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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF For the Quarterly Period Ended June 30, 2006 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) (I.R.S. 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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x] The number of shares outstanding of the issuer's common stock, par value $.01 per share, on August 1, 2006 was 41,433,371. CHYRON CORPORATION INDEX PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005 3 Consolidated Statements of Operations and Comprehensive Income/ Loss (unaudited) for the Three Months ended June 30, 2006 and 2005 4 Consolidated Statements of Operations and Comprehensive Income/ Loss (unaudited) for the Six Months ended June 30, 2006 and 2005 5 Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 2006 and 2005 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 1A. Risk Factors 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits 19 2 CHYRON CORPORATION Unaudited June 30, December 31, ASSETS 2006 2005 Current assets: Cash and cash equivalents $ 2,066 $ 2,331 Accounts receivable, net 6,111 4,613 Inventories, net 2,410 2,492 Prepaid expenses and other current assets 395 283 Total current assets 10,982 9,719 Property and equipment, net 898 653 Other assets 25 6 TOTAL ASSETS $11,905 $10,378 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 3,515 $ 3,318 Short term debt 673 1,326 Deferred revenue 1,296 1,038 Pension liability 468 558 Capital lease obligations 27 15 Total current liabilities 5,979 6,255 Long term debt 3,176 2,793 Pension liability 1,562 1,490 Other liabilities 507 433 Total liabilities 11,224 10,971 Commitments and contingencies Shareholders' equity (deficit): 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 - 41,431,038 at June 30, 2006 and 41,378,610 at December 31, 2005 414 414 Additional paid-in capital 72,093 71,989 Accumulated deficit (71,827) (72,995) Accumulated other comprehensive income (loss) 1 (1) Total shareholders' equity (deficit) 681 (593) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $11,905 $10,378 See Notes to Consolidated Financial Statements 3 CHYRON CORPORATION 2006 2005 Net sales $8,581 $5,782 Cost of products sold 2,797 1,996 Gross profit 5,784 3,786 Operating expenses: Selling, general and administrative 3,162 3,216 Research and development 943 683 Total operating expenses 4,105 3,899 Operating income (loss) 1,679 (113) Interest expense (58) (53) Interest income 29 22 Other income (expense), net 29 (25) Net income (loss) $1,679 $(169) Net income (loss) per share: Basic $0.04 $(0.00) Diluted $0.04 $(0.00) Weighted average shares outstanding: Basic 41,401 41,343 Diluted 44,136 41,343 Comprehensive income (loss): Net income (loss) $ 1,679 $ (169) Other comprehensive income: Foreign currency translation gain 2 Total comprehensive income (loss) $ 1,681 $ (169) See Notes to Consolidated Financial Statements 4 CHYRON CORPORATION SIX MONTHS ENDED JUNE 30, 2006 AND 2005 2006 2005 Net sales $13,424 $11,757 Cost of products sold 4,473 4,472 Gross profit 8,951 7,285 Operating expenses: Selling, general and administrative 5,929 6,217 Research and development 1,846 1,409 Total operating expenses 7,775 7,626 Operating income (loss) 1,176 (341) Interest expense (114) (119) Interest income 56 56 Other income (expense), net 50 (41) Net income (loss) $1,168 $ (445) Net income (loss) per common share: Basic $ 0.03 $(0.01) Diluted $ 0.03 $(0.01) Weighted average shares outstanding: Basic 41,390 41,336 Diluted 43,153 41,336 Comprehensive income (loss): Net income (loss) $1,168 $ (445) Other comprehensive income: Foreign currency translation gain 2 Total comprehensive income (loss) $1,170 $ (445) See Notes to Consolidated Financial Statements 5 CHYRON CORPORATION 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $1,168 $(445) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 183 171 Loss on disposal of equipment 64 99 Inventory provisions 186 Share-based compensation expense 82 Other (51) 27 Changes in operating assets and liabilities: Accounts receivable (1,498) (519) Inventories (104) (784) Prepaid expenses and other assets (142) (65) Accounts payable and accrued expenses 197 522 Other liabilities 292 (147) Net cash provided by (used in) operating activities 377 (1,141) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment (431) (158) Collection of proceeds from sale of subsidiary 428 Net cash (used in) provided by investing activities (431) 270 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on convertible debentures (1,345) (1,260) Borrowings from term