-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WueOdKUjl3ywLSQn83hQz2cZ5yUXFIk4UrcLbvW3og7+b6V5goceAbzlrZlLsl2t 8fFSQS7moH0xiTukZxJ2cA== 0000020232-95-000029.txt : 19951108 0000020232-95-000029.hdr.sgml : 19951108 ACCESSION NUMBER: 0000020232-95-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951107 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHYRON CORP CENTRAL INDEX KEY: 0000020232 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 112117385 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09014 FILM NUMBER: 95587898 BUSINESS ADDRESS: STREET 1: 5 HUB DR CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168452000 MAIL ADDRESS: STREET 1: 5 HUB DRIVE CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER EXCHANGE INC DATE OF NAME CHANGE: 19760114 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1995 Commission File Number 1- 9014 Chyron Corporation (Exact name of registrant as specified in its charter) New York 11-2117385 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 5 Hub Drive, Melville, NY 11747 (Address of principal executive offices) (Zip Code) (516) 845-2000 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by a check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock $.01 Par Value - 89,079,909 as of October 31, 1995 This document consists of 21 pages ITEM 1. FINANCIAL STATEMENTS CHYRON CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts) (unaudited) ASSETS September 30, December 31, 1995 1994 Current assets: Cash and temporary investments................ $ 6,954 $ 1,555 Accounts and notes receivable, net............ 14,770 13,225 Inventories .................................. 10,408 5,464 Prepaid expenses ............................. 1,312 1,898 Total current assets ....................... 33,444 22,142 Property and equipment, net .................... 3,436 3,646 Software development costs, net................. 2,095 2,520 Other assets ................................... 254 336 TOTAL ASSETS ................................... $ 39,229 $ 28,644 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ........ $ 12,383 $ 7,008 Reserve for West Coast restructuring.......... 916 2,824 Capital lease obligations..................... 121 207 Convertible subordinated notes payable........ 100 Total current liabilities .................. 13,520 10,039 Notes payable................................... 6,128 4,500 Capital lease obligations....................... 246 229 Convertible subordinated notes payable.......... 100 Total liabilities........................... 19,894 14,868 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 - 89,009,507 shares in September 1995, 87,392,524 shares in December 1994........ 890 874 Additional paid-in capital ................... 20,684 19,035 Retained (deficit)............................ (2,239) (6,133) Total shareholders' equity...................... 19,335 13,776 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $ 39,229 $ 28,644 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (In thousands except per share amounts) (Unaudited) 1995 1994 Net sales......................................... $ 14,099 $ 11,006 Costs and expenses: Manufacturing .................................. 6,091 4,782 Selling, general and administrative ............ 4,637 4,305 Research and development ....................... 1,027 998 Management fee.................................. 232 243 West Coast restructuring (recapture) charge..... (552) 12,716 Total costs and expenses ....................... 11,435 23,044 Operating income (loss)........................... 2,664 (12,038) Interest expense, net............................. 171 137 Income (loss) before income taxes................. 2,493 (12,175) Income taxes/equivalent provision (benefit)....... 686 (390) Net income (loss)................................. $ 1,807 $ (11,785) Earnings (loss) per common share.................. $ .02 $ (.13) Weighted average number of common and common equivalent shares outstanding................... 91,408 89,622 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (In thousands except per share amounts) (Unaudited) 1995 1994 Net sales......................................... $ 38,596 $ 31,385 Costs and expenses: Manufacturing .................................. 16,920 14,278 Selling, general and administrative ............ 12,648 11,475 Research and development ....................... 3,065 2,769 Management fee.................................. 695 854 West Coast restructuring (recapture) charge..... (552) 12,716 Total costs and expenses ....................... 32,776 42,092 Operating income (loss)........................... 