ITEM 1. BUSINESS
General Information Regarding the Company
Chyron Corporation ("Chyron") was incorporated under the laws of the State of New York on April 8, 1966 under the name The Computer Exchange, Inc., which was changed to the present name on November 28, 1975. On April 12, 1996, Chyron acquired Pro-Bel Limited ("Pro-Bel"; collectively with Chyron, the "Company"). The Company's principal executive offices are located at 5 Hub Drive, Melville, New York 11747 and its telephone number is (516) 845-2000. Its executive offices in the United Kingdom are located at Danehill, Lower Early, Reading, Berks RG6 4PB and its telephone number is 44-1734-86-61-21.
On September 17, 1990, Chyron and its subsidiaries sought relief under Chapter 11 of the United States Bankruptcy Code. On December 27, 1991, Chyron emerged from bankruptcy. Pursuant to its plan of reorganization, Chyron issued to its banks shares of Common Stock which represented 81% of the voting power and beneficial ownership of all the issued and outstanding Common Stock on a fully diluted basis. Such shares of Common Stock were then purchased from the banks by Pesa, Inc. ("Pesa"). An aggregate of 4,666,666 shares of Common Stock owned by Pesa were eventually acquired by Sepa Technologies Ltd., Co. ("Sepa"), an affiliate of Pesa.
In May 1995, CC Acquisition Company A, L.L.C., a Delaware limited liability company ("CCA"), acquired 3,333,333 shares of Common Stock from Pesa. In July 1995, control of Chyron was transferred through the sale of an additional 18,138,238 shares of Common Stock by Pesa and Sepa to (i) CC Acquisition Company B, L.L.C., a Delaware limited liability company ("CCB"); (ii) various funds managed by Weiss, Peck & Greer, L.L.C. ("Weiss, Peck & Greer"); and (iii) Westpool Investment Trust plc ("Westpool") (Weiss, Peck & Greer and Westpool are collectively referred to as the "WPG/Westpool Investment Group"). In addition, Sepa and other parties transferred the voting control over an aggregate of 3,000,000 shares of Common Stock to these entities. As of March 10, 1997, CCA and CCB together beneficially own 8,455,297 shares of Common Stock and the WPB/Westpool Investor Group beneficially own in the aggregate 15,774,432 shares.
The Company develops, manufactures, markets and supports a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. The Company's products enable users to (i) create and manipulate text, logos and other graphic images using special effects such as 3D transforming, compositing and painting; (ii) manage, monitor and distribute video, audio and other data signals; and (iii) control edit processes and automate broadcast equipment. The worldwide market for equipment, software and systems used in the production and presentation of video and audio content encompasses major television networks, cable television broadcasters, direct to home satellite program distributors, production companies and post-production houses, as well as organizations and individuals creating materials such as corporate and specialized video and audio presentations.
Products
The Company offers a broad range of products that address the needs of the video and audio production, post-production and distribution markets. The Company's line of high performance graphics systems are used by many of the world's leading broadcast stations to display new flashes, election results, sports scores, stock market quotations, programming notes and weather information. The Company's signal management systems interconnect video, audio and data signals to and from equipment within a studio's control room or edit suite, as well as to and from signal transmission sites. The Company's line of control and automation systems are used to automate the steps used in the management, editing and distribution of video and audio content.
Graphic Systems
Graphics and character generators. Chyron's family of iNFiNiT! products use a digital computer and electronic storage to permit operators to create images capable of being broadcast either independently or superimposed on other images. Images broadcast directly from the system have included election results, stock market quotations, sports scores, commercial advertising and promotional material. Superimposed images are similarly used for a variety of purposes such as identifying speakers during interviews or displaying statistics during sports telecasts.
The flagship iNFiNiT! is a dual-user graphics workstation with one to three output channels, each with a dedicated key signal. MAX!> is a signal-user graphics system with one or two separate video and key channels. MAXINE! is a single channel/single-user character generator. MAX!> and MAXINE! have similar feature sets and effective resolution to the iNFiNiT!. In September 1996, the Company introduced WiNFiNiT!, an optional PC-based graphical user interface which utilizes the Microsoft Windows NT operating system.
