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Proc-Type: 2001,MIC-CLEAR
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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2002 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) 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 - 39,563,691 as of May 10, 2002 This document consists of 15 pages CHYRON CORPORATION INDEX PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Operations (unaudited) for the Three Months ended March 31, 2002 and 2001 4 Consolidated Statements of Cash Flows (unaudited) for the Three Months ended March 31, 2002 and 2001 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 13 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6(a) Exhibits 14 Item 6(b) Reports on Form 8-K 14 Signatures 15 CHYRON CORPORATION Unaudited March 31, December 31, Assets 2002 2001 Current assets: Cash and cash equivalents $1,838 $4,342 Accounts receivable, net 6,688 8,029 Inventories, net 9,444 9,081 Investments 79 39 Prepaid expenses and other current assets 877 434 Total current assets 18,926 21,925 Property and equipment, net 5,312 5,803 Intangible assets, net 544 654 Software development costs, net 282 381 Pension and other assets 5,108 5,136 TOTAL ASSETS $30,172 $33,899 Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $8,359 $10,168 Current portion of long-term debt 4,587 7,286 Capital lease obligations 113 105 Total current liabilities 13,059 17,559 Long-term debt 2,254 1,139 Convertible debentures 10,965 10,798 Capital lease obligations 203 217 Pension and other liabilities 3,974 3,873 Total liabilities 30,455 33,586 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 March 31, 2002 and December 31, 2001 396 396 Additional paid-in capital 71,444 71,324 Accumulated deficit (71,389) (70,569) Accumulated other comprehensive loss (734) (838) Total shareholders' equity (283) 313 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 30,172 $ 33,899 See Notes to Consolidated Financial Statements CHYRON CORPORATION (Unaudited) 2002 2001 Net sales $10,068 $10,685 Cost of products sold 4,530 5,977 Gross profit 5,538 4,708 Operating expenses: Selling, general and administrative 4,615 9,280 Research and development 1,054 1,963 Total operating expenses 5,669 11,243 Operating loss (131) (6,535) Interest and other expense, net 689 771 Net loss $ (820) $(7,306) Net loss per common share - basic and diluted $(0.02) $ (0.19) Weighted average shares used in computing net loss per common share - basic and diluted 39,564 39,152 Comprehensive loss: Net loss $ (820) $(7,306) Other comprehensive income (loss): Foreign currency translation gain (loss) 64 (126) Unrealized gain (loss) on securities available for sale 40 (301) Total comprehensive loss $ (716) $(7,733) See Notes to Consolidated Financial Statements CHYRON CORPORATION 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(820) $(7,306) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 650 1,600 Non-cash settlement of interest liability 339 133 Amortization of debt issue costs 105 32 Loss on equity investments 21 55 Changes in operating assets and liabilities, net of effect of acquired business in 2001: Accounts receivable 1,261 2,876 Inventories (422) (514) Prepaid expenses and other assets (516) (5) Accounts payable and accrued expenses (1,281) (1,563) Other liabilities 105 66 Net cash used in operating activities (558) (4,626) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment (12) (795) Business acquisition (4,662) Net cash used in investing activities (12) (5,457) CASH FLOWS FROM FINANCING ACTIVITIES Payments of term loan (225) (Payments) borrowings on revolving credit agreements, net (1,904) 1,358 Payments of capital lease obligations (28) (103) Net cash (used in) provided by financing activities (1,932) 1,030 Effect of foreign currency rate fluctuations on cash and cash equivalents (2) 3 Change in cash and cash equivalents (2,504) (9,050) Cash and cash equivalents at beginning of period 4,342 15,332 Cash and cash equivalents at end of period $ 1,838 $ 6,282 See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION General In the opinion of management of Chyron Corporation ("Chyron" or 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 March 31, 2002 and the consolidated results of its operations and its cash flows for the periods ended March 31, 2002 and 2001. 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, 2002. 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 res
ults could 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, 2001. The December 31, 2001 figures included herein were derived from such audited consolidated financial statements. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 method of presentation. Nature of Business The Company provides signal distribution and graphics products to the broadcast industry for use in digital television. Currently, its customers are facing capital budget constraints due to a slowdown in the worldwide economy, and there are few signs of growth in its traditional markets. In addition, the Company has sustained losses from operations in each of the three years ended December 31, 2001, and had from time to time failed its financial covenant under its credit agreement for which it obtained waivers and/or amendments. While the Company met its financial covenants under its revolving line of credit agreement for the first quarter of 2002, there is no assurance that it will meet such covenants in future quarters. During 2002, the Company is operating with caution, adopting a modest outlook for growth, and sizing the business accordingly. The Company operates in a rapidly changing environment and it must remain responsive to changes as they occur. The Company has the abilit
