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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, 2007 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, 2007 was 45,675,421. CHYRON CORPORATION INDEX PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006 3 Consolidated Statements of Income for the Three Months ended (unaudited) June 30, 2007 and 2006 4 Consolidated Statements of Income for the Six Months ended (unaudited) June 30, 2007 and 2006 5 Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 2007 and 2006 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 1A. Risk Factors 18 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 2007 2006 Current assets: Cash and cash equivalents $ 1,648 $ 2,362 Accounts receivable, net 6,324 4,130 Inventories, net 2,855 2,958 Deferred taxes 270 270 Prepaid expenses and other current assets 526 334 Total current assets 11,623 10,054 Property and equipment, net 1,084 984 Deferred taxes 1,447 1,447 Other assets 5 18 TOTAL ASSETS $14,159 $12,503 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,627 $ 2,818 Deferred revenue 1,535 1,501 Pension liability 538 658 Capital lease obligations 35 28 Total current liabilities 5,735 5,005 Pension liability 1,550 1,457 Other liabilities 554 572 Total liabilities 7,839 7,034 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 - 45,675,421 at June 30, 2007 and 45,649,005 at December 31, 2006 457 456 Additional paid-in capital 75,196 75,025 Accumulated deficit (69,199) (69,874) Accumulated other comprehensive loss (134) (138) Total shareholders' equity 6,320 5,469 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,159 $12,503 See Notes to Consolidated Financial Statements 3 CHYRON CORPORATION 2007 2006 Net sales $ 7,755 $ 8,581 Cost of products sold 2,407 2,797 Gross profit 5,348 5,784 Operating expenses: Selling, general and administrative 3,457 3,162 Research and development 1,274 943 Total operating expenses 4,731 4,105 Operating income 617 1,679 Interest expense (6) (58) Interest income 37 29 Other income, net 8 29 Income before taxes 656 1,679 Income taxes 25 Net income $ 631 $1,679 Net income per share - basic and diluted $ 0.01 $ 0.04 Weighted average shares outstanding: Basic 45,662 41,401 Diluted 47,618 44,136 See Notes to Consolidated Financial Statements 4 CHYRON CORPORATION 2007 2006 Net sales $14,284 $13,424 Cost of products sold 4,528 4,473 Gross profit 9,756 8,951 Operating expenses: Selling, general and administrative 6,719 5,929 Research and development 2,404 1,846 Total operating expenses 9,123 7,775 Operating income 633 1,176 Interest expense (20) (114) Interest income 63 56 Other income, net 24 50 Income before taxes 700 1,168 Income taxes 25 Net income $ 675 $ 1,168 Net income per common share - basic and diluted $ 0.01 $ 0.03 Weighted average shares outstanding: Basic 45,656 41,390 Diluted 47,817 43,153 See Notes to Consolidated Financial Statements 5 CHYRON CORPORATION 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 675 $1,168 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization 231 183 Loss on disposal of equipment 64 Inventory provisions 175 186 Share-based compensation expense 162 82 Other 16 (51) Changes in operating assets and liabilities: Accounts receivable (2,194) (1,498) Inventories (72) (104) Prepaid expenses and other assets (193) (142) Accounts payable and accrued expenses 809 197 Other liabilities 1 292 Net cash (used in) provided by operating activities (390) 377 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment (314) (431) Net cash used in investing activities (314) (431) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on convertible debentures (1,345) Borrowings from term loan 1,345 Principal payments on term loan (224) Proceeds from exercise of stock options 10 22 Payments on capital lease obligations (20) (9) Net cash used in financing activities (10) (211) Change in cash and cash equivalents (714) (265) Cash and cash equivalents at beginning of period 2,362 2,331 Cash and cash equivalents at end of period $1,648 $2,066 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 7 $ 67 Assets acquired under capital lease 11 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, 2007 and the consolidated results of its operations and its cash flows for the periods ended June 30, 2007 and 2006. 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, 2007. 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, 2006. The December 31, 2006 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. Chyron's ChyTV product line provides low-cost, easy to use graphics for microcasting and digital displays applications. ChyTV, which is part of the Company's digital displays division, represents a reporting segment for the Company. 