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 quarterly period ended September 30, 2001 |
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 Incorporation or organization) | | (IRS Employer Identification No.) |
5 Hub Drive, Melville, New York | | 11747 |
(Address of principal executive offices) | | (Zip Code) |
(631) 845-2000 |
(Registrant's telephone number including area code) |
| |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
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.
As of November 14, 2001 there were 39,563,691 shares of common stock, par value $.01 of the registrant issued and outstanding.
This document consists of 16 pages
CHYRON CORPORATION
INDEX
PART I | FINANCIAL INFORMATION | Page |
Item 1. | Financial Statements | |
| | Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 | 3 |
| | Consolidated Statements of Operations (unaudited) for the Three Months ended September 30, 2001 and 2000 | 4 |
| | Consolidated Statements of Operations (unaudited) for the Nine Months ended September 30, 2001 and 2000 | 5 |
| | Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2001 and 2000 | 6 |
| | Notes to Consolidated Financial Statements (unaudited) | 7 |
| | | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| | | |
Item 3. | Quantitative and Qualitative Disclosure about Market Risk | 15 |
| | | |
PART II | OTHER INFORMATION | |
| | | |
Item 1. | Legal Proceedings | 15 |
Item 2. | Changes in Securities | 16 |
Item 3. | Defaults Upon Senior Securities | 16 |
Item 4. | Submission of Matters to a Vote of Security Holders | 16 |
Item 5. | Other Information | 16 |
Item 6(a) | Exhibits | 16 |
Item 6(b) | Reports on Form 8-K | 16 |
Signatures | | 16 |
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
ASSETS |
| | (Unaudited) September 30, 2001 | December 31, 2000 |
Current assets: | | |
Cash and cash equivalents | $ 2,234 | $15,332 |
Accounts receivable, net | 10,173 | 13,365 |
Inventories, net | 11,839 | 14,503 |
Investments | 63 | 603 |
Prepaid expenses and other current assets | 919 | 1,481 |
Total current assets | 25,228 | 45,284 |
| | | |
Property and equipment | 6,339 | 9,274 |
Excess of purchase price over net tangible assets acquired, net | 856 | 5,042 |
Pension and other assets | 4,757 | 4,997 |
Software development costs, net | 517 | 1,231 |
TOTAL ASSETS | $37,697 | $65,828 |
| | | |
LIABILITIES AND SHAREHOLDERS' EQUITY |
| | | |
Current liabilities: | | |
Accounts payable and accrued expenses | $13,462 | $11,870 |
Current portion of long-term debt | 2,916 | 2,141 |
Capital lease obligations | 181 | 254 |
Total current liabilities | 16,559 | 14,265 |
| | | |
Long-term debt | 5,726 | 6,571 |
Convertible debentures | 8,452 | 8,037 |
Capital lease obligations | 180 | 323 |
Pension and other liabilities | 3,799 | 3,671 |
Total liabilities | 34,716 | 32,867 |
| | | |
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 - | | |
39,563,691 at September 30, 2001 and 38,870,467 at December 31, 2000 | 395 | 389 |
Additional paid-in capital | 71,258 | 70,022 |
Accumulated deficit | (67,790) | (36,902) |
Accumulated other comprehensive income | (882) | (548) |
Total shareholders' equity | 2,981 | 32,961 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $37,697 | $65,828 |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands except per share amounts)
(Unaudited)
| | 2001 | 2000 |
| | | |
Net sales | $11,341 | $14,027 |
Cost of products sold | 9,961 | 7,025 |
Gross profit | 1,380 | 7,002 |
| | | |
Operating expenses: | | |
Selling, general and administrative | 6,496 | 7,739 |
Research and development | 1,216 | 1,790 |
Goodwill impairment charge | 3,595 | |
| | | |
Total operating expenses | 11,307 | 9,529 |
| | | |
Operating loss | (9,927) | (2,527) |
| | | |
(Loss) gain on sale of investments | (194) | 477 |
| | | |
Interest expense (income) and other, net | 64 | (320) |
| | | |
Net loss | $(10,057) | $(2,370) |
| | | |
Net loss per common share - basic and diluted | $ (0.25) | $ (0.07) |
| | | |
Weighted average shares used in computing net loss per common share - basic and diluted | 39,564 | 35,431 |
| | | |
Comprehensive loss: | | |
