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 June 30, 1999
Commission File Number 1-9014
Chyron Corporation
(Exact name of registrant as specified in its charter)
New York 11-2117385
(State or other jurisdiction (IRS Employer
of Incorporation or Identification No.)
organization)
5 Hub Drive, Melville, New 11747
York
(Address of principal (Zip Code)
executive offices)
(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 - 32,086,489 as of
August 6, 1999
This document consists of 19 pages
CHYRON CORPORATION
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations
(unaudited) for the Three Months ended
June 30, 1999 and 1998 4
Consolidated Statements of Operations
(unaudited) for the Six Months ended June
30, 1999 and 1998 5
Consolidated Statements of Cash Flows
(unaudited) for the Six Months ended June
30, 1999 and 1998 6
Notes to Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 18
Item 6(a) Exhibits 18
Item 6(b) Reports on Form 8-K 18
Signatures 19
CHYRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
ASSETS
(Unaudited) December
June 30, 31,
1999 1998
Current assets:
Cash and cash equivalents $ 988 $ 1,585
Accounts receivable, net 12,351 18,396
Inventories, net 14,759 19,378
Deferred tax assets 4,726
Prepaid expenses and other current
assets 2,401 1,982
Total current assets 30,499 46,067
Property and equipment 11,743 12,545
Excess of purchase price over net tangible
assets acquired 4,854 5,104
Investments 1,286 2,286
Software development costs 1,795 4,458
Deferred tax assets 8,343
Other assets 4,528 4,313
TOTAL ASSETS $54,705 $83,116
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $13,004 $14,136
Current portion of long-term debt 449 1,512
Capital lease obligations 473 383
Total current liabilities 13,926 16,031
Long-term debt 14,378 13,486
Capital lease obligations 330 515
Other liabilities 3,695 3,314
Total liabilities 32,329 33,346
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 -
32,086,483 at June 30, 1999 and
32,058,020 at December 31, 1998 321 321
Additional paid-in capital 44,073 44,021
Accumulated deficit/retained earnings (22,238) 4,790
Accumulated other comprehensive income 220 638
Total shareholders' equity 22,376 49,770
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $54,705 $83,116
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
1999 1998
Net sales $16,199 $21,096
Cost of products sold 11,035 11,416
Gross profit 5,164 9,680
Operating expenses:
Selling, general and administrative 7,363 8,966
Research and development 1,995 2,506
Restructuring and other nonrecurring
charges 6,681 3,979
Total operating expenses 16,039 15,451
Operating loss (10,875) (5,771)
Interest and other expense, net 227 478
Loss before provision (benefit) for income
taxes (11,102) (6,249)
Provision (benefit) for income taxes 14,076 (1,417)
Net loss $(25,178) $(4,832)
Net loss per common share - basic and
diluted $(.78) $ (.15)
Weighted average shares used in computing
net loss per common share - basic and
diluted 32,086 32,072
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except per share amounts)
(Unaudited)
1999 1998
Net sales $31,197 $42,621
Cost of products sold 19,286 22,219
Gross profit 11,911 20,402
Operating expenses:
Selling, general and administrative 14,640 16,685
Research and development 3,839 5,016
Restructuring and other nonrecurring
charges 6,681 3,979
Total operating expenses 25,160 25,680
Operating loss (13,249) (5,278)
Interest and other expense, net 529 836
Loss before provision (benefit) for income
taxes (13,778) (6,114)
Provision (benefit) for income taxes 13,250 (1,316)
Net loss $(27,028) $(4,798)
Net loss per common share - basic and
diluted $ (.84) $ (.15)
Weighted average shares used in computing
net loss per common share - basic and
diluted 32,080 32,072
See Notes to Consolidated Financial Statements
CHYRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands)
(Unaudited)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(27,028) $(4,798)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Restructuring and other nonrecurring
charges 6,681 3,979
Depreciation and amortization 2,671 2,600
Deferred income tax (benefit) 13,334 (1,590)
Changes in operating assets and liabilities:
Accounts receivable 5,752 997
Inventories 2,854 3,772
Prepaid expenses and other assets (708) (1,396)
Accounts payable and accrued expenses (2,118) (3,163)
Other liabilities 170 2,787
Net cash provided by operating activities 1,608 3,188
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment (250) (1,381)
Capitalized software development (1,850) (1,573)
Net cash used in investing activities (2,100) (2,954)
CASH FLOWS FROM FINANCING ACTIVITIES
Paydown of expiring credit facility (8,493)
Net proceeds from new credit facility 8,688
Payments of term loan (500) (1,000)
Borrowings from (payments to) revolving
credit agreements, net 243 (60)
Proceeds from issuance of convertible debt 159
Payments of capital lease obligations (201) (232)
Net cash used in financing activities (104) (1,292)
Effect of foreign currency rate fluctuations
on cash and cash equivalents (1) 2
Change in cash and cash equivalents (597) (1,056)
Cash and cash equivalents at beginning of
period 1,585 2,968
Cash and cash equivalents at end of period $ 988 $1,912
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 June 30, 1999 and the
consolidated results of its operations and its cash flows for the
periods ended June 30, 1999 and 1998. 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,
1999. 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, 1998. The December 31, 1998 figures included herein
were derived from such audited consolidated financial statements.
