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 March 31, 1998 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 Number) incorporation or organization) 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 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 - 32,605,706 as of May 8, 1998 This document consists of 12 pages CHYRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (In thousands except per share amounts) (Unaudited) 1998 1997 Net sales....................$21,525 $18,201 Cost of products sold.. ..... 10,803 10,051 Gross profit................. 10,722 8,150 Operating Expenses: Selling, general and administrative ............ 7,718 7,902 Research and development .. 2,510 1,512 Total operating expenses..... 10,228 9,414 Operating income (loss)...... 494 (1,264) Interest and other expense, net........................ 359 330 Income (loss) before provision for income taxes........... 135 (1,594) Income taxes/equivalent provision (benefit)........ 101 (498) Net income (loss)............$ 34 $(1,096) Net income (loss) per common share............... Basic......................$ 0 $ ($.03) Diluted......................$ 0 $ ($.03) Weighted average shares used in computing net income (loss) per common share: Basic...................... 32,606 32,387 Diluted...................... 32,606 32,740 See Notes to the Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) (Unaudited) ASSETS March 31, December 31, 1998 1997 Current assets: Cash and cash equivalents... $ 2,622 $ 2,968 Accounts and notes receivable. 19,258 21,125 Inventories................... 24,477 26,540 Prepaid expenses.............. 2,422 1,897 Deferred tax asset............ 4,458 4,301 Other......................... 342 283 Total current assets........ 53,579 57,114 Property and equipment.......... 13,239 12,373 Excess of purchase price over net tangible assets acquired... 6,628 6,779 Investment in RT-SET............ 2,161 2,161 Software development costs...... 5,692 5,224 Deferred tax asset.............. 7,070 7,070 Other........................... 3,364 3,359 TOTAL ASSETS $91,733 $94,080 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses................... $13,005 $15,491 Current portion of long-term debt ...................... 2,489 2,318 Capital lease obligations.... 513 350 Total current liabilities.. 16,007 18,159 Long-term debt................. 17,400 17,774 Capital lease obligations...... 36 317 Accrued pension expense......... 2,144 2,007 Other........................... 1,892 1,861 Total liabilities............. 37,479 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 - 32,605,706 shares at March 31, 1998 and December 31, 1997......... 326 326 Additional paid-in capital..... 44,016 44,016 Retained earnings.............. 9,271 9,237 Cumulative translation adjustment.................... 641 383 Total shareholders' equity... 54,254 53,962 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............$91,733 $94,080 See Notes to the Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31,1997 AND 1996 (In Thousands) (Unaudited) Three Months Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 Net income/(loss)................. $ 34 $(1,096) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..... 920 811 (Provision)/benefit of deferred income taxes.................... (157) (662) Changes in operating assets and liabilities: Accounts and trade notes receivable...................... 2,183 2,493 Inventories..................... 1,669 (345) Prepaid expenses ............... (496) (681) Other assets.................... (62) 252 Accounts payable and accrued expenses ..................... (2,765) 294 Other liabilities............... 168 Net cash provided by operating activities..................... 1,494 1,066 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Axis Holdings Incorporated..................... (368) Acquisitions of property and equipment........................ (551) (326) Capitalized software development .. (763) (331) Net cash used in investing activities....................... (1,314) (1,025) CASH FLOWS FROM FINANCING ACTIVITIES Payment of term loan............... (500) (500) Borrowings from (payment of) revolving credit agreement, net... 115 (335) Payments of capital lease obligations...................... (136) (60) Net cash used in financing activities....................... (521) (895) Effect of foreign currency rate fluctuations on cash and cash equivalents....................... (5) (4) Change in cash and cash equivalents..................... (346) (858) Cash and cash equivalents at beginning of year................ 2,968 4,555 Cash and cash equivalents at end of period.................... $2,622 $3,697 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. See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in conformity 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. These statements should be read in conjunction with 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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 2. REVENUE RECOGNITION In the first quarter of 1998, the Company adopted Statement of Position SOP 97-2, "Software Revenue Recognition." The adoption of 97-2 did not have a material affect on the results of operations in the first quarter of 1998. 