Net loss | $(10,057) | $(2,370) |
Other comprehensive loss: | | |
Foreign currency translation adjustment | (62) | (305) |
Unrealized loss on securities available for sale | (59) | (1,676) |
| | | |
Total comprehensive loss | $(10,178) | $(4,351) |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands except per share amounts)
(Unaudited)
| | 2001 | 2000 |
| | | |
Net sales | $35,251 | $44,851 |
Cost of products sold | 24,235 | 23,887 |
Gross profit | 11,016 | 20,964 |
| | | |
Operating expenses: | | |
Selling, general and administrative | 23,949 | 21,132 |
Research and development | 4,656 | 5,293 |
Restructuring and goodwill impairment charges | 11,898 | |
| | | |
Total operating expenses | 40,503 | 26,425 |
| | | |
Operating loss | (29,487) | (5,461) |
| | | |
(Loss) gain on sale of investments | (292) | 477 |
| | | |
Interest and other expense, net | (1,109) | (1,541) |
| | | |
Loss before provision for income taxes | (30,888) | (6,525) |
| | | |
Net loss | $(30,888) | $(6,525) |
| | | |
Net loss per common share - basic and diluted | $ (.78) | $ (.19) |
| | | |
Weighted average shares used in computing net loss per common share - basic and diluted | 39,415 | 34,208 |
| | | |
Comprehensive loss: | | |
Net loss | $(30,888) | $(6,525) |
Other comprehensive loss: | | |
Foreign currency translation adjustment | (189) | (744) |
Unrealized loss on securities available for sale | (261) | (821) |
| | | |
Total comprehensive loss | $(31,338) | $(8,090) |
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands)
(Unaudited)
| | 2001 | 2000 |
CASH FLOWS FROM OPERATING ACTIVITIES | | |
Net loss | $(30,888) | $(6,525) |
Adjustments to reconcile net loss to net cash used in operating activities: | | |
Restructuring and other nonrecurring charges | 7,298 | |
Impairment of the excess of purchase price over net assets acquired | 3,595 | |
Depreciation and amortization | 4,100 | 3,361 |
Non-cash settlement of interest liability | 410 | 542 |
Loss (gain) loss on sale of investments | 292 | (477) |
Other | 47 | |
Changes in operating assets and liabilities: | | |
Accounts receivable, net | 3,370 | (2,005) |
Inventories | 2,632 | (819) |
Prepaid expenses and other assets | 584 | (187) |
Accounts payable and accrued expenses | 615 | 3 |
Other liabilities | 134 | 359 |
Net cash used in operating activities | (7,811) | (5,748) |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | |
(Acquisitions) of property and equipment, net | (511) | (1,000) |
Sale of investments | 106 | 620 |
Business acquisition | (4,662) | |
Net cash used in investing activities | (5,067) | (380) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | |
Payments of term loan | (675) | (250) |
Borrowings (payments) on revolving credit agreements, net | 658 | (2,753) |
Payments of capital lease obligations | (207) | (363) |
Net proceeds from sale of common stock | | 18,187 |
Exercise of stock options and warrants | | 697 |
Net cash (used in) provided by financing activities | (224) | 15,518 |
| | | |
Effect of foreign currency rate fluctuations on cash and cash equivalents | 4 | (1) |
| | | |
Change in cash and cash equivalents | (13,098) | 9,389 |
| | | |
Cash and cash equivalents at beginning of period | 15,332 | 5,453 |
Cash and cash equivalents at end of period | $ 2,234 | $14,842 |
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.BASIS OF PRESENTATION
General
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, 2001 and the consolidated results of its operations and its cash flows for the periods ended September 30, 2001 and 2000. 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, 2001. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Also, during interim periods, certain costs and expenses are allocated among periods based on an estimate of time expired, benefit received, or other activity associated with the periods. Accordingly, actual results co uld differ from those estimates. 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, 2000. The December 31, 2000 figures included herein were derived from such audited consolidated financial statements. Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 method of presentation.
