and development 7,615 5,106
Restructuring and other non-recurring charges 3,979 3,082
Total operating expenses 35,547 29,794
Operating loss (4,695) (790)
Gain on sale of Trilogy Broadcast, Limited 1,194
Interest and other expense, net (1,405) (1,175)
Loss before provision for income taxes (4,906) (1,965)
Benefit for income taxes (1,429) (573)
Net loss (3,477) (1,392)
Retained earnings - beginning of period 9,237 9,997
Retained earnings - end of period $ 5,760 $ 8,605
Net loss per common share - basic and diluted $ (.11) $ (.04)
Weighted average shares used in computing net
loss per common share - basic and diluted 32,072 32,516
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
(Unaudited)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,477) $(1,392)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain of sales of Trilogy Broadcast, Limited (1,194)
Restructuring and other non-recurring charges 3,370 1,801
Depreciation and amortization 3,897 2,925
Deferred income tax (benefit) (1,539) (1,778)
Changes in operating assets and liabilities:
Accounts receivable 3,608 2,933
Inventories 5,665 (2,897)
Prepaid expenses and other assets (85) (1,502)
Accounts payable and accrued expenses (2,503) 3,939
Deferred revenue (1,018)
Other liabilities 60 (286)
Net cash provided by operating activities 6,784 3,743
CASH FLOWS FROM INVESTING ACTIVITIES
Gross proceeds from sale of Trilogy
Broadcast, Limited 2,746
Acquisition of Axis Holdings Incorporated (413)
Acquisitions of property and equipment (1,793) (1,588)
Capitalized software development (2,474) (1,583)
Net cash used in investing activities (1,521) (3,584)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of term loan (3,000) (1,500)
(Payments of) borrowings from revolving
credit agreement, net (2,116) 2,663
Payments of capital lease obligations (260) (80)
Other (27)
Net cash (used in)provided by financing
activities (5,376) 1,056
Effect of foreign currency rate fluctuations
on cash and cash equivalents 2 5
Change in cash and cash equivalents (111) 1,220
Cash and cash equivalents at beginning of period 2,968 4,555
Cash and cash equivalents at end of period $ 2,857 $ 5,775
Non-cash investing and financing activities:
On March 31, 1997, the Company acquired all the issued and outstanding
shares of Axis Holdings Incorporated. The consideration, in addition to cash
paid, included the issuance of 173,913 shares of Chyron Corporation common
stock valued at $750,000 and notes payable of $667,000.
On August 19, 1998, the Company sold Trilogy Broadcast, Limited. The
proceeds included cash and an interest bearing note for 300,000 British
Pounds Sterling. The Company retained a 19% interest in the newly formed
Company. See Note 6 to the Consolidated Financial Statements.
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management of Chyron Corporation (the Company), the
accompanying unaudited consolidated interim financial statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30,
1998 and the consolidated results of its operations and its cash flows for
the periods ended September 30, 1998 and 1997. The results of operations
for such interim periods are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. 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, 1997. The December 31, 1997
figures included herein were derived from such audited consolidated
financial statements. Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 method of presentation.
2. NEW ACCOUNTING POLICIES
In the first quarter of 1998, the Company adopted AICPA Statement of
Position 97-2 (SOP 97-2), "Software Revenue Recognition." This SOP provides
guidance on when revenue should be recognized for licensing, selling,
leasing, or otherwise marketing computer software. The adoption of SOP 97-
2 did not have a material effect on the results of operations of the Company
for the three and nine month periods ended September 30, 1998.
During 1997 and 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 129, Disclosure of
Information About Capital Structure, SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, and SFAS No. 132,
Employers' Disclosures About Pensions and Other Post Retirement Benefits.
These accounting standards are effective for financial statements issued for
fiscal years beginning after December 15, 1997 and require restatement of
disclosures for earlier periods. The Company will adopt the new requirements
in its annual financial statements in 1998. The Company does not anticipate
that the adoption of these new standards will have a material impact on
information previously disclosed in the Company's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for
financial statements issued for all fiscal quarters of fiscal years
beginning after June 15, 1999. Accordingly, the Company will adopt the
provisions of the standard on January 1, 2000. The Company does not
anticipate that the adoption of this standard will have a material impact
on results of operations, financial position or liquidity.
3. PRODUCT LINE RESTRUCTURING
During the second quarter of 1998, as a result of continued poor operating
results and the inability of the Company's Concerto Division to meet revenue
and operating targets, management determined that it would be in the
Company's best interest to implement a restructuring plan and refocus on its
core business of graphics, routing and automation products for the
television broadcast, cable and post production industries. Such
restructuring plan involved the disposal of the Concerto and Trilogy
Divisions, the modification of its investment in RT-SET and the
reorganization of the Company's core product sales force to be complimentary
to its new sales and marketing strategy. As a result, the Company recorded
a $3,979,000 charge to operations during the second quarter of 1998. Such
charge resulted from a write-down of assets to estimated net realizable
value and employee severance and selling costs as a result of such
restructuring plans. Additional amounts were accrued for litigation and
other costs.