3. RESTATEMENT AND RECLASSIFICATION In 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings per Share", which was effective for the year ended December 31, 1997. Accordingly, all prior period amounts have been restated to reflect this new statement. In addition, certain prior year amounts have been reclassified to conform to current year presentation. 4. ACCOUNTS AND NOTES RECEIVABLE Trade accounts and notes receivable are stated net of an allowance for doubtful accounts of $3,154,000 and $3,124,000 at March 31, 1998 and December 31, 1997, respectively. 5. INVENTORIES Inventories consist of the following (in thousands): March 31, December 31, 1998 1997 Finished goods $13,101 $12,346 Work-in-process 7,891 9,303 Raw material 3,485 4,891 $24,477 $26,540 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS 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 anticipate 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, rapid technological changes, highly competitive environment, new product introductions, seasonality, fluctuations in quarterly operating results, expansion into new markets and the Company's ability to implement successfully its acquisition and 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 March 31, 1998 and 1997 Sales for the quarter ended March 31, 1998 were $21.5 million, an increase of $3.3 million, or 18.3%, over the $18.2 million reported for the first quarter of 1997. This increase was a result of increases in sales of the Company's Pro-Bel product line which showed an over 500% growth domestically and 9% growth internationally for the comparable periods. Chyron sales showed a modest increase over the prior year. Gross profit increased to $10.7 million for the quarter ended March 31, 1998. The increase of $2.6 million, or 31.6%, over the $8.2 million reported for the first quarter of 1997 was attributable in part to the increase in sales for the first quarter of 1998. Gross margins as a percentage of sales increased to 49.8% in 1998 versus 44.9% in 1997 mainly as a result of the change in the product mix. Chyron sales, although showing only slight increases for the comparative periods, included more volume of the high end iNFiNit graphic system and software products for the first quarter of 1998. Additionally, Pro-Bel sales included an increased level of software product for 1998 as compared to the prior year. Both of these items led to increased gross profit for the first quarter of 1998. Selling, general and administrative (SG&A) expenses decreased by $183,000 or 2.3%, to $7.7 million compared to $7.9 million for the first quarter of 1997. Slight increases were incurred at both Chyron and Pro-Bel which are a direct result of the increases in sales volume. Additional increases were incurred due to sales and marketing efforts for the Company's new "Concerto" product line. These increases were offset by the inclusion in the prior year amount of $675,000 of non-recurring costs attributable to the termination of the planned secondary offering of the Company's common stock. Exclusive of this non-recurring charge, SG&A as a percentage of sales remained relatively consistent for the comparable periods. Research and development (R&D) costs increased during the first quarter 1998 compared to the same period in 1997 by $1.4 million. Increases were incurred at both Chyron and Pro-Bel as the Company has focused its attention on new product development to address a recent FCC ruling requiring broadcasters to utilize digital advanced television transmission beginning in 1998. Additional increases were incurred related to the continued development of the "Concerto" product line. These increases were offset by net capitalized software costs which increased $383,000 for the three months ended March 31, 1998 versus the same period in 1997. The Company showed income before income taxes of $135,000 compared to a loss of $1.6 million for the same period in the prior year. This income was a direct result of increased sales and gross profit for the first quarter of 1998 versus the comparable period in 1997, offset by increases in R&D expenses described above. The Company provided for income taxes in the amount of $101,000 for the first quarter of 1998 compared to a tax benefit of $498,000 for 1997. The income taxes are primarily attributable to the income of $135,000 before taxes for 1998 versus loss of $1.6 million before taxes for 1997. Liquidity and Capital Resources At March 31, 1998, the Company had cash on hand of $2.6 million and working capital of $37.6 million. In connection with the acquisition of Axis, the