7 Net Income Per Share We report our net income per share in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. Shares used to calculate earnings per share are as follows (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2007 2006 2007 2006 Basic weighted average shares outstanding 45,662 41,401 45,656 41,390 Effect of dilutive stock options 1,956 1,597 2,161 1,169 Effect of dilutive convertible debentures 1,138 594 Diluted weighted average shares outstanding 47,618 44,136 47,817 43,153 Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive Stock options 787 4,052 751 4,285 Convertible debentures 2,960 3,505 787 7,012 751 7,790 2. SHARE-BASED COMPENSATION We account for share-based compensation cost in accordance with Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment." 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 were estimated based on the following weighted average assumptions: Three Months Six Months Ended June 30, Ended June 30, 2007 2006 2007 2006 Expected volatility 99.2% 110.2% 99.2% 109.9% Risk-free interest rate 4.64% 4.93% 4.64% 4.91% 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 $0.57 $0.70 $0.57 $0.66
THE SECURITIES EXCHANGE ACT OF 1934
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands)
(Unaudited)
(UNAUDITED)
8
The impact on our results of operations of recording share-based compensation expense is as follows:
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
Cost of products sold |
$13,096 |
$6,246 |
$22,654 |
$12,360 |
Research and development |
28,999 |
12,492 |
50,161 |
24,719 |
Selling, general and administrative |
51,449 |
22,902 |
88,996 |
45,318 |
$93,544 |
$41,640 |
$161,811 |
$82,397 |
As of June 30, 2007, there was approximately $671 thousand of total unrecognized share-based compensation expense related to options granted under our plans that will be recognized over the next three years.
3. INVENTORIES
Inventories, net is comprised of the following (in thousands):
June 30, |
December 31, |
|
2007 |
2006 |
|
Finished goods |
$ 548 |
$ 418 |
Work-in-progress |
426 |
160 |
Raw materials |
1,881 |
2,380 |
$2,855 |
$2,958 |
4. BENEFIT PLANS
The net periodic benefit cost is as follows (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
Service cost |
$108 |
$ 96 |
$216 |
$192 |
Interest cost |
56 |
47 |
112 |
94 |
Expected return on plan assets |
(38) |
(39) |
(76) |
(78) |
Amortization of prior service cost |
(9) |
(8) |
(18) |
(16) |
Amortization of prior gain |
3 |
|
6 |
|
$120 |
$ 96 |
$240 |
$192 |
During the six months ended June 30, 2007, we made contributions of $267 thousand to the Company's Pension Plan. Our policy is to fund the minimum contributions required under the Employee Retirement Income Security Act (ERISA) and, subject to cash flow levels, it is the Company's intention to make additional contributions to the Pension Plan to reduce the unfunded liability. During the second half of 2007, we expect to contribute a minimum of $441 thousand for the 2006 and 2007 plan years, based on these funding requirements. In July of 2007, the
9
Company made an additional contribution, in excess of the ERISA requirement, of $50,000. In addition, in 2007, the Company intends to pay all Pension Plan expenses, as permitted by ERISA.
5. SEGMENT AND GEOGRAPHIC INFORMATION
We conduct our current operations through two reportable segments: broadcast graphics and digital displays. The broadcast graphics segment supplies graphics hardware and software to the broadcast industry. Our digital displays segment provides low-cost graphics equipment for digital signage applications.
The following table presents information about our segments (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
Net sales |
||||
Broadcast graphics |
$7,555 |
$8,404 |
$13,815 |
$13,037 |
Digital displays |
200 |
177 |
469 |
387 |
Operating income (loss) |
||||
Broadcast graphics |
1,157 |
2,180 |
1,727 |
2,003 |
Digital displays |
(540) |
(501) |
(1,094) |
(827) |
The details of the Company's geographic sales are as follows (in thousands):
|
Three Months |
Six Months |
||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
United States |
$5,974 |
$7,547 |
$11,199 |
$11,310 |
Europe |
1,167 |
608 |
2,024 |
1,256 |
Rest of world |
614 |
426 |
1,061 |
858 |
6. 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, |
|||
2007 |
2006 |
2007 |
2006 |
|
Balance at beginning of period |
$ 143 |
$ 78 |
$ 50 |
$ 223 |
Provisions (credits) |
(133) |
(41) |
104 |
(198) |
Warranty services provided, net |
40 |
13 |
(104) |
25 |
$ 50 |
$ 50 |
$ 50 |
$ 50 |
10
7. INCOME TAXES
Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of such date, we did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.