loan 1,345 Principal payments on term loan (224) Proceeds from exercise of stock options 22 5 Payments on capital lease obligations (9) (6) Net cash used in financing activities (211) (1,261) Change in cash and cash equivalents (265) (2,132) Cash and cash equivalents at beginning of period 2,331 2,855 Cash and cash equivalents at end of period $2,066 $ 723 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 67 $ 6 See Notes to Consolidated Financial Statements 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION General In the opinion of management of Chyron Corporation (the "Company" or "Chyron"), 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, 2006 and the consolidated results of its operations and its cash flows for the periods ended June 30, 2006 and 2005. 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, 2006. 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 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, 2005. The December 31, 2005 figures included herein were derived from such audited consolidated financial statements. Nature of Business Chyron and its wholly-owned subsidiaries is a supplier of character generators ("CG") and graphics hardware and software related products to the television industry. The Company develops, manufactures, markets and supports hardware and software products that enhance the presentation of live and pre-recorded video, audio and other data. Chyron's products are used in broadcast production facilities worldwide for applications including news, sports, weather and election coverage. The Company's graphics products create, manipulate, store, playback and manage content including 2D/3D text, logos, graphics, animations and video stills/clips. In January 2005, Chyron introduced the ChyTV product line providing low-cost, easy to use graphics for microcasting and digital displays applications. 7 Net Income (Loss) Per Share Basic net income (loss) per share is computed based on the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. For all periods in 2005, basic net loss per share equaled diluted net loss per share because the effect of common stock equivalents was anti-dilutive, and therefore excluded from the calculation of diluted net loss per share. Shares used to calculate net income (loss) per share are as follows (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2006 2005 2006 2005 Basic weighted average shares outstanding 41,401 41,343 41,390 41,336 Effect of dilutive stock options 1,597 1,169 Effect of dilutive convertible debentures 1,138 594 Diluted weighted average shares outstanding 44,136 41,343 43,153 41,336 Weighted average shares which are not included in the calculation of diluted net income (loss) per share because their impact is anti-dilutive Stock options 4,052 4,999 4,285 4,964 Convertible debentures 2,960 4,734 3,505 5,100 Warrants 25 148 7,012 9,758 7,790 10,212 2. SHARE BASED COMPENSATION Incentive awards are provided to employees under the terms of our 1999 Incentive Compensation Plan (the "Plan"). The Plan allows for the award of incentive and non-incentive options to employees and non-incentive options to non-employee members of our Board of Directors (the "Board"). The Plan is administered by a committee, designated by the Board, to determine the time and circumstances under which an employee option may be exercised. Generally, employee options vest one-third each year, are fully vested three years from grant date and have a term of ten years. Options awarded to our Board on an annual basis are fully vested at grant date and have a term of ten years. Effective January 1, 2006, the Company adopted the
provisions of FAS No. 123(R), "Share-Based Payment" ("FAS123(R)"). Under
FAS123(R), share-based compensation cost is measured at the grant date, based on
the estimated fair value of the award, and is recognized as an expense over the
requisite service period. The Company adopted the provisions of FAS123(R) using
a modified prospective application. Under this method, compensation cost is
recognized for all share-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. Prior periods are not revised for comparative purposes.
Because the Company previously adopted only the pro forma disclosure provisions
of SFAS 123, it will recognize compensation cost relating to the unvested 8 portion of awards granted prior to the date of adoption,
using the same estimate of the grant-date fair value and the same attribution
method used to determine the pro forma disclosures under SFAS 123, except that
forfeitures rates will be estimated for all options, as required by FAS123(R).