y and intention to reduce its variable costs or delay capital expenditures and discretionary spending if necessary during 2002 in order to conserve cash. However, there can be no assurance that the Company will be able to adjust its variable costs and reduce capital expenditures and discretionary spending in sufficient time to respond to revenue shortfalls, or obtain waivers and/or amendments should defaults occur under its revolving line of credit or otherwise. 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 and approximately 633,000 shares of Chyron common stock ($1.3 million) accounted for based on the stock price two days before and two days after the announcement and direct acquisition costs of approximately $0.2 million. 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. Due to a general slowdown in the economy, the Company experienced lower than expected revenues in the streaming media markets. Consequently, during the second quarter of fiscal year 2001, management approved a restructuring plan to realign its organization and curtail any spending associated with pursuit of streaming services. In addition, the Company assessed the recoverability of its investment i
n Interocity and determined that the entire net asset associated with this acquisition was permanently impaired and recognized a charge of $5.5 million during the second quarter of 2001. 3. RESTRUCTURING During 2001 the Company recorded goodwill impairment, restructuring and other nonrecurring charges totaling $12.5 million. At December 31, 2001, future cash outlays associated with these charges totaled $0.4 million. During the first quarter of 2002, $0.2 million of costs related to severance and lease payments were paid, and $0.2 million is expected to be paid in the second and third quarters of 2002. 4. OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). Pursuant to the provisions of SFAS 142, the Company is amortizing the value of its supplier arrangement with a related party over the three-year life of the contract. As of March 31, 2002 and December 31, 2001, the gross asset balance was $1.1 million, and the accumulated amortization was $0.6 million and $0.5 million, respectively. Amortization expense for the quarter ended March 31, 2002 was $0.09 million. Estimated annual amortization for other intangibles is as follows: Year Ended December 31 Amount (In thousands) 2002 $ 354 2003 300 5. INVENTORIES Inventories, net of obsolescence reserves, consist of the following (in thousands): March 31, 2002 December 31, 2001 Finished goods $3,919 $3,644 Work-in-process 926 737 Raw material 4,599 4,700 $9,444 $9,081 6. 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 Signal Distribution and Automation. The Streaming Services Division was closed in the second quarter of 2001. 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, 2001. 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) Signal Three months ended March 31, 2002 Net sales $4,817 $5,251 Operating profit (loss) 8 (139) Depreciation and amortization 359 291 Three months ended March 31, 2001 Net sales $ 4,238 $ 6,265 $ 182 Operating loss (2,599) (1,207) (2,729) Depreciation and amortization 502 546 552 Geographic Areas United States Europe Other Three months ended March 31, 2002 Net sales $5,591 $4,108 $369 Three months ended March 31, 2001 Net sales $5,503 $4,257 $925 7. RECENT ACCOUNTING PRONOUNCEMENTS In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The statement primarily rescinds and amends certain reporting requirements relating to gains and losses from extinguishment of debt, accounting for intangible assets of motor carriers, and accounting for leases in sale-leaseback transactions. The provision of the statement relating to gains and losses on extinguishment of debt is effective for fiscal years beginning after May 15, 2002 while the remaining provisions of the statement are effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's financial statements. 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, 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. Additional factors affecting future results include:
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(In thousands except per share amounts)
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(In thousands)
(Unaudited)
(UNAUDITED)
Graphics
Distribution
and
Automation
Streaming
Services
Results of Operations
This discussion should be read in conjunction with the Consolidated Financial Statements including the Notes thereto.
Comparison of the Three Months Ended March 31, 2002 and 2001
Revenues for the quarter ended March 31, 2002 were $10.1 million, a decrease of $0.6 million or 6% as compared to the $10.7 million reported for the first quarter of 2001, which included $0.2 million from the new media products division that was discontinued in the second quarter of 2001. First quarter 2002 revenues from the graphics division were $4.8 million as compared to $4.2 million for first quarter 2001, an increase of 14%. Despite the slower economy, greater customer acceptance in both the U.S. and Europe of the Company's new Windows NT-based Duet and Aprisa Clip/Stillstore products, which replace the legacy iNFiNiT! products, accounted for the increase. Duet and Aprisa Clip/Stillstore accounted for over 90% of graphics division product sales in the first quarter of 2002 as compared to approximately 60% in first quarter 2001. First quarter 2002 revenues from the signal distribution and automation division were $5.3 million as compared to $6.3 million for the first quart er 2001, a decrease of 16%. The decrease can be attributed to continued lower customer spending for technology in the European market, and the division's continuing transition from one generation of modular products to the next, which contributed to customer uncertainty and slower sales.