FIN 48 allows the Company to prospectively change its accounting policy as to where interest expense and penalties on income tax liabilities are classified. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the respective quarters.
We file U.S. federal income tax returns as well as income tax returns in various states and two foreign jurisdictions. We may be subject to examination by the Internal Revenue Service ("IRS") for calendar years 2003 through 2006 under the normal statute of limitations. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. Generally, for state tax purposes, the Company's 2002 through 2006 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may keep their statute open for six to ten years.
In the second quarter of 2007 the Company recorded a foreign tax provision of $25,000 attributable to the generation of taxable income from our foreign subsidiaries. In the United States we have approximately $50 million of net operating loss carryforwards ("NOLs") which can be utilized against future U.S. taxable income. However, these NOLs are not available to offset foreign taxable income and therefore, a foreign tax provision was recorded.
8. OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
Net income, as reported |
$ 631 |
$1,679 |
$ 675 |
$1,168 |
Foreign currency translation adjustments |
2 |
2 |
4 |
2 |
Comprehensive income |
$ 633 |
$1,681 |
$ 679 |
$1,170 |
11
The components of accumulated other comprehensive income (loss) are as follows (in thousands):
June 30, |
December 31, |
|
2007 |
2006 |
|
Foreign currency translation adjustments |
$ 9 |
$ 5 |
Pension benefit costs |
(143) |
(143) |
$(134) |
$(138) |
Effective December 31, 2006, the Company adopted FASB No. 158, Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans ("FASB 158"). As a result the Company recorded an additional pension liability of $143 thousand that was included in accumulated other comprehensive income ("AOCI"). This adjustment was shown in the consolidated statement of shareholders' equity as a component of comprehensive income for 2006. However, it should have been recorded as an adjustment of the ending balance of AOCI. Consequently, the presentation of comprehensive income for 2006 will be modified in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. This reclassification has no effect on the previously reported ending balance of AOCI and shareholders' equity at December 31, 2006 or reported net income for the year ended 2006.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not yet evaluated the impact of implementation on our consolidated financial statements.
12
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, use and improvement of the Internet, new technologies that could render certain Chyron products to be obsolete, a highly competitive environment, com petitors 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 2006 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, 2007 and 2006
Net Sales. Revenues for the three and six month periods are as follows (in thousands):
Three Months |
Six Months |
|||||||
Ended June 30, |
Ended June 30, |
|||||||
|
% of |
|
% of |
|
% of |
|
% of |
|
Broadcast graphics |
$7,555 |
97% |
$8,404 |
98% |
$13,815 |
97% |
$13,037 |
97% |
Digital displays |
200 |
3% |
177 |
2% |
469 |
3% |
387 |
3% |
$7,755 |
$8,581 |
$14,284 |
$13,424 |
Revenues, by geographic area, for the three and six month periods are as follows (in thousands):
Three Months |
Six Months |
|||||||
Ended June 30, |
Ended June 30, |
|||||||
|
% of |
|
% of |
|
% of |
|
% of |
|
United States |
$5,974 |
77% |
$7,547 |
88% |
$11,199 |
78% |
$11,310 |
84% |
International |
1,781 |
23% |
1,034 |
12% |
3,085 |
22% |
2,114 |
16% |
$7,755 |
$8,581 |
$14,284 |
$13,424 |
Revenues for the quarter ended June 30, 2007 were $7.8 million, a decrease of $0.8 million, or 10% from the $8.6 million reported in the quarter ended June 30, 2006. Revenues for
13
the six month period ended June 30, 2007 were $14.3 million, an increase of $0.9 million, or 6% from the $13.4 million reported in the six months ended June 30, 2006.