5,820 (10,707) Interest expense, net............................. 449 426 Income (loss) before income taxes................. 5,371 (11,133) Income taxes/equivalent provision................. 1,477 Net income (loss)................................. 3,894 (11,133) Retained (deficit) earnings - beginning of period. (6,133) 2,861 Retained (deficit) - end of period................ $ (2,239) $ (8,272) Earnings (loss) per common share.................. $ .04 $ (.12) Weighted average number of common and common equivalent shares outstanding................... 90,597 89,590 See Notes to Consolidated Financial Statements CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (In Thousands) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES 1995 1994 Net income (loss) $ 3,894 $(11,133) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization ................... 1,481 1,605 Loss on abandonment of leasehold improvements.... 350 Income tax equivalent provision.................. 1,342 Changes in operating assets and liabilities: Accounts and trade notes receivable, net......... (1,463) 3,109 Inventories...................................... (4,944) 1,092 Prepaid expenses ................................ 586 (1,502) Accounts payable and accrued expenses ........... 5,345 (2,519) Reserve for West Coast restructuring............. (1,908) 12,716 Net cash provided by operating activities........... 4,333 3,718 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment............... (656) (780) Capitalized software development costs.............. (190) (1,286) Other assets........................................ 82 34 Net cash (used in) investing activities............. (764) (2,032) CASH FLOWS FROM FINANCING ACTIVITIES Payments of capital lease obligations............... (69) Capital lease obligations incurred.................. 325 Payment of notes payable............................ (4,500) (1,250) Net proceeds from new credit facility............... 6,128 Proceeds from exercise of common stock purchase warrants, net...................................... 323 43 Payments of Chapter 11 claims and other reorganization items............................... (80) Other............................................... (52) (47) Net cash provided by (used in) financing activities. 1,830 (1,009) Change in cash and temporary investments............ 5,399 677 Cash and temporary investments at beginning of period............................... 1,555 213 Cash and temporary investments at end of period.....$ 6,954 $ 890 SUPPLEMENTAL CASH FLOW INFORMATION Interest payments...................................$ 394 $ 391 Income tax payments.................................$ 98 $ 62 See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED CONTROL OF REGISTRANT On July 25, 1995, Pesa, Inc., a Delaware corporation ("Pesa") sold 49,414,732 shares of Chyron Corporation ("Chyron") to the entities listed below for an aggregate purchase price of $24,719,071. Additionally, on July 25, 1995, Sepa Technologies, Ltd., a Georgia limited liability company ("Sepa"), and an affiliate of Pesa, sold 5,000,000 shares to the entities listed below for an aggregate purchase price of $2.6 million. On May 26 1995, Pesa sold 10,000,000 shares of Chyron to CC Acquisition Company A, a Delaware limited liability company ("CCACA"), for an aggregate purchase price of $5,000,000. The sales were made pursuant to two agreements entered into on May 26, 1995: (1) CCACA and CC Acquisition Company B, a Delaware limited liability company ("CCACB"), and an affiliate of CCACA, entered into a stock purchase agreement with Pesa (the "Pesa Agreement") pursuant to which (i) CCACA acquired 10,000,000 shares of Chyron and (ii) CCACA and CCACB agreed to acquire an additional 49,414,732 shares and (2) CCACA entered into a stock purchase agreement with Sepa (the "Sepa Agreement") pursuant to which CCACA agreed to acquire 5,000,000 shares of Chyron, and the voting rights and right of first refusal to an additional 9,000,000 shares. CCACA and CCACB are collectively referred to herein as CCAC. On July 25, 1995, CCACA entered into an agreement(the "Leubert Agreement") with Alfred O.P. Leubert Ltd., a New York corporation ("Leubert"), pursuant to which CCACA was granted a right of first refusal to acquire 300,000 shares of common stock, which shares were acquired by Leubert from Sepa and which reduced from 9,000,000 to 8,700,000 the right of first refusal to acquire shares of common stock as set forth in the Sepa Agreement. On July 25, 1995, CCACA and CCACB entered into an assignment and assumption agreement (the "Assignment Agreement") by and among CCACA, CCACB, WPG