Nature of Business
The Company experienced a significant weakness in its graphics business during the first nine months of 2001, due in large part to a slowdown in the U.S. economy. Also, revenues in the new media business were significantly lower than anticipated as potential customers delayed or eliminated their streaming initiatives in order to curtail discretionary spending. In addition to the losses sustained in the first, second and third quarters of 2001, the Company has sustained losses from operations in each of the three years ended December 31, 2000. At times, the Company has failed its financial covenant under its credit agreement for which it obtained waivers and/or amendments. As a result, the Company has taken aggressive steps to reduce its cost structure through facility consolidation, personnel reductions and spending restrictions to bring its operations in line with current and projected revenue levels. In addition, it has eliminated any additional investment in the area of streaming services. The Company believes that this restructuring and downsizing will not compromise the Company's ability to achieve growth in the markets it serves. While the Company has the ability and intention to continue to reduce the cost structure and delay expenditures in an effort to preserve cash, there can be no assurance that the Company will be able to adjust its variable costs in sufficient time to respond to revenue shortfalls or obtain waivers and/or amendments should defaults occur. The Company will be implementing additional headcount reductions in the fourth quarter of 2001 to reduce its cost structure in line with anticipated revenue levels.
Recent Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and other intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The Company does not believe the impact of adopting these statements will be material to the financial statements.
In August 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations," which addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. FAS 143 will be effective January 1, 2003 for the Company. In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the accounting and reporting for the impairment and disposal of long-lived assets. FAS 144 will be effective January 1, 2002 for the Company. The financial statement impact of adopting these statements has not yet been determined.
2.BUSINESS ACQUISITION
In January 2001, the Company acquired Interocity Development Corporation, a privately-held company based in New York City. The purchase price consisted of $5 million in cash, $1.3 million in Chyron common stock and direct acquisition costs of approximately $0.2 million. Approximately 632,000 shares were issued at a price of $1.58, which was based on the 10-day average of the NYSE closing price of the stock for the 10 trading days prior to the closing. The acquisition was accounted for as a purchase in accordance with APB16 and accordingly, the excess of the purchase price over the net assets acquired of $6.2 million was allocated to goodwill. See note 3 for subsequent events related to the Company's investment in Interocity.
3.RESTRUCTURING AND OTHER NONRECURRING CHARGES
During 2001 the Company has experienced a slowdown in revenues in its graphics business. In addition, revenues in the new media business were significantly lower than anticipated and the Company has virtually eliminated any additional investment in this business for the foreseeable future. Consequently, during the second quarter of 2001, management approved restructuring plans to realign its organization, reduce operating costs, and curtail any spending associated with the pursuit of streaming services. This restructuring involves the reduction of employee staff by approximately 40 positions and the closure of its New York and London offices and two satellite offices. The Company is actively seeking third parties to sub-lease abandoned facilities. As a result of these circumstances and events, the Company considered a variety of factors and determined that the carrying amount of the excess of purchase price over net tangible assets acquired and other long-lived assets were in excess of their fair value. Impairment charges were recorded for the write down of the excess of purchase price over net tangible assets acquired associated with the streaming services business, leasehold improvements, software, computers and other equipment. As a result, the Company recorded restructuring and other nonrecurring charges totaling $8.3 million.
These primarily non-cash restructuring and nonrecurring charges include the write downs of certain fixed assets of $1.5 million, goodwill impairment of $5.5 million, severance costs of $0.7 million, loss on lease commitments of $0.5 million and other costs of $0.10 million. From July 1, 2001 through September 30, 2001, the following cash outlays have been made (in thousands):
| | Severance | Lease Commitments | Other |
| | | | |
Accruals at June 30, 2001 | $347 | $442 | $27 |
Cash outlays during third quarter 2001 | (347) | (126) | (27) |
Remaining at September 30, 2001 | - | 316 | - |
4.ACCOUNTS RECEIVABLE
Accounts receivable is stated net of an allowance for doubtful accounts of $2.0 million and $2.3 million at September 30, 2001 and December 31, 2000, respectively.