Revenues in the quarter ended June 30, 2007 were lower than the quarter ended June 30, 2006 due only to the timing of receipt of customer orders. On a cumulative basis, year to date 2007 revenues are $0.9 million greater than year to date 2006 revenues. This increase is due to the realization of enhanced product offerings, which now include mid-range high definition products and channel branding. Also contributing to our growth is improved realization of sales over our competitors. The increase in sales in our digital displays product line is due to the expansion of our product offerings and the growth in our sales network. International revenues in the quarter and year to date have increased due to greater market penetration in Europe and Asia.
Gross profit. Gross margins for the three and six month periods are as follows (in thousands):
Three Months |
Six Months |
||||||||
Ended June 30, |
Ended June 30, |
||||||||
|
% of |
|
% of |
|
% of |
|
% of |
||
Broadcast graphics |
$5,232 |
69% |
$5,680 |
68% |
$9,481 |
69% |
$8,708 |
67% |
|
Digital displays |
116 |
58% |
104 |
59% |
275 |
59% |
243 |
63% |
|
$5,348 |
69% |
$5,784 |
67% |
$9,756 |
68% |
$8,951 |
67% |
Improvements in gross margins in our broadcast graphics segment for the three and six month periods are primarily a result of reduced material costs associated with enhanced product offerings and improved technology. Reductions in gross margins in our digital display segment in both periods is due to the fact that 2006 included services associated with a special consulting project, whereas 2007 reflects a standard margin based on product sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three and six month periods are as follows (in thousands):
Three Months |
Six Months |
|||||||
Ended June 30, |
Ended June 30, |
|||||||
|
% of |
|
% of |
|
% of |
|
% of |
|
Broadcast graphics |
$2,976 |
86% |
$2,704 |
86% |
$5,725 |
85% |
$5,128 |
86% |
Digital displays |
481 |
14% |
458 |
14% |
994 |
15% |
801 |
14% |
$3,457 |
$3,162 |
$6,719 |
$5,929 |
The increase in SG&A expenses of $0.3 million for the broadcast graphics segment in the second quarter of 2007 as compared to the second quarter of 2006 was driven primarily by an increase of $0.1 million in costs associated with the operation of our international offices, $0.2 million from additional sales, product support and customer support staff and $0.3 million of higher employee benefit costs and costs related to new ventures and the Company's application for listing on the American Stock Exchange ("AMEX"). These costs in 2007 were offset by $0.3 million realized from a gain on the satisfaction of a note receivable from an operation sold in 1998, that was previously written down to zero.
14
The increase in SG&A expenses of $0.6 million for the broadcast graphics segment in the six month period ended June 30, 2007 as compared to June 30, 2006 was driven primarily by an increase of $0.2 million in costs associated with the operation of our international offices, $0.3 million from additional sales, product support and customer support staff, $0.4 million of higher employee benefit, new venture and AMEX listing application related costs, offset by the $0.3 million gain from the satisfaction of a note receivable, as discussed above.
The increase in SG&A expenses for the digital displays segment increased by approximately $0.02 million in the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006 as a result of higher employee benefit costs. The increase in SG&A expenses of $0.2 million for the digital display segment in the six month period ended June 30, 2007 as compared to June 30, 2006 are higher benefit costs and legal expenses associated with protection of our intellectual property.
Research and Development Expenses. Research and development ("R&D") costs for the three and six month periods are as follows (in thousands):
Three Months |
Six Months |
|||||||
Ended June 30, |
Ended June 30, |
|||||||
|
% of |
|
% of |
|
% of |
|
% of |
|
Broadcast graphics |
$1,099 |
86% |
$ 796 |
84% |
$2,029 |
84% |
$1,577 |
85% |
Digital displays |
175 |
14% |
147 |
16% |
375 |
16% |
269 |
15% |
$1,274 |
$ 943 |
$2,404 |
$1,846 |
The primary factor contributing to the increase in all periods presented in the broadcast graphics segment is the Company's investment, primarily in the form of additional staff and related costs, in the development of new products for HDTV, mobile content, and channel branding. At this time virtually 95% of our products are now HD/SD switchable. The increase in R&D in all periods presented in the digital displays segment is also due to the Company's investment, in the form of personnel and related costs, in new product offerings, as this line is expanded.