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 method of presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable is stated net of an allowance for
doubtful accounts of $3,865,000 and $3,881,000 at June 30, 1999
and December 31, 1998, respectively.
3. INVENTORIES
Inventories, net of obsolescence reserves, consist of the
following (in thousands):
June 30, December 31,
1999 1998
Finished goods $ 6,918 $ 7,266
Work-in-process 1,802 3,048
Raw material 6,039 9,064
$14,759 $19,378
4. LONG-TERM DEBT
On March 29, 1999, the Company entered into a new $12
million credit facility which expires March 31, 2002. Under this
facility, the Company borrowed $2 million in the form of a term
loan and can obtain revolving credit loans based on its eligible
accounts receivable and inventory for the balance of the
facility. Total borrowings at closing were $8.7 million. These
borrowings were used primarily to pay down the outstanding
balance under the expiring credit facility of $8.5 million,
including $500,000 outstanding on a term loan.
The term loan requires no principal payments through
September 30, 1999, $25,000 per month for the period October 1,
1999 through September 30, 2000, $75,000 per month for the period
October 1, 2000 through September 30, 2001 and $133,333 per month
from October 1, 2001 through March 31, 2002. Interest is payable
monthly at LIBOR plus 1.875% (6.9% at June 30, 1999), or at a
rate based on Prime. The Company must pay a monthly commitment
fee equal to one half of 1% per annum on the daily unused portion
of the facility.
The entire facility is secured by Chyron's accounts
receivable and inventory and the common stock of Pro-Bel. The
agreement contains requirements for levels of operating income
and prohibits the Company from paying dividends in excess of 25%
of net income in any fiscal year.
As of June 30, 1999, the Company was not in compliance with
certain financial covenants for which it obtained waivers from
its lender.
5. RESTRUCTURING AND OTHER NONRECURRING CHARGES
The delay in the rollout of HDTV by broadcasters and their
reluctance to purchase analog equipment has significantly
impacted the Company's ability to achieve desired levels of
operating results. To weather this difficult time and to better
position itself for the future, the Company has critically
evaluated its product lines and its position in the industry. The
results of this evaluation are a more focused strategy on
products that serve a broader spectrum of delivery options and
the elimination of certain non-producing products which will
allow the Company to be in a better position to remain
competitive through the difficult times facing the industry.
During the second quarter of 1999, the Company recorded
nonrecurring charges totaling $6.7 million, of which $5.0 million
was directly related to the change in strategy. These primarily
non-cash restructuring and nonrecurring charges include the write-
down of certain capitalized software of $3.6 million, inventory
write-downs due to changes in product strategy of $1.0 million,
severance costs of $0.4 million resulting from staff reductions,
the write-down of $1 million of an equity investment and other
charges related to an adjustment to deferred maintenance revenue
totaling $0.7 million. The only component of the charge that
will require a cash outlay is severance of approximately $0.4
million. Following this restructuring, future operating costs are
expected to be reduced by approximately $0.8 million per quarter.