The cumulative effect of applying the forfeiture rates is not material. The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company's stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. The fair values of the options granted during the three and six month periods ended June 30, 2006 and 2005, were estimated based on the following weighted average assumptions: Three Months Six Months Ended June 30, Ended June 30, 2006 2005 2006 2005 Expected volatility 110.2% 95.9% 109.9% 95.9% Risk-free interest rate 4.93% 3.69% 4.91% 3.69% Expected dividend yield 0.0% 0.0% 0.0% 0.0% Expected life (in years) 4.0 4.0 4.0 4.0 Estimated fair value per option granted $0.70 $0.23 $0.66 $0.23
THE SECURITIES EXCHANGE ACT OF 1934
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME/LOSS
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
(In thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME/LOSS
(In thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(In thousands)
(Unaudited)
(UNAUDITED)
Stock option activity during the six months ended June 30, 2006, is as follows:
Weighted |
||||
Weighted |
average |
|||
average |
remaining |
Aggregate |
||
Number of |
exercise |
contracted |
intrinsic |
|
options |
price |
term (years) |
value |
|
Outstanding at January 1, 2006 |
5,248,233 |
$0.84 |
||
Options granted |
792,000 |
0.86 |
||
Options exercised |
(52,428) |
0.41 |
||
Options forfeited |
(28,166) |
2.51 |
||
Options outstanding at June 30, 2006 |
5,959,639 |
0.84 |
7.15 |
$2,394,351 |
Options exercisable at June 30, 2006 |
4,510,054 |
0.90 |
6.44 |
$1,876,314 |
The aggregate intrinsic value of options exercised during the three and six month periods ended June 30, 2006 were $26,031 and $29,831, respectively.
The impact on our results of operations of recording share-based compensation expense for the three and six-month periods ended June 30, 2006 is as follows:
9
Three Months |
Six Months |
|
Ended June 30, 2006 |
||
Cost of products sold |
$ 6,246 |
$12,360 |
Research and development |
12,492 |
24,719 |
Selling, general and administrative |
22,902 |
45,318 |
$41,640 |
$82,397 |
As of June 30, 2006, there was approximately $552,000 of total unrecognized share-based compensation expense related to options granted under our plans that will be recognized over the next three years.
A summary of our non-vested options as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented below:
Weighted average |
||
grant date |
||
Shares |
fair value |
|
Nonvested at January 1, 2006 |
885,583 |
$0.26 |
Granted |
792,000 |
0.66 |
Vested |
(199,832) |
3.78 |
Forfeited |
(28,166) |
0.80 |
Nonvested at June 30, 2006 |
1,449,585 |
0.30 |
Awards granted prior to the adoption of FAS123(R) were accounted for under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its related interpretations. Under this intrinsic value method there was no compensation expense recognized for the three and six month periods ended June 30, 2005 because all options had exercise prices equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net loss and net loss per common share if the fair value method had been applied (in thousands except per share amounts):
Three Months |
Six Months |
|
Ended June 30, 2005 |
||
Net loss - as reported |
$ (169) |
$ (445) |
Total share-based compensation expense |
||
determined under fair value based method |
(24) |
(777) |
Pro forma net loss |
$ (193) |
$(1,222) |
Earnings per share: |
||
Basic - as reported |
$ (0.00) |
$ (0.01) |
Basic - pro forma |
(0.00) |
(0.03) |
Diluted - as reported |
(0.00) |
(0.01) |
Diluted - pro forma |
(0.00) |
(0.03) |
10
3. INVENTORIES
Inventories, net is comprised of the following (in thousands):
June 30, |
December 31, |
|
2006 |
2005 |
|
Finished goods |
$ 585 |
$ 540 |
Work-in-progress |
309 |
329 |
Raw materials |
1,516 |
1,623 |
$2,410 |
$2,492 |
4. LONG-TERM DEBT
June 30, |
December 31, |
|
2006 |
2005 |
|
Term Loan |
$1,121 |
$ - |
Series C Debentures |
- |
1,326 |
Series D Debentures |
2,728 |
2,793 |
3,849 |
4,119 |
|
Less current portion |