Interest Income and Expense and Other Income, Net. The reduction in interest expense in all periods presented reflect the elimination in 2007 of any interest cost associated with convertible debentures which were not outstanding during any periods in 2007. Interest income in all periods presented reflect higher interest rates in 2007 and overall higher cash balances that are invested overnight.
15
The components of other income (expense), net are as follows (in thousands):
Three Months |
Six Months |
|||
Ended June 30, |
Ended June 30, |
|||
2007 |
2006 |
2007 |
2006 |
|
Foreign exchange transaction (loss) gain |
$ (6) |
$ 15 |
$ (16) |
$ 21 |
Subrental income |
14 |
14 |
28 |
28 |
Other |
|
|
12 |
1 |
$ 8 |
$ 29 |
$ 24 |
$ 50 |
Liquidity and Capital Resources
At June 30, 2007, we had cash on hand of $1.6 million and working capital of $5.9 million.
During the six months ended June 30, 2007, net cash of $0.4 million was used by operations. The amount of net cash used in operations was primarily driven by an increase in accounts receivable resulting from the greater level of 2007 revenues, year to date, and delay in receipt of certain international receivables that were received in July 2007. The Company also received $0.3 million from the satisfaction of a note receivable from an operation sold in 1998, that was previously written down to zero.
In 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, 2007, available credit for borrowings on the revolver was $1.5 million. The revolver will mature on April 13, 2008 and bears 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. The term loan was payable in twenty-four equal monthly installments plus interest at Prime +1.75%. The Company was making monthly installments on the term loan since its inception and on December 28, 2006, paid in full the remaining balance on the term loan of $840 thousand. The Company is required to maintain cash or availability of $1.0 million and minimum cumulative EBITDA, excluding FAS123(R) stock option expense, as follows:
YTD March 31, 2007 |
$ (225,000) |
YTD June 30, 2007 |
300,000 |
YTD September 30, 2007 |
725,000 |
YTD December 31, 2007 |
1,200,000 |
The Company did not meet the EBITDA requirement of $100,000 for the quarter ended March 31, 2006, for which period a waiver was obtained. The Company has met the EBITDA requirement for all other quarters in 2006 and 2007 to date. 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.
16
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 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 September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not yet evaluated the impact of implementation on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which applies to all entities with available-for-sale and trading securities. This statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. We have not yet evaluated the impact of implementation on our consolidated financial statements.
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, 2007 and 2006, sales to foreign customers were 23% and 12% of total sales, respectively. For the six months ended June 30, 2007 and 2006, sales to foreign customers were 22% and 16% of total sales, respectively. All sales generated outside of the U.S. are denominated in British Pounds Sterling, Euros and U.S. Dollars.
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The net impact on earnings of foreign exchange transactions was a loss of $6 thousand and a gain of $15 thousand in the three months ended June 30, 2007 and 2006, respectively. The net impact of foreign exchange transactions was a loss of $16 thousand in the six month period ended June 30, 2007 and a gain of $21 thousand in the six month period ended June 30, 2006. We record translation gain or loss as a separate component of other comprehensive income or loss in shareholders' equity.
Additionally, were we to borrow under our term loan, we would be exposed to interest rate risk because it carries a variable interest rate. Rates that affect the variable interest on this term loan 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, 2007, 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, 2007. 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.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2006, 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.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on May 16, 2007. The voting results were as follows:
Proposal Number 1: Election of Directors |
||
|
For |
Against |
Donald P. Greenberg |
37,011,468 |
400,517 |
Richard P. Greenthal |
37,088,418 |
323,567 |
Christopher R. Kelly |
36,651,197 |
760,788 |
Eugene M. Weber |
37,084,747 |
327,238 |
Michael I. Wellesley-Wesley |
36,910,202 |
501,782 |
Michael C. Wheeler |
37,087,160 |
324,825 |
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 |
19
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 10, 2007 |
/s/ Michael Wellesley-Wesley |
|
(Date) |
Michael Wellesley-Wesley |
|
President and |
||
Chief Executive Officer |
||
August 10, 2007 |
/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 10, 2007
/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 10, 2007
/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, 2007 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 10, 2007
/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, 2007 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 10, 2007
/s/ Jerry Kieliszak |
|
Jerry Kieliszak |
|
Senior Vice President and |
|
Chief Financial Officer |
|