Still store management systems. IMAGESTOR! offers real-time playback of uncompressed video frames and instant access to thousands of one-line or archived images. Live newscasters and broadcast trucks use IMAGESTOR! for live video capture as well as for image storage retrieval for on-air display. The IMAGESTOR! system allows on-line storage of 2,000 still images with optional additional storage available. The library of stills can be searched and sorted by criteria, keywords and other attributes. Users can create a playlist of images for automatic playback during live on-air operations and embed the selected still images with effects such as cut, dissolve, wipe, push, reveal and hide. IMAGESTOR! is available as a stand-alone workstation or a database file management software program for use with Chyron's iNFiNiT! family of graphics systems.
Compact graphics and character generators. The Company's compact character generators, sold under the CODI and PC-CODI names, provide real-time text, titling and logo generation which are used for broadcasting time, temperature, weather warnings, sports statistics, scoreboards, news updates and financial information. CODI products may operate through touch screens for real-time on-screen drawing. They can work with standard computer platforms regardless of operating system or system performance.
Electronic paint and animation systems and software. Chyron's Liberty family of paint and animation tools are resolution-independent, non- linear, digital image processing systems and software. Liberty products are used to create, edit and composite special visual effects in an on- line, real-time environment. Liberty products have been used for high- end film applications and have created special effects for major feature films, including Casino and Broken Arrow. Liberty products operate on various Silicon Graphics workstations and support all popular file formats. Liberty offers a menu of video graphic creation tools, such as painting, compositing, morphing, titling, 3D transforming, layering, coloring, cycle animation, rotoscoping and cell animation.
Signal Management Systems
Switching and routing systems. Under the Pro-Bel name, the Company provides a complete range of control solutions for matrix systems which process and distribute multimedia signals. The PROCION product offers a range of IBM PC/Windows touch screen control systems which are easy to use and configure. System 3 provides a push button control panel which can utilize simple signal matrix solutions and multi-matrix installations with integrated tie-line management. System 3 and PROCION can co-exist for maximum flexibility.
The new XD series of digital router switchers are large-scale routing systems that can produce high-performance signal distribution across a wide spectrum of applications. The TM Series are compact digital routing switchers that provide a cost-effective solution for users moving from analog to digital distribution and for smaller scale routing solutions such as remote broadcast vehicles. The HD series of routing switchers includes matrix products for digital and analog video, digital and analog audio and RS422 machine control.
Intercom/talkback. The Trilogy Commander 400 Series combines Digital Signal Processing ("DSP") audio techniques with control technology to produce a digital intercom/talkback system. The system is supplied with IBM compatible PC-based editing and control panels to manage audio crosspoints. Intercom systems are implemented in a wide range of applications including television and radio broadcast facilities, airports, hospitals, outside and remote broadcast trucks, post-production suites and leisure complexes.
Control and Automation Systems
Master control, storage and station automation. Pro-Bel has developed a suite of products which are designed to process video, audio and related data signals, automate playout of the signals and manage media signal storage devices in the master control and transmission suites.
MAPP is a Windows-based, video server management and control system. MAPP provides facilities to record, track, cache and replay broadcast material according to a user defined schedule. MAPP easily interfaces with disk based video servers manufactured by many different vendors.
The COMPASS station automation system provides comprehensive station automation capability to major broadcasters that have complex playlists. Video tape cartridge machines, video servers and other devices are typically interfaced by high speed data links which allow the system to control the devices according to a playlist schedule. The automation system monitors all functions to check for discrepancies such as time errors, machines not available for control or manual intervention.
The Company's digital master control switcher TX-220 employs component digital and AES/EBU digital audio signal processing. Features include 10 bit component digital video/audio processing with an analog option, up to 4 AES/EBU levels, stand-alone operation with an upstream keyer, multifunction plasma display, simple user friendly manual control and full integration with the compass Automation System. The master control switcher switches and combines video and audio content signals from various devices, such as video tape machines, disk based video servers, character generators and still storage systems, to produce seamless program flow for distribution to the final program delivery channel.
Electronic editing control systems. The CMX OMNI family of edit controllers are designed to control and operate edit suite equipment. CMX OMNI systems are flexible, configurable and easy to operate. They are capable of controlling over 200 types of edit suite devices developed by other manufacturers, including video tape recorders, video disks, production control switchers, digital video effects equipment, time base correctors and audio equipment.
Marketing and Sales
The Company markets its products and systems to traditional broadcast, production and post-production facilities, government agencies, educational institutions and telecommunications and corporate customers.