6. INCOME TAXES
In the second quarter of 1999, the Company established a
full valuation allowance of $14 million against its net deferred
tax asset. The Company's net deferred tax asset includes
substantial amounts of net operating loss carryforwards.
Inability to generate taxable income within the carryforward
period would affect the ultimate realization of such asset.
Consequently, management determined that sufficient uncertainty
exists regarding the realization of this asset to warrant the
establishment of the allowance.
7. SUBSEQUENT EVENT
During July 1999, the Company raised $4.0 million through
the issuance of 8% subordinated convertible debentures due
December 31, 2003, to certain of its existing shareholders, some
of whom are directors of the Company. The debentures are
convertible, at any time, at the option of the holders thereof,
into common stock of the Company at a conversion price of $1 5/8
per share (the closing price immediately preceding the issue
date). The debentures may be redeemed by the Company, commencing
one year from issue date, for a price equal to the principal and
accrued but unpaid interest at the redemption date. Interest is
payable quarterly. Interest may be paid in the form of additional
debentures until July 15, 2001. These funds will be used to build
the restructured operations and to fund research and development,
particularly for certain Internet initiatives. The notes have not
been registered under the Securities Act of 1933 and may not be
offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. In
addition, in order for the debentures purchased by funds managed
by Weiss Peck & Greer LLC to be converted into shares of common
stock, under the rules of the New York Stock Exchange,
shareholder approval is required. In the event that shareholder
approval is not given, the debentures owned by such funds will
not be convertible. The Company intends to seek such shareholder
approval in the immediate future.
8. SEGMENT INFORMATION
Chyron's businesses are organized, managed and internally
reported as two segments. The segments, which are based on
differences in products and technologies, are Graphics Products
and Media Management Systems. 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, 1998. 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.
Business Segment
Information
(In thousands)
Media
Graphics(1) Management
Three months ended June 30,
1999
Net sales $ 6,875 $ 9,324
Operating loss (10,563) (312)
Depreciation
and amortization 587 757
Three months ended June 30,
1998
Net sales 9,560 11,536
Operating loss (4,976) (795)
Depreciation
and amortization 516 1,164
June 30, 1999
Identifiable assets 19,891 34,814
Geographic Areas
United Europe Other
States(1)
Three months ended June 30,
1999
Net sales $ 9,671 $ 5,703 $ 825
Operating loss (9,498) (1,178) (199)
Three months ended June 30,
1998
Net sales 9,865 10,187 1,044
Operating loss (4,661) (286) (824)
June 30, 1999
Identifiable assets 22,568 32,072 65
(1) Includes restructuring and other nonrecurring charges of
$6,681 and $3,979 for the three months ended June 30, 1999 and
1998, 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, but are not limited to, 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, ability to maintain
adequate levels of working capital, 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 June 30, 1999 and 1998
The delay in the rollout of HDTV by broadcasters and their
reluctance to purchase analog equipment has significantly
impacted the Company's ability to achieve desired levels of
operating results. To weather this difficult time and to better
position itself for the future, the Company has critically
evaluated its product lines and its position in the industry. The
results of this evaluation are a more focused strategy on
products that serve a broader spectrum of delivery options and
the elimination of certain non-producing products which will
allow the Company to be in a better position to remain
competitive through the difficult times facing the industry.
During the second quarter of 1999, the Company recorded
nonrecurring charges totaling $6.7 million, of which $5.0 million
was directly related to the change in strategy. These primarily
non-cash restructuring and nonrecurring charges include the write-
down of certain capitalized software, inventory write-downs due
to changes in product strategy, severance costs resulting from
staff reductions and the write-down of an equity investment. The
only component of the charge that will require a cash outlay is
severance of approximately $0.4 million. Following this
restructuring, future operating costs are expected to be reduced
by approximately $0.8 million per quarter.
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 nonrecurring charges of $3,979,000 during
the second quarter of 1998.