Corporate Development Associates IV, L.P., a Delaware limited partnership ("CDA"), WPG Corporate Development Associates IV (Overseas), L.P., a Cayman Islands exempt limited partnership ("CDAO"), WPG Enterprise Fund II, L.P., a Delaware limited partnership ("WPGII"), Weiss, Peck & Greer Venture Associates III, L.P., a Delaware limited partnership ("WPGIII"), Westpool Investment Trust plc., a public limited company organized under the laws of England ("WIT"), Lion Investments Limited, a limited company organized under the laws of England ("Lion") and Charles M. Diker (such individual together with CDA, CDAO, WPGII, WPGIII, WIT and Lion, the "WPG/Westpool Investor Group") and certain other persons (such persons together with the WPG/Westpool Investor Group, the "Assignees"), pursuant to which (i) CCACA assigned to the Assignees its rights under the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED Pesa Agreement to acquire 20,000,000 shares, (ii) CCACA assigned its rights under the Sepa Agreement to acquire 5,000,000 shares of common stock, (iii) CCACA assigned its right of first refusal to acquire 5,400,000 of the 9,000,000 shares of common stock as set forth in the Sepa Agreement and the Leubert Agreement described above, and (iv) CCACB assigned its rights under the Pesa Agreement to acquire 17,648,839 shares of common stock. The closing, as contemplated by the Pesa Agreement and the Sepa Agreement, occurred on July 25, 1995. Consequently, CCAC beneficially owns in the aggregate 21,765,892 shares and the WPG/Westpool Investor Group beneficially owns in the aggregate 41,905,896 shares. Beneficial ownership does not include 9,000,000 shares for which the voting rights have been assigned to CCAC and the WPG/Westpool Investor Group. Name of Owner Number of Shares Date of Acquisition CCACA 10,000,000 May 26, 1995 CCACB 11,765,892 July 25, 1995 CDA 17,770,615 July 25, 1995 CDAO 4,285,120 July 25, 1995 WPGII 4,415,557 July 25, 1995 WPGIII 3,671,545 July 25, 1995 WIT 6,984,311 July 25, 1995 Lion 3,308,366 July 25, 1995 C.M. Diker 1,470,382 July 25, 1995 Others 742,944 July 25, 1995 Pesa is a 100% owned subsidiary of a Spanish Company, Pesa Electronica, S.A. ("Electronica"), which in turn was 99% owned by a Spanish Company, Amper, S.A. On June 24, 1994, Amper sold all of its issued and outstanding shares of stock of Electronica to Sepa. On August 2, 1994, Sepa acquired 14,000,000 shares of Chyron common stock from certain foreign shareholders. Consequently, Sepa directly and indirectly through Pesa became the beneficial owner of 73,414,732 shares of Chyron common stock. On October 5, 1994, Electronica filed for receivership in Spain ("Suspension de Pagos"). The proceedings are comparable to a Chapter 11 reorganization under the U.S. Bankruptcy laws. The sale by Pesa of its Chyron common stock to CCAC, the WPG/Westpool Investor Group and certain other persons on July 25, 1995 was a direct result of Electronica's filing for receivership in Spain. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED RELATED PARTY TRANSACTIONS Sepa, prior to the above described change in control, was the beneficial owner of 73,414,732 shares of Chyron common stock. Consequent to such ownership, Sepa holds an amended and restated management agreement with Chyron, whereby Chyron agreed to pay management fees to Sepa at 2.5% of consolidated revenues through December 31, 1997. The management fees under this agreement are subject to an annual limitation of $1.5 million. In July 1994, Chyron took advantage of an option to prepay the management fee at a 25% discount from the aggregate estimated yearly fees for the period July 1, 1994 through December 31, 1995, resulting in estimated aggregate total savings of $486,250 in fees for the eighteen month period ending December 31, 1995. Management fees for the nine months ended September 30, 1995 and 1994 amounted to $695,000 and $854,000, respectively, and for the three months then ended amounted to $232,000 and $243,000, respectively. The prepaid management fee to Sepa was $215,600 at September 30, 1995. As of September 30, 1995 and December 31, 1994, the Company was indebted to Sepa and its affiliates for Nil and $49,000, respectively, representing the cost of services provided and interest accrued on the Convertible Subordinated Notes. Also as of these dates, the Company had outstanding receivables due from Electronica and its affiliates for equipment and services amounting to $436,000 and $685,000, respectively. In light of Electronica's filing "Suspension de Pagos" in Spain, $403,000 and $545,000 of these receivables have been reserved for as of September 30, 1995 and December 31, 1994, respectively. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. 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, 1994. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED PRINCIPLES OF CONSOLIDATION The consolidated financial statements at September 30, 1995 include the accounts of the Company and its wholly owned subsidiary, Digital Services Corporation (currently an inactive entity). All significant intercompany transactions and accounts are eliminated in consolidation. COMMON STOCK EQUIVALENTS In December 1991, the Company originally issued to Pesa $5 million of Convertible Subordinated Notes ("Notes"). The Notes are convertible into shares of Chyron common stock at a conversion rate of $.20 per share. As of September 30, 1995, only $100,000 of the Notes are outstanding. See Convertible Subordinated Notes Payable Note to the Consolidated Financial Statements. In January 1992, shareholders of the Company, other than Pesa, received one Common Stock Purchase Warrant for every two shares of common stock. The Company issued 5,795,555 of these warrants. Each warrant entitles its holder to purchase one share of the Company's common stock at $.20 per share. These warrants expire on January 31, 1996. As of September 30, 1995, a total of 3,543,780 Common Stock Purchase Warrants have been exercised. LONG-TERM INCENTIVE PLAN In May 1995, the Company's shareholders approved the Chyron Corporation Long-Term Incentive Plan ("the Plan"). The Plan allows for a maximum of 5,000,000 shares of common stock to be available with respect to the grant of awards under the Plan; any or all of such common stock may be granted for awards of Incentive Stock Options. On July 25, 1995, the Board of Directors granted Incentive Stock Options for the purchase of 3,005,000 of such shares. The purchase price per option share is $1.625, the quoted market price at the date of grant, and is payable in cash or in common stock of Chyron. The options vest over three years at 33 1/3% per annum and expire on July 25, 2000. At September 30, 1995, no options were exercisable. On July 25, 1995, the Board of Directors approved the amendment of the Plan to provide that all Directors who are not officers of the Company shall receive as a formula grant, on an annual basis on the last trading date of each July, stock options for 10,000 shares of the Company's common stock, at an exercise price equal to the fair market of the stock on the date of grant; provided that this amendment is subject to shareholder approval at the next annual meeting of shareholders. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED EARNINGS PER SHARE Earnings per share is based on the weighted average number of common shares outstanding during the period plus, when dilutive, additional shares issuable upon the assumed exercise of outstanding Common Stock Purchase Warrants and outstanding Incentive Stock Options. Fully diluted earnings per share are not presented since such presentation would not be materially different from primary earnings per share. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable are stated net of an allowance for doubtful accounts of $2,663,000 and $2,204,000 at September 30, 1995 and December 31, 1994, respectively. The Company periodically evaluates the credit worthiness of its customers and determines whether collateral (in the form of letters of credit or liens on equipment sold) should be taken or whether reduced credit limits are necessary. Credit losses have consistently been within management's expectations. Accounts and notes receivable are principally due from customers and dealers serving the broadcast video industry and non-broadcast display markets. INVENTORIES Inventories consist of the following: 09/30/95 12/31/94 (In thousands) Finished goods $ 1,854 $ 1,811 Work-in-process 4,500 1,807 Raw material 4,054 1,846 $10,408 $ 5,464 NOTES PAYABLE On April 27, 1995, the Company entered into a two year credit facility for $10,000,000 with the CIT Group. This facility is secured by substantially all the Company's accounts receivable and inventories. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Interest is payable monthly at the prime rate (8.75% at September 30, 1995) plus 2% per annum. At September 30, 1995, the Company had $6,128,000 outstanding under such facility. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED CONVERTIBLE SUBORDINATED NOTES PAYABLE The 4-year Notes (originally issued on December 27, 1991 and aggregating $5.0 million) mature January 31, 1996, bear interest (payable annually in arrears) at the prime rate (8.5% at December 31, 1994), adjusted annually each December. The Notes were originally convertible into 25,000,000 shares of common stock of the Company at a conversion rate of 20 cents per share. When the Notes were originally issued to Pesa it was anticipated that the Notes would be resold by Pesa at face value in a private placement to various investors, including certain current and past members of management of the Company. Through December 27, 1993, Pesa had converted $4.8 million in aggregate principal amount of the Notes into 24 million shares of Chyron common stock. The effect of these conversions was to increase shareholders' equity by $4.8 million and reduce future years interest expense. On December 31, 1993, Pesa sold 14 million of these shares to two non-US residents, and on August 2, 1994, Sepa acquired these 14 million shares. See Control of Registrant Note to the Consolidated Financial Statements. During May and September 1994, Pesa sold its remaining $200,000 in aggregate principal amount of the Notes to various current and past members of the Company's management at face value. As of September 30, 1995, all but $100,000 of the original aggregate principal amount of the Notes have been converted into shares of common stock of the Company. INCOME TAXES In connection with Chyron's emergence from its reorganization proceeding under Chapter 11 of the United States Bankruptcy Code on December 27, 1991, the Company adopted "Fresh Start Accounting" in accordance with AICPA Statement of Position, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Accounting requires that the Company report an income tax equivalent provision when there is book taxable income and a pre- reorganization net operating loss carryforward. This requirement applies despite the fact that the Company's pre-reorganization net operating loss carryforward would eliminate (or reduce) the related income tax payable. The current and future year benefit related to the carryforward is not reflected in Net Income, but instead is recorded as a direct increase to Additional Paid-in Capital. During the nine months ended September 30, 1995 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED and 1994, the income tax equivalent provision and the associated increase in Additional Paid-in Capital each amounted to $1,342,000 and Nil, respectively. The income tax equivalent provision does not affect the Company's tax liability. WEST COAST RESTRUCTURING During the third quarter of 1994, as the result of continuing significant operating losses by the Company's West Coast Operations and its inability to meet revenue and operating targets, management determined that it would be in the Company's best interest to implement a restructuring plan to eliminate a substantial number of the CMX and Aurora product lines and consolidate certain remaining products into the Company's Graphic Operations, with only certain product engineering capabilities remaining on the West Coast. As a result, the Company recorded a $12.7 million charge to operations during the third quarter of 1994, resulting from headcount reductions, consolidation costs, write-downs of assets related to discontinued product lines and accrual of estimated operating losses anticipated during the disposition period. For the nine months ended September 30, 1995, operating losses of $1,552,000 related to the discontinued product lines were charged against the reserve for West Coast restructuring. During August 1995, the Company entered into an agreement to sublease a portion of the office space for the West Coast Operations. The subleasing served to decrease future rent commitments and, as a result, the Company reversed $356,000 of the original $12.7 million charge to account for the decrease in projected rent expense. Additionally, during the three months ended September 30, 1995, the Company sold certain inventory that had been fully reserved for in the original $12.7 million charge. The Company realized a gain of $196,000 related to this inventory. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Overview This discussion should be read in conjunction with the Consolidated Financial Statements including the Notes thereto: Comparison of the Three Months Ended September 30, 1995 and 1994 Sales increased 28% primarily as a result of improvement in sales of the Company's graphic and character generator products, which reflects strong sales of the upper line products with particular increases coming from the Infinit!, Max>! and Maxine. Gross margin increased to $8.0 million as a result of the 28% increase in sales. Gross margins as a percentage of sales increased to 57% in 1995 compared to 56% in 1994, which is a direct result of the increased sales volume and enhanced efficiencies in the factory. Selling, general and administrative expenses increased by $332,000 or 8% over the comparable period, primarily due to the accrual of severance payments due to former management in the amount of $390,000. The increase can also be attributed to increased selling and marketing costs related to higher sales volume. This increase is net of benefits of the West Coast restructuring and other efforts by management to decrease overall selling, general and administrative expenses as a percentage of sales. Research and development expenses for the three month period ended September 30, 1995 increased by 3% over the comparable 1994 period. This increase is due to additional expenditures for new product development to address emerging markets targeted by the Company, as well as the development of new features for the Company's existing product line. This increase is net of decreases in capitalization and amortization on certain projects included in the 1994 period that were discontinued and written off in connection with the West Coast Restructuring. During September 1994, the Company restructured its West Coast operations, which resulted in a $12.7 million charge. During the three month period ending September 30, 1995 $552,000 of the original charge was recaptured by the Company. See further discussion of the related charges below in the West Coast Restructuring section. Net interest expense increased $34,000 or 25% due to increases in the average outstanding loan balance and increases in the interest rates over the comparable prior year period. Income before income taxes increased substantially to $2.5 million in 1995 from a loss of ($12.2) million in 1994. The loss in 1994 includes the West Coast Restructuring Charge of $12.7 million which was recorded during September. When comparing income before income taxes for the periods exclusive of the West Coast Restructuring Charge in 1994 and recapture of such charge in 1995, 1995 amounts rose $1.4 million or 259% due primarily to increases in sales volume and gross margin coupled with cost savings measures instituted by the Company that decreased selling, general and administrative expenses as a percentage of sales as described above. Comparison of the Nine Months Ended September 30, 1995 and 1994 Sales increased 23% primarily as a result of improvement in sales of the Company's graphic and character generator products, which reflects strong sales of the upper line products with particular increases coming from the Infinit!, Max>! and Maxine. Gross margin increased to $21.7 million as a result of the increase in sales. Gross margins as a percentage of sales were 56% in 1995 compared to 55% in 1994. The increase in the gross margin percentage is a result of the increased sales volume for the upperline products, increased sales volume for software products and enhanced efficiency in the factory. Selling, general and administrative expenses increased by $1.2 million or 10%. This increase is due to the increase in commission expense on increased sales, increased international travel costs as well as new marketing initiatives. The increase is also attributable to legal and investment banking fees amounting to $443,000 incurred with respect to the undertakings of the Special Transaction Committee of the Board of Directors, which had been appointed in connection with the potential change of control of Chyron if Pesa sold its shares. Additional increases are due to the accrual of severance payments as described in the three month comparison above. Research and development ("R&D") expenses for the nine months ended September 30, 1995 increased by 11% as compared to the same period in 1994. This increase is due to additional expenditures for new product development as well as expenditure for development of new features on the Company's existing product lines. This increase is offset by decreases attributable to the West Coast Restructuring and the related discontinuance of certain R&D operations. Net interest expense increased $23,000 due to increases in the average outstanding loan balance for the period and increases in the average interest rates in effect for the period. Income before income taxes, exclusive of the West Coast Restructuring Charge in 1994 and recapture in 1995, increased $3.2 million or 204% due to the increase in sales and respective gross margins, coupled with decreases in selling, general and administrative as a percentage of sales. See the three month comparison above for further discussion. The income taxes/equivalent provision