4. ACCOUNTS RECEIVABLE
Accounts receivable is stated net of an allowance for doubtful accounts of
$3,423,000 and $3,124,000 at September 30, 1998 and December 31, 1997,
respectively.
5. INVENTORIES
Inventories, net of obsolescence reserves, consist of the following (in
thousands):
September 30, December 31,
1998 1997
Finished goods $ 7,735 $12,346
Work-in-process 3,027 9,303
Raw material 8,318 4,891
$19,080 $26,540
6. SALE OF TRILOGY BROADCAST, LIMITED
On August 19, 1998, the Company completed the sale of Trilogy Broadcast,
Limited (Trilogy), a wholly-owned subsidiary of Pro-Bel, Limited, to the
management of Trilogy. The Company received gross proceeds of 2.0 million
British Pounds Sterling, an interest bearing note for 300,000 British Pounds
Sterling and a 19% interest in the new company that results from this
transaction. This transaction resulted in an overall gain of approximately
$1.2 million.
As a result of this sale, the Company's assets and liabilities decreased by
approximately $2.9 million and $800,000, respectively. For the nine months
ended September 30, 1998, Trilogy contributed sales, gross profit and
operating income of $2.9 million, $1.6 million and $20,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
From time to time, including in this Quarterly Report on Form 10-Q, the
Company may publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, changes in the industry, new products, research and
development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for such forward-
looking statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause the Company's actual
results to differ from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include, without limitation, the
following: product concentration in a mature market, dependence on the
emerging digital market and the industry's transition to DTV and HDTV,
consumer acceptance of DTV and HDTV, resistance within the broadcast or
cable industry to implement DTV and HDTV technology, rapid technological
changes, new technologies that could render certain Chyron products to be
obsolete, a highly competitive environment, competitors with significantly
greater financial resources, new product introductions by competitors,
seasonality, fluctuations in quarterly operating results, expansion into new
markets and the Company's ability to successfully implement its acquisition
and strategic alliance strategy.
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, 1998 and 1997
Sales for the quarter ended September 30, 1998 were $22.1 million, a
decrease of $1.4 million, or 6%, over the $23.5 million reported for the
third quarter of 1997. This decrease was primarily due to a loss in volume
from the sale of Trilogy Broadcast, Limited (Trilogy) and a decline in
international graphic and international Pro-Bel sales. An increase in Pro-
Bel America revenues of 62% offset a portion of this decline.
Gross profit decreased to $10.5 million for the quarter ended September 30,
1998. The decrease of $487,000, or 4.5%, from the $10.9 million reported for
the third quarter of 1997 was primarily attributable to the decrease in
sales for the third quarter of 1998. Gross margins as a percentage of sales
increased to 47.4% in 1998 versus 46.5% in 1997 mainly as a result of the
change in the product mix.
Selling, general and administrative (SG&A) expenses increased by $367,000,
or 5%, to $7.3 million in the quarter ended September 30, 1998 compared to
$6.9 million for the third quarter of 1997. This growth in overall SG&A
expenses is directly related to the continued efforts to improve customer
service and to focus on sales and marketing initiatives, specifically
directed at supporting and growing the Pro-Bel product lines in America and
the establishment of the Chyron/Pro-Bel sales office in France.
Gross research and development (R&D) costs increased by $944,000 during the
third quarter of 1998 as compared to the same period in 1997. Increases
were incurred at both Chyron and Pro-Bel as the Company continues to focus
its attention on new product development to address the FCC ruling requiring
broadcasters to utilize digital advanced television transmission beginning
in 1998.
In connection with the restructuring plan implemented in the second quarter
of 1998, the Company completed the sale of Trilogy to its management on
August 19, 1998. This transaction resulted in an overall gain of
approximately $1.2 million.
Interest and other expense, net increased primarily as a result of foreign
currency transaction losses of approximately $150,000 for the quarter ended
September 30, 1998, offset by a decrease in interest expense related to a
lower average outstanding debt balance.
The Company recorded a tax benefit of $113,000 for the quarter ended
September 30, 1998. This is primarily due to a foreign tax loss resulting
from an overall reduced gain on the sale of Trilogy and the timing of other
taxable transactions. The Company's effective tax rate in the quarter
ended September 30, 1997 was 37%.
Comparison of the Nine Months Ended September 30, 1998 and 1997
Sales for the nine months ended September 30, 1998 were $64.7 million, an
increase of $1.1 million, or 2%, over the $63.6 million reported for the
first nine months of 1997. This increase was a result of substantial
increases in the domestic sales of the Pro-Bel line, which showed a growth
of nearly 150%, offset by decreases in international graphics and Pro-Bel
sales.
Gross profit increased to $30.9 million for the nine months ended September
30, 1998. The increase of $1.8 million, or 6%, over the $29 million
reported for the nine months of 1997 was primarily attributable to the
growth in sales. Gross margins as a percentage of sales increased to 47.7%
in 1998 versus 45.6% in 1997 mainly as a result of the change in the product
mix.