673 |
1,326 |
$3,176 |
$2,793 |
On March 1, 2006, the Company amended its lending agreement to provide for a $1.5 million revolving line of credit ("revolver"), with an advance rate of up to 80% of eligible accounts receivable. At June 30, 2006, available borrowings on the revolver were $1.5 million. The revolver will mature on April 13, 2008 and will bear interest at Prime +1%. The lending agreement also provides for a $1.5 million term loan, which the Company drew down on March 20, 2006, in the amount of $1.3 million in order to redeem the Series C Debentures which were scheduled to mature in April 2006. The term loan will be payable in twenty-four equal monthly installments plus interest at Prime +1.75% (9.75% at June 30, 2006). Interest expense on the term loan totaled $30 thousand and $35 thousand in the three and six month periods ended June 30, 2006, respectively. The Company will be required to maintain cash or availability of $1 million and minimum cumulative EBITDA as follows (2007 and future lev els will be determined in late 2006 or early 2007):
Q1 2006 |
$100,000 |
Q2 2006 |
(250,000) |
Q3 2006 |
125,000 |
Q4 2006 |
775,000 |
The Company did not meet the EBITDA requirement for Q1 2006, for which period a waiver was obtained. The Company did meet the EBITDA requirement for Q2 2006. The future covenant levels will be reviewed with our lender and we believe we will meet the covenant requirements going forward. As is usual and customary in such lending agreements, the lending agreement also contains certain non-financial requirements, such as required periodic reporting
11
to the bank and various representations and warranties. The lending agreement also restricts our ability to pay dividends, without the bank's consent.
The Series C Debentures, which totaled $1.3 million in principal and accrued interest at March 20, 2006, were redeemed in full on that date with the proceeds from the term loan. The Series C Debentures accrued interest at an annual rate of 7%, which totaled nil and $22 thousand in the second quarter of 2006 and 2005, respectively. Interest expense totaled $19 thousand and $64 thousand in the six month periods ended June 30, 2006 and 2005, respectively.
The Series D Debentures are scheduled to mature on December 31, 2007 and can be converted into shares of common stock at a per share conversion price of $0.65. Interest is payable in cash, on a quarterly basis, at an annual rate of 8%. In the second quarter of 2006 and 2005, interest expense attributable to the Series D Debentures totaled approximately $20 thousand and $18 thousand, respectively. Interest expense totaled $41 thousand and $34 thousand in the six month periods ended June 30, 2006 and 2005, respectively. The reported amount of interest expense has been adjusted to create a constant effective rate of 3% as a result of amortization of a gain on exchange that took place in 2004, that was deferred in accordance with SFAS No. 15.
5. BENEFIT PLANS
The net periodic benefit cost is as follows (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2006 |
2005 |
2006 |
2005 |
|
Service cost |
$ 96 |
$ 74 |
$192 |
$148 |
Interest cost |
47 |
42 |
94 |
84 |
Expected return on plan assets |
(39) |
(31) |
(78) |
(62) |
Amortization of prior service cost |
(8) |
(9) |
(16) |
(18) |
Amortization of prior gain |
|
(2) |
|
(4) |
$ 96 |
$ 74 |
$192 |
$148 |
During the six months ended June 30, 2006, we made contributions of $210 thousand to the Company's Pension Plan. Our policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA). During the second half of 2006, we expect to contribute approximately $349 thousand for the 2006 and 2007 plan years, based on these funding requirements. In addition, in 2006, the Company intends to pay all Pension Plan expenses, as permitted by ERISA, whereas in 2005, certain expenses were paid by the Pension Plan. Furthermore, subject to cash flow levels, it is the Company's intention to make additional contributions to the Pension Plan to reduce the unfunded liability.