5.INVENTORIES
Inventories, net of obsolescence reserves, consist of the following (in thousands):
| | September 30,
2001 | December 31,
2000 |
Finished goods | $ 5,437 | $ 5,330 |
Work-in-process | 1,329 | 1,133 |
Raw material | 5,073 | 8,040 |
| | $11,839 | $14,503 |
During the quarter ended September 30, 2001, the Company recorded an inventory write down in the amount of $3.2 million, which is included in the cost of products sold in the accompanying consolidated statement of earnings. Approximately $2.2 million of this charge relates to the Graphics division, primarily the iNFiNiT! product line, due to declining sales, as well as certain other excess inventory items. The remaining $1.0 million of this charge relates to certain Signal Distribution and Automation product lines which have been discontinued as well as obsolete demonstration equipment out at customer locations.
6.GOODWILL IMPAIRMENT
Due to the continued decline in the financial results of Pro-Bel Limited and the slow down in the global economy, the Company evaluated its investment in Pro-Bel for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("FAS 121"). In accordance with FAS 121, the Company assessed the recoverability of its investment in Pro-Bel by comparing the undiscounted future cash flows with the carrying value of its investment. As a result of this analysis, the Company determined that the expected future cash flows would be insufficient to recover the carrying value of its investment and determined the asset was impaired. Accordingly, the Company recognized a goodwill impairment charge of $3.6 million during the quarter ended September 30, 2001. The Company calculated the goodwill impairment by comparing the carrying value of its investment with the present value of its e stimated future cash flows. As a result of this analysis, the Company determined that the cash flows from this subsidiary would be insufficient to recover the carrying value and, accordingly, the value of this asset was impaired to the extent the carrying value would not be recovered. The Company has determined that the entire net asset of $3.6 million is non-recoverable based on current and forecasted operating results of the division.
7.LONG -TERM DEBT
On May 14, 2001, the Company amended its credit facility with its lender that reduced the total facility to $5.7 million from $12 million, changed the interest rate to Prime + 1% from Libor + 2.125% or a rate based on Prime, at the Company's option, extended the expiration date to March 31, 2003, and established revised covenants to reflect the Company's 2001 projections. As of September 30, 2001, the Company was in violation of its EBIDTA financial covenant with its lender, for which its agreement was amended.
During the third quarter 2001, holders of the Company's Series B Convertible Debentures elected to extend the option of receiving interest in the form of additional debentures in lieu of cash, which was to terminate contractually on July 15, 2001, to April 15, 2002. For the three and nine months ended September 30, 2001, approximately $0.14 million and $0.41 million, respectively, was paid in the form of additional debentures by the Company.
8.LISTING STATUS
In July 1999, the New York Stock Exchange (NYSE) revised the minimum requirements for continued listing by eliminating the net tangible asset requirement of $12 million and replacing it with a stockholders' equity of $50 million and raising global market capitalization to $50 million from $12 million. The Company was allotted 18 months to comply with the revised listing requirements. In April 2001, the Company received notification that its stock should be removed from the NYSE list as it was not in compliance with the revised continued listing requirements. The Company requested a review with a committee of the board of directors of the NYSE to appeal the decision, which was scheduled for June 6, 2001. In May 2001, the Company voluntarily withdrew its appeal of the NYSE's decision due to the considerable amount of resources it would cost to appeal the decision. The Company believes it is in the best interest of its shareholders to focus its efforts on executing its business plan an d improving the operating performance of the Company.
The Company began trading its common stock on the OTC Bulletin Board on May 25, 2001, under the symbol CYRO. The OTC Bulletin Board (OTCBB) is a regulated quotation service that displays real-time quotes, last sales prices and volume information in over-the-counter (OTC) equity securities.
9.SEGMENT INFORMATION
Chyron's businesses are organized, managed and internally reported as three segments. The segments, which are based on differences in products and technologies, are Graphics Products, Signal Distribution and Automation and Digital Media Services. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" included in the Company's Financial Statements contained in its Annual Report on Form 10-K for the year ended December 31, 2000. The Company is an integrated organization characterized by interdivisional cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these segments, if operated independently, would report the financial information shown below. In future quarters, due to the restructuring and downsizing previously discussed, the Digital Media Services will no longer be reported as a separate segment.