Company issued promissory notes to the shareholders of Axis for $667,000. The amount of installment payments was contingent upon the Axis division realizing certain revenue targets. $250,000 of such notes was paid from Chyron's operating cash flow on March 31, 1998, with the remaining $417,000 being due on March 31, 1999. The Company's promissory notes to the former shareholders of Pro-Bel for 3.5 million pounds sterling ($5.9 million, converted at March 31, 1998 exchange rate) were paid on April 15, 1998. The funds to pay the notes were drawn from the Company's facility with Fleet Bank described below. On March 28, 1996 and April 16, 1996, the Company entered into agreements with Fleet Bank (formerly NatWest Bank) to obtain a revolving credit facility of $10.0 million and a term loan of $8.0 million, respectively. The entire facility is secured by certain of the Company's assets. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Interest on the revolving credit facility is equal to adjusted LIBOR plus 175 basis points or prime (8.50% at March 31, 1998) and is payable monthly. The term loan is payable in quarterly installments of $500,000, commencing June 1, 1996. Interest on the term loan is equal to adjusted LIBOR plus 200 basis points or prime and is payable monthly. At December 31,1997, the Company did not comply with certain financial covenants and, accordingly, had obtained waivers for periods up to and including March 30, 1998 and amendments with respect to such covenants from its lender for periods up to and including April 16, 2000, the maturity date of the term loan. Currently management is negotiating an increase in the revolving credit facility with the Bank. The revolving credit facility is scheduled to expire on March 28, 1999. Management intends to renew such facility prior to the expiration date. Pro-Bel has a commercial mortgage term loan with Barclay's Bank Plc. ("Barclays"). The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR plus 2% (9.63% at March 31, 1998). The loan (including interest) is payable in quarterly installments of 80,600 pounds sterling ($137,000 converted at the March 31, 1998 exchange rate). On January 13, 1998, Pro-Bel entered into an agreement with Barclays whereby Barclays agreed to provide an overdraft facility of up to 4.0 million pounds sterling ($6,780,000 converted at the March 31, 1998 exchange rate) through December 31, 1998 to Pro-Bel, and its subsidiaries. The overdraft facility provides for interest at 1.5% per annum over the bank's base rate (8.75% at March 31, 1998). Interest is payable quarterly in arrears. This facility replaces the overdraft facility of up to 3.0 million pounds sterling in place at December 31, 1997. All monies under the facility are repayable upon written demand. Management intends to renew this facility on or about December 31, 1998. Total borrowings are limited to amounts computed under multiple formulas of eligible accounts receivable and inventory. On December 20, 1996, Pro-Bel entered into an agreement with a bank to obtain an overdraft facility of up to 3.0 million pounds sterling through December 31, 1997, subsequently extended to January 12, 1998 ($4,943,000 converted at the December 31, 1997 exchange rate). Total borrowings were limited to amounts computed under a formula for eligible accounts receivable. Interest was equal to the bank's base rate plus 1.5% (8.75% at December 31, 1997) and was payable in arrears. The facility was payable upon written demand by the bank and any undrawn portion was cancellable by the bank at any time. This facility was replaced by the facility with Barclays, described above, dated January 13, 1998. At March 31, 1998, the Company had operating and capital lease commitments totaling $12.9 million and $.7 million, respectively, of which $1.2 million and $.4 million, respectively, is payable within one year. Such lease commitments were for equipment, factory and office space and are expected to be paid out of operating cash flows of the Company. The Year 2000 The Company has taken actions to make its system products and infrastructure year 2000 compliant. The current budget includes an allocation of $400,000 for a new integrated information system at Pro-Bel. Management believes based on available information that aside from the amounts described above, additional year 2000 issues are immaterial and that the Company will be able to handle the year 2000 transition, without any material adverse effects on its business operations, products or financial prospects. PART II. OTHER INFORMATION ITEMS 1., 2., 3., 4. Not applicable. ITEM 5. Other Information 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 6. Not applicable. 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 11, 1998 /s/ Edward Grebow (Date) Edward Grebow President and Chief Executive Officer May 11, 1998 /s/ Patricia Lampe (Date) Patricia Lampe Chief Financial Officer and Treasurer