12
6. GEOGRAPHIC INFORMATION
The details of the Company's geographic sales are as follows (in thousands):
|
Three Months |
Six Months |
||
Ended June 30, |
Ended June 30, |
|||
2006 |
2005 |
2006 |
2005 |
|
United States |
$7,547 |
$4,219 |
$11,310 |
$9,184 |
Europe |
608 |
1,067 |
1,256 |
1,675 |
Rest of world |
426 |
496 |
858 |
898 |
7. PRODUCT WARRANTY
We provide product warranties for our various products, typically for one year. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the sale is recognized. We established our reserve based on historical data, taking into consideration specific product information. The following table sets forth the movement in the warranty reserve (in thousands):
|
Three Months |
Six Months |
||
Ended June 30, |
Ended June 30, |
|||
2006 |
2005 |
2006 |
2005 |
|
Balance at beginning of period |
$ 78 |
$ 50 |
$223 |
$ 50 |
Expenses (credits) |
(41) |
(3) |
(198) |
13 |
Warranty services provided |
13 |
3 |
25 |
(13) |
$ 50 |
$ 50 |
$ 50 |
$ 50 |
8. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" which is effective for fiscal years beginning after September 15, 2006. The statement was issued to clarify the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. We have evaluated the new statement and have determined that it will not have a significant impact on the determination of our financial results.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" which is effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. We have evaluated the new statement and have determined that it will not have a significant impact on the determination of our financial results.
13
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. We have not yet evaluated the impact of implementation on our consolidated 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, we 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, we note that a variety of factors could cause our actual results to differ from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our 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 ("digital television") and HDTV ("high definition telev ision"), 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 Over the Counter Bulletin Board as a trading platform, and expansion into new markets.
The following discussion should be read along with our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited financial statements included in this Form 10-Q.
Comparison of the Three and Six Months Ended June 30, 2006 and 2005
Revenues for the quarter ended June 30, 2006 were $8.6 million, an increase of $2.8 million, or 48% from the $5.8 million reported for the second quarter of 2005. Revenues for the six months ended June 30, 2006 were $13.4 million, an increase of $1.6 million, or 14% from the $11.8 million reported for the first six months of 2005.
Revenues derived from U.S. customers were $7.5 million in the second quarter of 2006 as compared to $4.2 million in the second quarter of 2005. Revenues derived from international customers were $1.1 million in the second quarter of 2006 as compared to $1.6 million in the second quarter of 2005. Year to date revenues in the U.S. were $11.3 million in 2006 and $9.2
14
million in 2005. Year to date international revenues were $2.1 million in 2006 and $2.6 million in 2005.
Domestic revenues in all periods in 2006 increased in comparison to 2005 amounts as a result of the impact of the high definition ("HD") market. Consumer demands for HD have increased which has required broadcasters to definitize their HD programs and Chyron's HyperX systems, which can be configured as HD, standard definition ("SD") or a combination of both, offers a highly flexible and scalable migration path to high definition broadcasting. International revenues in all periods in 2005 were higher than 2006 as a result of a European government upgrade program that leveled off in 2006. However, we expect that HD demands will also continue to increase internationally, which could be beneficial to Chyron in future periods. Sales of our new microcasting and digital displays product line accounted for 2% and 15% of the increase in the three and six month periods in 2006, respectively.
Gross margins for the second quarter of 2006 increased to 67% from 65% in the comparable quarter in 2005. Gross margins for the six month periods in 2006 and 2005 were 67% and 62%, respectively. Improvements in gross margins are primarily a result of lower material costs. The reduction in material costs has been driven by several factors, primarily the result of newer technology, which lowers the purchase cost and also results in greater reliability and lower warranty costs. In addition, we have been able to purchase in greater quantities due to the interchangeability of components across product lines and higher sales volume.