Business Segment Information | | Signal | Digital |
(In thousands) | | Distribution | Media |
| Graphics | & Automation | Services |
Three months ended September 30, 2001 | | | |
Net sales | $4,740 | $6,601 | |
Operating loss | 4,418 | 5,509 | |
Depreciation and amortization | 451 | 415 | |
| | | |
Three months ended September 30, 2000 | | | |
Net sales | $6,793 | $7,209 | $ 25 |
Operating profit (loss) | 417 | (1,199) | (1,745) |
Depreciation and amortization | 438 | 652 | 32 |
Geographic Areas | United States | Europe | Other |
| | | |
Three months ended September 30, 2001 | | | |
Net sales | 5,624 | 5,222 | 495 |
Operating loss | 4,585 | 4,879 | 463 |
| | | |
Three months ended September 30, 2000 | | | |
Net sales | $8,333 | $ 5,037 | $ 657 |
Operating loss | (45) | (2,159) | (323) |
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, consum er acceptance of DTV and HDTV, resistance within the broadcast or cable industry to implement DTV and HDTV technology, weakness in the market for digital media services, rapid technological changes, use and improvement of the Internet, 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, ability to maintain adequate levels of working capital, viability of the OTC Bulletin Board as a trading platform, 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 and Nine Months Ended September 30, 2001 and 2000
Sales for the quarter ended September 30, 2001 were $11.3 million, a decrease of $2.7 million, or 19% over the $14.0 million reported for the third quarter of 2000. Sales for the nine months ended September 30, 2001 were $35.2 million, a decrease of $9.6 million or 21% over the $44.8 million reported for the first nine months of 2000. The decreases in both the three and nine month levels result from declines in the level of sales of graphics and signal distribution and automation products. The declines are a result of the transition to the next generation high definition graphics products, the absence of one large router order that was present in 2000 and a general downturn in the economy.
Sales of the Company's next generation high definition graphics products of Duet, Aprisa and Digital Codi, increased in the aggregate by approximately $1.6 million in the third quarter of 2001 as compared to 2000. At the same time, overall sales of iNFiNiT! family products declined by approximately $1 million. Sales in Q3 2001 from the Company's signal distribution and automation business declined primarily because one large routing order which was present in 2000, coupled with an overall decline in demand as a result of a general downturn in the global economy.
Gross margins for the third quarter of 2001 decreased to 12.0% from 50.0% in the comparable quarter in 2000. Third quarter 2001 gross margins included a $3.2 million write down of inventory and demonstration equipment. The inventory write down had the effect of reducing the quarterly gross margin by 28%. The inventory write down in the amount of $3.2 million, is included in the cost of products sold in the accompanying consolidated statement of earnings. Approximately $2.2 million of this charge relates to the Graphics division, primarily the iNFiNiT! product line, due to declining sales, as well as certain other excess inventory items. The remaining $1.0 million of this charge relates to certain Signal Distribution and Automation product lines which have been discontinued as well as obsolete demonstration equipment out at customer locations. Gross margins for the nine month periods in 2001 and 2000, were 31% and 47%, respectively. The nine months ending 2001 included the write down of inv entory and demonstration equipment of $3.2 million which impacted gross margins in the nine month period by 9%. Gross margins for the three and nine months ended September 30, 2001 decreased from 50% to 40% and 40% to 50% respectively, exclusive of the inventory write down, due to a greater percentage of fixed overhead costs in comparison to the level of business for the graphics business and product mix in the signal and distribution business.
Selling, general and administrative (SG&A) expenses decreased by $1.2 million, to $6.5 million in the quarter ended September 30, 2001, compared to $7.7 million in the third quarter of 2000. SG&A expenses increased by $2.8 million, or 13%, to $24.0 million in the first nine months of 2001, compared to $21.1 million for the first nine months of 2000. The decrease in the three month 2001 amounts is a result of the restructuring plan implemented in the second quarter of 2001 which resulted in reduced operating costs and curtailed spending associated with Digital Media Services. The increase in the nine month 2001 amounts is substantially the result of the activities associated with the pursuit of the Digital Media Services and Interactive TV markets during 2001, which had only begun operating in late 2000. Due to the continued decline in the financial results of Pro-Bel Limited and the slow down in the global economy, the Company evaluated its investment in Pro-Bel for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("FAS 121"). In accordance with FAS 121, the Company assessed the recoverability of its investment in Pro-Bel by comparing the undiscounted future cash flows with the carrying value of its investment. As a result of this analysis, the Company determined that the expected future cash flows would be insufficient to recover the carrying value of its investment and determined the asset was impaired. Accordingly, the Company recognized a goodwill impairment charge of $3.6 million during the quarter ended September 30, 2001. The Company calculated the goodwill impairment by comparing the carrying value of its investment with the present value of its estimated future cash flows.