has been decreased to reflect a reduction in the effective tax rate from 37.5% to 27.5%, cumulatively, as a result of book versus tax differences arising primarily from the West Coast Restructuring charge. Under Fresh Start Accounting, the Company is required to report an income tax equivalent provision where there is book taxable income and pre-reorganization net operating loss carryforwards. West Coast Restructuring As of September 30, 1994, Chyron's West Coast operations, CMX and Aurora, reflected a continuing trend of poor operating performance. Due to these disappointing results, the lack of certain products in the high growth sector of the market and the strategic decision by Chyron's management to redirect its product lines to a broader base market and to reengineer its R&D focus, the Company's management initiated a plan to restructure the West Coast operations. Consequently, as a major step in increasing the Company's profitability as a whole, the Company's management decided to eliminate unprofitable product lines such as CMX 6000, Cinema, Gemini, LSI and the 3500 and 3600 series product lines, reduce the workforce by 30% or 12 employees, write-down certain assets directly attributable to the unprofitable product lines to estimated net realizable value, write-off software costs that the Company felt no longer fit its strategic initiative and focus, dispose of certain assets, accrue losses for the restructuring period originally estimated to be from October 1, 1994 through March 31, 1995, subsequently revised to be from October 1, 1994 through June 30, 1995, and downsize the Company's Santa Clara, California facility. The result of these measures was a restructuring charge of $12.7 million for the West Coast operations during the year ended December 31, 1994. The specific components of the restructuring charge broken-out between asset write downs and cash outlays are as follows: Asset write downs: Write down of assets to estimated net realizable value $ 6,952 Write-off of software development costs 1,991 Total non cash charges 8,943 Cash Outlays: Accrued operating losses through date of disposition 2,500 Loss on lease commitment 700 Accrued severance for reduction in workforce 300 Other 273 $12,716 The cash outlays required by the restructuring are being funded by the Company's profitable product lines. Cash outlays for the restructuring period, which include accrued operating losses, accrued severance and other costs, were estimated to be $3,773,000. Cash outlays through September 30, 1995 amounted to $2,228,000. The estimated loss on lease commitment was revised in August 1995 as the Company began to sublease a portion of the office space for the West Coast Operations. The Company recaptured $356,000 of the lease commitment accrual to account for the decrease in future rent payments that was realized. The loss on the lease will be funded over the remaining lease term of 31 months subsequent to the restructuring period. During the three months ended September 30, 1995, the Company sold inventory which was fully reserved for in the restructuring charge. The Company recaptured $196,000 related to the cost of this inventory. Operating results as a result of the West Coast restructuring are projected to benefit by a savings of over $2 million for the year ending December 31, 1995, principally due to a reduction in annual salaries and employees benefits of $750,000, a decrease in depreciation and amortization expense of $200,000 per year, a reduction of overhead costs of approximately $200,000 per year, and a reduction in losses on unprofitable product lines of approximately $850,000 per year. OTHER INFORMATION In connection with the change in control as described in the Notes to the Consolidated Financial Statements, effective July 25, 1995 the Company increased the Board of Directors from seven members to nine members, including five newly elected directors. The Board elected Michael Wellesley-Wesley Chairman and Chief Executive Officer, succeeding John A. Servizio, who remains a director of the Company. Liquidity and Capital Resources On April 27, 1995, the Company entered into a $10,000,000, two-year, secured credit facility with the CIT Group. This facility replaced the $4.5 million secured credit facility which was to expire on April 30, 1995. See Notes Payable Note to the Consolidated Financial Statements. The Company's current ratio is 2.47 to 1.00 at September 30, 1995. At September 30, 1995, the Company's commitments consisted of $1,250,000 for the license and distribution rights of a software product payable through December 31, 1995 and capital resource