Sales for the quarter ended June 30, 1999 were $16.2
million. This represents a decrease of $4.9 million, or 23%,
compared to the $21.1 million reported for the second quarter of
1998. This decrease results from lower sales volumes of graphics
products of $2.6 million, the loss of $1.5 million in revenues
associated with the Trilogy division, which was sold in August
1998, and lower volumes of Pro-Bel products of $0.8 million. From
a geographic perspective, while there was an overall decline in
domestic sales of graphics products and foreign sales of Pro-Bel
products, U.S. sales of Pro-Bel products increased by $2.4
million.
Gross profit decreased to $5.2 million for the second
quarter of 1999 as compared to $9.7 million for the same 1998
period. The respective gross margin percentages were 31.9% and
45.9%. This decline is attributable to the lower level of sales
volume and $2.2 million of inventory write-downs. Gross margins
in the graphics business have suffered due to a lower level of
absorption of overhead costs resulting from lower sales volumes.
Underlying margins for Pro-Bel products during the period have
improved due to stronger sales of new products with greater
margins.
Selling, general and administrative (SG&A) expenses declined
to $7.4 million for the quarter ended June 30, 1999 compared to
$9.0 million in the comparable period in 1998. Research and
development (R&D) expenses, net of amounts capitalized, also
decreased in the second quarter of 1999 to $2.0 million, or 12.3%
of net sales, versus $2.5 million, or 11.9% of net sales, for the
comparable 1998 quarter. These reductions were primarily due to
the elimination of operating costs associated with the Trilogy
and Concerto divisions, as well as other expense reductions.
Interest and other expense, net, decreased by $0.25 million
in the second quarter of 1999 as compared to the second quarter
of 1998. This decrease is primarily due to foreign exchange
gains as a result of favorable rates between the U.S. dollar and
British pounds sterling. Interest expense also declined primarily
as a result of lower average borrowings.
In the second quarter of 1999 the Company also established a
full valuation allowance of $14 million against its net deferred
tax asset. The Company's net deferred tax asset includes
substantial amounts of net operating loss carryforwards.
Inability to generate taxable income within the carryforward
period would affect the ultimate realization of such asset.
Consequently, management determined that sufficient uncertainty
exists regarding the realization of this asset to warrant the
establishment of the allowance.
Comparison of the Six Months Ended June 30, 1999 and 1998
Sales for the six months ended June 30, 1999 were $31.2
million, a decrease of $11.4 million, or 26.7%, over the $42.6
million reported for the first half of 1998. This decline results
from lower sales volumes of graphics products of $6.1 million,
Pro-Bel products of $2.5 million and the loss of $2.8 million in
revenues associated with the Trilogy division, which was sold in
August 1998. The delay in the industry transition to DTV and
HDTV continues to evolve slowly as broadcasters cautiously
upgrade and replace equipment. In addition, the first quarter has
historically been weak since broadcasters typically postpone
capital expenditures awaiting new product introductions at the
annual National Association of Broadcasters Convention (NAB) held
in April.
Gross profit declined to $11.9 million for the six months
ended June 30, 1999. The decrease of $8.5 million, over the $20.4
million reported for the first half of 1998 is primarily
attributable to the loss in sales volume and $2.2 million of
inventory write-downs. Gross margins in the graphics business
have suffered due to a lower level of absorption of overhead
costs resulting from lower sales volumes.
SG&A expenses decreased by $2 million, or 12%, to $14.6
million in 1999 compared to $16.7 million for the first half of
1998. R&D costs, net of amounts capitalized, decreased during the
first half of 1999 compared to the same period in 1998 by $1.2
million. As outlined in the three month comparison these
reductions were primarily due to the elimination of operating
costs associated with the Trilogy and Concerto divisions.
For the six months ended June 30, 1999, the Company recorded
restructuring and other nonrecurring charges totaling
approximately $6.7 million. In the prior year's comparable
period, the Company had nonrecurring charges totaling
approximately $4 million. See the discussion of the components of
these charges in the three month comparison above.
Interest and other expense, net, decreased by $0.3 million
in the first half of 1999 as compared to the first half of 1998.
This decrease is primarily a result of increased foreign exchange
gains due to favorable rates between the U.S. dollar and British
pounds sterling and lower interest expense from lower average
borrowings, offset by the write-off of debt issuance costs
related to the credit agreement that was replaced in March, 1999.