Research and development (R&D) costs in the third quarter of 2001 decreased from the comparable 2000 levels by approximately $0.6 million. R&D costs decreased during the first nine months of 2001 compared to the same period in 2000 by $0.6 million. Efforts in this area continue, but are relatively flat as the current focus is directed at expanding our existing product family and making enhancements to our existing generation of products.
During 2001 the Company has experienced a slowdown in revenues in its graphics business. In addition, revenues in the new media business were significantly lower than anticipated and the Company has virtually eliminated any additional investment in this business for the foreseeable future. Consequently, during the second quarter of 2001, management approved restructuring plans to realign its organization, reduce operating costs, and curtail any spending associated with the pursuit of streaming services. This restructuring involves the reduction of employee staff by approximately 40 positions and the closure of its New York and London offices and two satellite offices. The Company is actively seeking third parties to sub-lease abandoned facilities. As a result of these circumstances and events, the Company considered a variety of factors and determined that the carrying amount of the excess of purchase price over net tangible assets acquired and other long-lived assets were in excess of their fair value. Impairment charges were recorded for the write down of the excess of purchase price over net tangible assets acquired associated with the streaming services business, leasehold improvements, software, computers and other equipment. As a result, the Company recorded restructuring and other nonrecurring charges totaling $8.3 million.
Interest and other expense, net, increased by $0.10 million in the three months ended September 30, 2001, exclusive of a $0.48 million foreign exchange gain in the third quarter of 2001, as compared to 2000. Interest and other expense, net, increased in the comparable nine month period by $0.43 million. Both the three and nine month periods in 2001 were impacted by the reduced level of interest income attributable to lower cash balances offset by a lower expense attributable to lower average borrowings. Interest expense in the nine month period in 2000 included a non-cash charge of $0.5 million related to the Company's decision to satisfy an interest obligation on its subordinated debentures by issuing additional debentures.
Liquidity and Capital Resources
At September 30, 2001, the Company had cash on hand of $2.2 million and working capital of $8.7 million.
As set forth in the Consolidated Statements of Cash Flows, the Company used $7.8 million in cash from operations during the nine months ended September 30, 2001 as compared to using $5.7 million in cash for the comparable 2000 period. The utilization of cash from operations results primarily from the realization of the net loss offset by the cash generated from lower inventory and receivable balances.
The Company also paid $4.7 million in cash for the acquisition of Interocity Development Corporation and $0.8 million to acquire property and equipment, primarily related to the infrastructure associated with its new media initiatives.
In response to lower than anticipated sales levels and an apparent slowdown in the U.S. economy, the Company has taken steps to reduce its costs structure. Also during the second quarter, the Company realigned its organization and significantly downsized its new media initiatives to conserve cash. Personnel reductions have occurred during 2001 and subsequent to June 30, 2001 and employee headcount is approximately 260 as compared to 326 at the beginning of the year. Additional downsizing and curtailed spending initiatives will continue as necessary. The Company continues to believe that it will have sufficient cash resources through December 31, 2001. However, there can be no assurance that the Company will be able to adjust its structure in sufficient time to respond to revenue shortfalls. The Company will be implementing additional headcount reductions in the fourth quarter of 2001 to reduce its cost structure in line with anticipated revenue levels.
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The Company is exposed to currency risk in the normal course of business related to investments in its foreign subsidiaries and the level of sales to foreign customers. For the three months ended September 30, 2001 and 2000, sales to foreign customers were 50% and 41% of total sales, respectively. Substantially, all sales generated outside of the U.S. are denominated in British pounds sterling. The net impact of foreign exchange transactions for the three months ended September 30, 2001 and 2000 was a gain of $0.48 million and a loss of $0.13 million, respectively.
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
None.
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, 2001.
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 14, 2001 | | /s/ Roger Henderson |
(Date) | | Roger Henderson |
| | | President and Chief Executive Officer |
| | | |
November 14, 2001 | | /s/ G.R. Sam Seraphim |
(Date) | | G.R. Sam Seraphim |
| | | Interim Chief Financial Officer |