Selling, general and administrative (SG&A) expenses were $3.2 million in the quarter ended June 30, 2006 and 2005. SG&A expenses decreased by $0.3 million, to $5.9 million in the first six months of 2006 compared to $6.2 million for the first six months of 2005. In the first six months of 2005, we incurred approximately $0.1 million in severance costs which did not recur in 2006. Other decreases related to $0.1 million in consulting costs related to systems upgrades. Cost savings of $0.2 million were also realized in the area of sales and marketing due to a refocus of worldwide strategies relating to advertising, public relations and trade shows. These expense reductions were offset by approximately $0.1 million of additional costs related to legal fees for matters incidental to our business and increased commissions associated with greater revenue levels.
Research and development (R&D) costs in the second quarter of 2006 increased by $0.2 million to $0.9 million, compared to $0.7 million in the quarter ended June 30, 2005. R&D costs increased by $0.4 million, to $1.8 million in the first six months of 2006, compared to $1.4 million for the first six months of 2005. The primary factor contributing to the increase is personnel and related costs. We hired additional developers in 2006, primarily devoted to the development of products for HDTV and the digital display product line.
Interest expense in the second quarter of 2006 and 2005 approximated $50 thousand. Interest expense in the first six months of 2006 and 2005 was approximately $100 thousand. The levels of average borrowings of the Company have decreased but the savings have been offset by increases in interest rates.
15
The components of other income (expense), net are as follows (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2006 |
2005 |
2006 |
2005 |
|
Foreign exchange transaction (loss) gain |
$15 |
$(39) |
$21 |
$(69) |
Other |
14 |
14 |
29 |
28 |
$29 |
$(25) |
$50 |
$(41) |
Liquidity and Capital Resources
At June 30, 2006, we had cash on hand of $2.1 million and working capital of $5 million.
During the six months ended June 30, 2006, net cash of $0.4 million was provided by operations. The amount of net cash from operations was primarily driven by the net income in the period offset by an increase in accounts receivable resulting from the greater level of 2006 revenues.
On March 1, 2006, the Company amended its lending agreement with its U.S. bank to provide for a $1.5 million revolving line of credit ("revolver"), with an advance rate of up to 80% of eligible accounts receivable. At June 30, 2006, available borrowings on the revolver were $1.5 million. The revolver will mature on April 13, 2008 and will bear interest at Prime +1%. The agreement also provides for a $1.5 million term loan, which the Company drew down on March 20, 2006, in the amount of $1.3 million in order to redeem the Series C Debentures which were scheduled to mature in April 2006. The term loan will be payable in twenty-four equal monthly installments plus interest at Prime +1.75% (9.75% at June 30, 2006). The Company will be required to maintain cash or availability of $1 million and minimum cumulative EBITDA as follows (2007 and future levels will be determined in late 2006 or early 2007):
Q1 2006 |
$100,000 |
Q2 2006 |
(250,000) |
Q3 2006 |
125,000 |
Q4 2006 |
775,000 |
The Company did not meet the EBITDA requirement for Q1 2006, for which period a waiver was obtained. The Company did meet the EBITDA requirement for Q2 2006. The future covenant levels will be reviewed with our lender and we believe we will meet the covenant requirements going forward. As is usual and customary in such lending agreements, the agreement also contains certain non-financial requirements, such as required periodic reporting to the bank and various representations and warranties. The agreement also restricts our ability to pay dividends without the bank's consent.
We provide graphics products to the broadcast industry for use in digital television. Our future growth and success will depend to a significant degree on the continued growth of various markets that use our products. We operate in a rapidly changing environment and must remain
16
responsive to changes as they occur. In the event that revenues are significantly below forecasted revenues, we believe we have the ability to reduce or delay discretionary expenditures, including capital purchases, and reduce headcount, so that we will have sufficient cash resources. However, there can be no assurance that we will be able to adjust our costs in sufficient time to respond to revenue and cash shortfalls, should that occur.
The long term success of the Company will be dependent on maintaining profitable operating results and the ability to raise additional capital should such additional capital be required. In the event the Company is unable to achieve expected goals of profitability or raise sufficient additional capital, if needed, we may have to scale back or eliminate certain parts of our operations.