commitments for leases of equipment and factory office space totaling $3.9 million of which $699,000 of the capital resource commitments are payable within one year. PART II. OTHER INFORMATION ITEMS 1., 2., 3., AND 4. Not applicable. ITEM 5. OTHER INFORMATION Effective July 25, 1995, the Company increased the size of the Board of Directors from seven members to nine members, including five newly elected directors. Additionally, On August 29, 1995, Steven N. Hutchinson resigned from the Board of Directors and on September 12, 1995, Charles M. Diker was appointed a Board of Director of Chyron. The directors constituting the Board effective September 12, 1995 are as follows: Director Director Since Frederick D. Brown 1971 Sheldon D. Camhy July 25, 1995 Charles M. Diker September 12, 1995 Alan J. Hirschfield July 25, 1995 Wesley W. Lang, Jr. July 25, 1995 Robert E. Mulcahy 1987 John A. Servizio 1991 Eugene M. Weber July 25, 1995 Michael Wellesley-Wesley May 26, 1995 Effective July 25, 1995, the Board of Directors elected Michael Wellesley-Wesley Chairman and Chief Executive Officer succeeding John A. Servizio, who remains a director of the Company. Effective July 25, 1995, Daniel DeWolf was appointed Secretary of the Company, replacing Peter J. Lance. On July 26, 1995, Mark C. Gray, President and Chief Operating Officer severed his employment with Chyron. On July 27, 1995, Isaac Hersly was appointed President and Chief Operating Officer. Previously Mr. Hersly held the position of Executive Vice President. Effective August 4, 1995, Chyron severed the employment of Peter J. Lance, Chief Administrative Officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits a(4) Registration Rights Agreement dated July 25, 1995 by and between Chyron Corporation and CC Acquisition Company A, L.L.C., CC Acquisition Company B., L.L.C., WPG Corporate Development Associates, IV, L.P., WPG Corporate Development Associates IV (Overseas), L.P., WPG Enterprises Fund II, L.P., Weiss, Peck & Greer Venture Associates, III, L.P., Westpool Investment Trust PLC, Lion Investments Limited, Charles Diker, Mint House Nominees Limited, Pine Street Ventures, L.L.C., Isaac Hersly, Alan I. Annex, Ilan Kaufthal, Z Four Partners L.L.C. and A.J.L. Beare. (b) Reports on Form 8-K b(1) Filed May 30, 1995 - Item 1 (Change in Control of Registrant). Pesa, Inc. ("Pesa"), abd Sepa Technologies, Ltd., Co ("Sepa") executed agreements in principle on May 11, 1995 and May 12, 1995, respectively, pursuant to which Pesa would sell to the MWW Group or affiliates thereof 59,414,732 shares of common stock, and Sepa would sell to the MWW Group or an affiliate thereof 5,000,000 shares of common stock. b(2) Filed June 9, 1995 (Change in Control of Registrant). Pursuant to the agreements in principle executed by Pesa and Sepa with the MWW Group on May 11, and May 12, 1995, Pesa and Sepa each separately executed on May 26, 1995, a Stock Purchase Agreement. Additionally, on May 26, 1995 Pesa sold 10,000,000 shares of common stock. b(3) Filed August 8, 1995 (Change in Control of Registrant). On July 25, 1995, Pesa, Inc. sold 49,414,732 shares of common stock of Chyron Corporation to a group of entities. Additionally, on July 25, 1995 Sepa Technologies, Ltd. sold 5,000,000 shares to the same group of entities. b(4) Filed October 25, 1995 (Change in Registrant's Certifying Accountants). On October 19, 1995, the Company dismissed Ernst & Young, LLP as its principal accountants to audit its financial statements and engaged Price Waterhouse LLP as its new independent accountants to audit its financial statements. 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) November 7, 1995 Michael Wellesley- Wesley (Date) Michael Wellesley- Wesley Chief Executive Officer and Chairman of the Board of Directors November 7, 1995 Patricia Lampe (Date) Patricia Lampe Chief Financial Officer and Treasurer EX-27 2
5 9-MOS YEAR 3-MOS 3-MOS 9-MOS DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 DEC-31-1994 SEP-30-1995 DEC-31-1994 SEP-30-1995 SEP-30-1994 SEP-30-1994 6,954 1,555 0 0 0 0 0 0 0 0 14,770 13,225 0 0 0 0 0 0 0 0 10,408 5,464 0 0 0 33,444 22,142 0 0 0 3,436 3,646 0 0 0 0 0 0 0 0 39,229 28,644 0 0 0 13,520 10,039 0 0 0 0 0 0 0 0 890 874 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 39,229 28,644 0 0 0 38,596 0 14,099 11,066 31,385 0 0 0 0 0 16,920 0 6,091 4,782 14,278 32,776 0 11,435 23,044 42,092 0 0 0 0 0 0 0 0 0 0 449 0 171 137 426 5,371 0 2,493 (12,175) (11,133) 1,477 0 686 (390) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,894 0 1,807 (11,785) (11,133) .04 0 .02 (.13) (.12) 0 0 0 0 0
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