Gross margins for the first quarter of 2002 increased to 55% from 44% for the comparable quarter of 2001. The higher margins were primarily due to lower fixed overhead costs attributable to the Company's cost reduction efforts, decreased outsourcing and a change in product mix to higher margin products in the graphics division, and increased margin contribution from the signal distribution and automation division which had a significant sale of automation product in the quarter, which carried a higher gross margin.
Selling, general and administrative (SG&A) expenses decreased 50% from $9.3 million in first quarter of 2001 to $4.6 million for the first quarter of 2002, primarily due to the effect of the Company's cost cutting and restructuring efforts implemented in 2001. Additionally, the first quarter of 2001 included $3.1 million in SG&A expenses related to the Company's new media streaming services division that was discontinued in the second quarter of 2001.
Research and development (R&D) costs in first quarter of 2002 of $1.1 million were 45% lower than R&D costs of $2.0 million in first quarter of 2001. Throughout 2001, as the Company launched its new products and refocused on its core competencies, it became apparent that its expenditures on R&D could be reduced to a level commensurate with its projected product needs. R&D efforts were refocused on current and near term products rather than on products in early stage of development for which no definable future product benefits were apparent. As a result, first quarter of 2002 development was focused on enhancing and improving existing product lines.
Interest and other expense, net of $0.7 million decreased $0.1 million or 12% as compared to the 2001 first quarter amount of $0.8 million. First quarter of 2002 included a foreign exchange loss of $0.1 million as compared to a loss of $0.5 million for the first quarter of 2001. Interest expense, net for first quarter of 2002 of $0.6 million was $0.3 million or 50% higher than the $0.3 million recorded in the first quarter of 2001. Additional interest expense as a result of the issuance of senior notes, and additional amortization of debt issue and warrants costs and higher interest rates resulting from the Company's restructuring of its convertible debentures in December 2001, accounted for the majority of the increase. In addition, interest income was reduced by approximately $0.1 million due to lower cash balances available for investment purposes.
Liquidity and Capital Resources
At March 31, 2002, the Company had cash on hand of $1.8 million and working capital of $5.9 million.
As is shown in the Consolidated Statement of Cash Flows, the Company used $0.6 million of cash in operations during the first quarter of 2002 as compared to $4.6 million during the first quarter of 2001. The net loss of $0.8 million, when adjusted for non-cash items totaling $1.1 million, resulted in positive cash flow of $0.3 million. This positive cash flow was offset by a net use of $0.9 million in operating activities, primarily the reduction of accounts payable and accrued expenses.
The Company also used $1.9 million of cash to pay down its revolving line of credit and overdraft facility balances.
In response to lower than anticipated sales and a slowdown in the worldwide economy, the Company took steps during the second and fourth quarters of 2001 to reduce its cost structure to a level that is more in line with its planned sales levels for 2002. Should planned sales levels not be achieved, the Company may implement an additional downsizing and further curtail capital expenditures and discretionary spending. The Company believes that it will have sufficient cash and availability of cash through borrowings under its credit arrangements if it achieves its planned results of operations. However, there can be no assurance that the Company will meet its planned results of operations or will have sufficient time to recognize the benefit of reduced expenditures if revenue shortfalls were to occur.
Recent Accounting Pronouncements
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The statement primarily rescinds and amends certain reporting requirements relating to gains and losses from extinguishment of debt, accounting for intangible assets of motor carriers, and accounting for leases in sale-leaseback transactions. The provision of the statement relating to gains and losses on extinguishment of debt is effective for fiscal years beginning after May 15, 2002 while the remaining provisions of the statement are effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's financial statements.
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 March 31, 2002 and 2001, sales to foreign customers were 44% and 48% 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 March 31, 2002 and 2001 were losses of $0.1 million and $0.5 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
On February 28, 2002, the Company's Board of Directors agreed to modify the Company's 12% Senior Subordinated Notes due December 31, 2003 and 12% Series A and Series B Debentures due December 31, 2004 such that the Company will only pay interest thereon by increasing the amount of principal owed thereunder.
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
None.
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.
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CHYRON CORPORATION |
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(Registrant) |
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May 15, 2002 |
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/s/ Roger Henderson |
(Date) |
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Roger Henderson |
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President and Chief Executive Officer |
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May 15, 2002 |
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/s/ Jerry Kieliszak |
(Date) |
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Jerry Kieliszak |
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Chief Financial Officer and Senior Vice President |