The Company recorded a tax provision of $13.3 million for
the six months ended June 30, 1999 as compared to a tax benefit
of $1.3 million in the comparable six month period in 1998.
Through the first quarter of 1999 the Company was recording a tax
benefit resulting from the generation of U.S. and U.K. tax
losses. In the second quarter of 1999, the Company established a
full valuation allowance of $14 million against its net deferred
tax asset. The Company's net deferred tax asset includes
substantial amounts of net operating loss carryforwards.
Inability to generate taxable income within the carryforward
period would affect the ultimate realization of such asset.
Consequently, management determined that sufficient uncertainty
exists regarding the realization of this asset to warrant the
establishment of the allowance.
Liquidity and Capital Resources
At June 30, 1999, the Company had cash on hand of $1.0
million and working capital of $16.6 million.
As set forth in the Consolidated Statements of Cash Flows,
the Company generated $1.6 million in cash from operations during
the six months ended June 30, 1999 as compared to $3.2 million
for the comparable period in 1998. The reduction in cash flows
from operations is principally due to the realization of the net
loss and reductions in the level of customer deposits, offset by
lower accounts receivable balances. Reduced levels of spending
related to software development were a result of the elimination
of efforts associated with the Trilogy and Concerto divisions.
During July 1999, the Company raised $4.0 million through
the issuance of 8% subordinated convertible debentures due
December 31, 2003, to certain of its existing shareholders, some
of whom are directors of the Company. The debentures are
convertible, at any time, at the option of the holders thereof,
into common stock of the Company at a conversion price of $1 5/8
per share (the closing price immediately preceding the issue
date). The debentures may be redeemed by the Company, commencing
one year from issue date, for a price equal to the principal and
accrued but unpaid interest at the redemption date. Interest is
payable quarterly. Interest may be paid in the form of additional
debentures until July 15, 2001. These funds will be used to build
the restructured operations and to fund research and development,
particularly for certain Internet initiatives. The notes have not
been registered under the Securities Act of 1933 and may not be
offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. In
addition, in order for the debentures purchased by funds managed
by Weiss Peck & Greer LLC to be converted into shares of common
stock, under the rules of the New York Stock Exchange,
shareholder approval is required. In the event that shareholder
approval is not given, the debentures owned by such funds will
not be convertible. The Company intends to seek such shareholder
approval in the immediate future.
On March 29, 1999, the Company entered into a new $12
million credit facility which expires March 31, 2002. Under this
facility, the Company borrowed $2 million in the form of a term
loan and can obtain revolving credit loans based on its eligible
accounts receivable and inventory for the balance of the
facility. Total borrowings at closing were $8.7 million. These
borrowings were used primarily to pay down the outstanding
balance under the expiring credit facility of $8.5 million,
including $500,000 outstanding on a term loan.
The term loan requires no principal payments through
September 30, 1999, $25,000 per month for the period October 1,
1999 through September 30, 2000, $75,000 per month for the period
October 1, 2000 through September 30, 2001 and $133,333 per month
from October 1, 2001 through March 31, 2002. Interest is payable
monthly at LIBOR plus 1.875% (6.9% at June 30, 1999), or at a
rate based on Prime. The Company must pay a monthly commitment
fee equal to one half of 1% per annum on the daily unused portion
of the facility.
The entire facility is secured by Chyron's accounts
receivable and inventory and the common stock of Pro-Bel. The
agreement contains requirements for levels of operating income
and prohibits the Company from paying dividends in excess of 25%
of net income in any fiscal year.
As of June 30, 1999, the Company was not in compliance with
certain financial covenants for which it obtained waivers from
its lender.
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 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 address internal
systems, infrastructure, facilities, suppliers and vendors as
well as products and services. In this regard, the Company has
completed the assessment of its critical internal information
technology (IT) and non-IT systems and has determined that it
needs to replace a portion of its business system in the UK. The
Company believes that this replacement of existing software will
enable the Company to operate effectively after December 31,
1999. The Company has also completed its product review and is
engaged in remediation efforts, where appropriate, including
upgrading and retiring of systems and components, which is
expected to continue through the fourth quarter of 1999. All
products being shipped currently have been extensively tested and
found to be compliant. The Company has surveyed vendors and
suppliers and is reviewing their remediation efforts to ensure
uninterrupted operations. Contingency plans will be prepared, as
needed, during the second half of the year. The Company is
primarily utilizing internal resources in its efforts and the
associated costs are being expensed as incurred. Total costs are
expected to be less than $500,000.