We believe that cash on hand, net cash to be generated in the business, and availability under our line of credit, will be sufficient to meet our cash needs if we are able to achieve our planned results of operations and retain availability of credit under our lending agreement.
Recent Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" which is effective for fiscal years beginning after September 15, 2006. The statement was issued to clarify the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. We have evaluated the new statement and have determined that it will not have a significant impact on the determination of our financial results.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" which is effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. We have evaluated the new statement and have determined that it will not have a significant impact on the determination of our financial results.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. We have not yet evaluated the impact of implementation on our consolidated financial statements.
17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are exposed to foreign currency and exchange risks in the normal course of business related to investments in our foreign subsidiaries and sales to foreign customers. For the three months ended June 30, 2006 and 2005, sales to foreign customers were 12% and 27% of total sales, respectively. For the six months ended June 30, 2006 and 2005, sales to foreign customers were 16% and 22% of total sales, respectively. All sales generated outside of the U.S. are denominated in British Pounds Sterling, Euros and U.S. Dollars.
The net impact on earnings of foreign exchange transactions was a gain of $15 thousand and a loss of $39 thousand in the three months ended June 30, 2006 and 2005, respectively. The net impact of foreign exchange transactions was a gain of $21 thousand in the six month period ended June 30, 2006 and a loss of $69 thousand in the six month period ended June 30, 2005. We record translation gain or loss as a separate component of other comprehensive income or loss in shareholders' equity (deficit).
Additionally, we are exposed to interest rate risk with respect to any bank debt that carries a variable interest rate, such as our term loan. Rates that affect the variable interest on this debt include the Prime Rate. We have evaluated the foreign currency exchange risk and interest rate risk and believe that our exposure to these risks are not material to our near-term financial position, earnings, or cash flows.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2006, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2006. There have been no changes in the Company's internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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.
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ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in part 1, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on May 17, 2006. The voting results were as follows:
Proposal Number 1: Election of Directors |
||
|
For |
Against |
Donald P. Greenberg |
32,540,138 |
259,791 |
Richard P. Greenthal |
32,582,405 |
217,523 |
Roger Henderson |
32,554,414 |
245,515 |
Christopher R. Kelly |
32,379,517 |
420,412 |
Eugene M. Weber |
32,561,389 |
238,540 |
Michael I. Wellesley-Wesley |
32,400,535 |
399,394 |
Michael C. Wheeler |
32,581,555 |
218,374 |
ITEM 6. EXHIBITS
Exhibit No. |
Description of Exhibit |
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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 11, 2006 |
/s/ Michael Wellesley-Wesley |
|
(Date) |
Michael Wellesley-Wesley |
|
President and |
||
Chief Executive Officer |
||
August 11, 2006 |
/s/ Jerry Kieliszak |
|
(Date) |
Jerry Kieliszak |
|
Chief Financial Officer and |
||
Senior Vice President |
20
Exhibit 31.1
Certification of Chief Executive Officer Pursuant To
Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael Wellesley-Wesley, President and Chief Executive Officer of Chyron Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Chyron Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [Reserved];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 11, 2006
/s/ Michael Wellesley-Wesley |
Michael Wellesley-Wesley |
President and |
Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer Pursuant To
Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jerry Kieliszak, Senior Vice President and Chief Financial Officer of Chyron Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Chyron Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [Reserved];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 11, 2006
/s/ Jerry Kieliszak |
Jerry Kieliszak |
Senior Vice President and |
Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Chyron Corporation (the "Company") on Form 10-Q for the quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Wellesley-Wesley, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) the Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 11, 2006
/s/ Michael Wellesley-Wesley |
|
Michael Wellesley-Wesley |
|
President and |
|
Chief Executive Officer |
|
Exhibit 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Chyron Corporation (the "Company") on Form 10-Q for the quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry Kieliszak, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) the Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 11, 2006
/s/ Jerry Kieliszak |
|
Jerry Kieliszak |
|
Senior Vice President and |
|
Chief Financial Officer |
|