SG&A expenses increased by $2.3 million, or 10.9%, to $23.9 million in the
first nine months of 1998 compared to $21.6 million for the first nine
months of 1997. As outlined in the three month comparison, increases were
seen at both Chyron and Pro-Bel as a result of the new sales and marketing
initiatives implemented by the Company. In addition, approximately $590,000
of this increase was related to the support of the Concerto product line,
which will be non-recurring as a result of the product line restructuring
described below.
Gross R&D costs increased during the first nine months of 1998 compared to
the same period in 1997 by $2.5 million. Increases were incurred at both
Chyron and Pro-Bel as the Company focuses its attention on new product
development to address an FCC ruling requiring broadcasters to utilize
digital advanced television transmission beginning in 1998. Approximately
$314,000 of this increase was related to the support of the Concerto product
line, which will be non-recurring as a result of the product line
restructuring described below.
During the second quarter of 1998, management determined that it would be
in the Company's best interest to implement a restructuring plan and refocus
its efforts on its core products of graphics, routing and automation for
television broadcast, cable and post production industries. This product
line restructuring included the sale of Trilogy; the modification of the
Company's investment in RT-SET; the reorganization of Chyron's sales and
marketing organization; and the disposition of the Concerto Division. As a
result, the Company recorded restructuring and other non-recurring charges
of $3,979,000 during the second quarter of 1998.
The restructuring charge included the write-down of Concerto assets, accrued
severance, legal costs and costs of disposition of such division totaling
$2.9 million. Other non-recurring charges totaled $1.1 million and related
to management's initiative to refocus on the Company's core products.
Included in other non-recurring charges are costs related to the sales
reorganization, accrued severance and other miscellaneous costs, all of
which will require cash outlays. Additional accruals have been made for
litigation and other legal costs. As of September 30, 1998 approximately
35% of total cash expenditures have been settled.
During the nine months ended September 30, 1998, the Company completed the
sale of Trilogy to its management. This transaction resulted in an overall
gain of approximately $1.2 million.
In the nine months ended September 30, 1997, the Company recorded non-
recurring charges of approximately $3.1 million comprising a $2.4 million
charge related to the repositioning by the Company to address the effects
of an FCC ruling requiring digital advanced television transmission
beginning in 1998 and $675,000 attributable to the Company's planned
secondary offering of common stock which was terminated due to the market
valuation of the stock.
Interest and other expenses, net increased mainly as a result of foreign
currency transaction losses for the period as compared to a gain in the
prior year, offset by a slight decrease in interest expense resulting from
lower average borrowings.
The Company's effective tax (benefit) rate was 29% for each of the nine
month periods ended September 30, 1998 and 1997. This rate, which is lower
than the U.S. statutory rate, reflects the benefit recorded in the third
quarter of 1998 discussed above and the effects of foreign income (losses)
taxed at lower rates.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash on hand of $2.9 million and
working capital of $32.2 million.
As set forth in the Consolidated Statements of Cash Flows, the Company
generated $6.8 million in cash from operations during the nine months ended
September 30, 1998 as compared to $3.7 million for the comparable 1997
period. The improvement in cash flows from operations is principally due
to lower accounts receivable balances from improved collections and the
timing of certain customer down payments, reductions in inventory levels
primarily as a result of subcontracting inventory assemblies in lieu of
manufacturing and applying 'just in time' methodologies, offset by declines
in the level of accounts payable. The Company also received $2.7 million in
gross proceeds from the sale of Trilogy. These funds were used to paydown
a portion of the Company's term loan.
At September 30, 1998, the Company had available lines of credit of $1.5
million under its revolving credit facility. Such facility is scheduled to
expire on March 28, 1999 and management intends to seek renewal of such
facility prior to the expiration date.
In addition, Pro-Bel has an overdraft facility with a bank of up to 4.0
million British Pounds Sterling through December 31, 1998. Total borrowings
are limited to amounts computed under multiple formulas of eligible accounts
receivable and inventory. All monies under the facility are repayable upon
written demand. Management intends to seek renewal of this facility prior
to the expiration date.
The Year 2000
The Company has taken actions to ensure that its products, internal systems
and procedures are Year 2000 Compliant. To this end, the Company has
established a proactive plan to assess the Year 2000 impact in order to
minimize any interruption of its operations or its ability to serve its
customers. The Company has also established a Year 2000 Committee whose
members include senior management and functional area leaders.
The Company has structured its plan to assess internal systems,
infrastructure, facilities, suppliers and vendors as well as products and
services. Our assessment phase is in progress, with a target completion
date of December 31, 1998. A target date of June 1, 1999 has been set for
completion of remediation efforts based upon the results of our assessment.
At this time, Chyron has not encountered any Year 2000 issues which would
have a material adverse effect on its business or current products.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6(a). Exhibits
(27) Financial Data Schedule
ITEM 6(b). Reports on Form 8-K
The Company did not file any current reports on Form 8-K during its fiscal
quarter ended September 30, 1998.
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 13, 1998 /s/ Edward Grebow
(Date) Edward Grebow
President and
Chief Executive Officer
November 13, 1998 /s/ Dawn Johnston
(Date) Dawn Johnston
Senior Vice President and
Chief Financial Officer
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