The Company is taking what it considers to be reasonable
steps to prevent major interruptions in its business due to Year
2000 issues. The inability of the Company or significant third
parties to adequately address Year 2000 issues could cause
inefficiencies in the Company's business operations. At this
time, the Company has not encountered any Year 2000 issues which
it believes could have a material adverse effect on its business
or current products.
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 June 30, 1999 and 1998, sales to foreign customers were 40%
and 53% 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 June 30, 1999 and 1998 were a gain of
$92,000 and a loss of $132,000, respectively. Foreign currency
hedging activity is not material to the Company's consolidated
financial position, results of operations, or its cash flow.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
During the second quarter, a former employee of Chyron
Corporation ("Chyron"), brought suit against Chyron in the U.S.
District Court for the Southern District of New York. The
complaint alleges breach of contract relative to the Acquisition
Agreement, or ancillary agreements, of Axis Holdings, Inc., by
Chyron on March 24, 1997. Chyron believes that the claims are
without merit and is vigorously defending the case.
The Company is also from time to time 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
At the Annual Meeting of Shareholders held on May 12, 1999,
the following proposals were adopted by the margin indicated:
The election of Charles M. Diker, Joseph A. Flaherty, Edward
Grebow, Donald P. Greenberg, Roger Henderson, Alan J.
Hirschfield, Wesley W. Lang, Jr., Eugene M. Weber, and Michael
Wellesley-Wesley, to the Board of Directors. No Director received
less than 99% of the votes cast.
The adoption of the Chyron 1999 Incentive Compensation Plan.
Share voting:
For: 19,645,736
Against: 1,050,130
Abstain: 627,786
ITEM 5. Other Information
In July 1999, the Company sold approximately $4.0 million
aggregate principal amount of 8% subordinated convertible
debentures, due December 21, 2003, to certain existing
shareholders of the Company, some of whom are directors of the
Company. The debentures are convertible, at any time, at the
option of the holders thereof, into common stock of the Company
at a conversion price of $1 5/8 (the closing price of the common
stock on the trading day immediately preceding the issue date);
provided, however, that in order for the debentures purchased by
funds managed by Weiss, Peck & Greer LLC to be converted into
common stock, under the rules of the New York Stock Exchange,
shareholder approval is required. In the event that such
shareholder approval is not obtained, the debentures held by such
funds will not be convertible. The debentures may be redeemed by
the Company, commencing one year from the issue date, for a price
equal to the principal and accrued but unpaid interest at the
redemption date. Interest is payable quarterly and may be paid in
the form of additional debentures until July 15, 2001. The
proceeds from the sale will be used to build the restructured
operations of the Company and for research and development,
particularly for certain Internet initiatives. The debentures
have not been registered under the Securities Act of 1933, as
amended, and may not be sold in the United States absent
registration or an applicable exemption from the registration
requirements.
The sales of the debentures were made in reliance upon the
exemption from the registration provisions of the Securities Act
of 1933, as amended, afforded by Section 4(2) thereof and/or
Regulation D promulgated thereunder, as a transaction by an
issuer not involving a public offering. To the best of the
Company's knowledge, the purchasers of the debentures acquired
them for their own accounts, and not with a view to any
distribution thereof.
ITEM 6(a). Exhibits
(27) Financial Data Schedule
ITEM 6(b). Reports on Form 8-K
On June 11, 1999, the Company filed a report on Form 8-K
pertaining to senior management changes. Specifically, the
Company named Roger Henderson its President and Chief Executive
Officer and Michael I. Wellesley-Wesley its Executive Chairman.
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)
August 12,1999 /s/ Roger Henderson
(Date) Roger Henderson
President and
Chief Executive Officer
August 12, 1999 /s/ Dawn Johnston
(Date) Dawn Johnston
Senior Vice President and
Chief Financial Officer