In order to maintain and increase awareness of its products, the Company displays at the major domestic and international trade shows of the broadcast and computer graphics industries. In the United States, the Company exhibits at the National Association of Broadcasters (NAB) and ACM SIGGRAPH conventions. It also exhibits at the International Broadcasters Conventions (IBC) in Europe, INTERBEE in Japan and Broadcast-Asia in China. The Company uses direct-mail campaigns and places advertisements in broadcast, post-production and computer industry publications.
Sales of the Company's products in the United States and the United Kingdom are made through Company direct sales personnel, dealers, independent representatives, systems integrators and OEMs. Direct sales, marketing and product specialists serving the domestic markets act as links between the customer and the Company's development teams.
Sales of the Company's products outside of the United States and United Kingdom are made through dealers and several representatives covering specific territories. Some of the dealers have been granted exclusive rights to sell certain products in specified territories. During 1996, the Company opened a sales and support office in Hong Kong in order to better service the growing market of Asia. In some territories, dealers sell products from all of the Company's product categories; in other territories, dealers handle only specific products.
Service, Support and Training
The Company offers comprehensive technical service, support and training to its customers through 24 hour per day, seven days per week access to trained service and support professionals.
Training courses are available through the Company and range in length from a few days to a few weeks and consist of a mix of classroom discussions and hands-on training. The Company offers training courses for many of its products at its Melville (New York) headquarters and its Reading (United Kingdom), Atlanta (Georgia) and Burbank (California) centers. The Company also conducts on-site training. Installation assistance, hardware and software, maintenance contracts and spare parts are made available by Company. Support contracts and a responsive spare parts supply service facilitate customer satisfaction. Service is provided both domestically and internationally by the Company or its appointed dealers and representatives. The Company also provides sales and service support to its dealers from time to time. The Company provides warranties on all of its products ranging from 90 days to five years.
Research and Development
The Company's research and product development, conducted in Melville, New York, Reading, United Kingdom and Santa Clara, California is focused on the continued enhancement of its existing products and the development of new ones.
Historically, the Company has oriented its efforts toward the development of complete systems rather than of either hardware or software standing alone. A strategic engineering group evaluates hardware and software technologies.
During 1996, 1995 and 1994, the Company expensed approximately $5.3 million, $4.1 million and $4.2 million, respectively, for research and development and amortization of capitalized software development costs incurred in connection with the development of new products and the modification and enhancement of existing products.
Manufacturing
The Company has final assembly and system integration operations located in Melville and Reading. The Company primarily uses third-party vendors to manufacture and supply all of the hardware components and sub- assemblies utilized in the Company's graphics systems and relies upon a combination of third-party vendors and internal manufacturing for components and sub-assemblies utilized in the Company's signal management systems. The Company designs many of its system components to its own specifications, including metal and electronic parts and components, circuit boards and certain subassemblies. It assembles such items and standard parts, together with internally-developed software, to create final products. The Company then performs testing and quality inspections of each product.
Competition
The market for graphics imaging, editing and animation systems, signal routing systems and media storage systems is highly competitive and is characterized by rapid technological change and evolving industry standards. Rapid obsolescence of products, frequent development of new products and significant price erosion are all features of the industry in which the Company operates. The Company anticipates increased competition from both existing companies and new market entrants. The Company is currently aware of several major and a number of smaller competitors. In the graphics area, the Company believes its primary competitors are Aston Electronic Designs Limited, Digital Graphix Inc., Dynatech Corporation, Quantel Inc. and Scitex Corporation Ltd. In the signal management area, the Company believes its primary competitors are Dynatech Corporation, Leitch Incorporated, Philips Electronics N.V., Sony Corporation and Tektronix Inc. In the control and automation area, the Company believes its primary competitors are Accom, Inc., Louth Automation, Philips Electronics N.V., Sony Corporation and Tektronix, Inc. Many of these companies have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, certain product categories and market segments, on a region-by- region basis, in which the Company does or may compete, are dominated by certain vendors.
Backlog
The Company's backlog of orders at December 31, 1996 approximated $4 million. The Company believes these orders to be firm and expects to fulfill the entire amount of this backlog in 1996.
Employees
As of December 31, 1996, the Company employed 405 persons on a full-time basis, including 63 in sales and marketing, 159 in manufacturing and testing, 39 in customer support, service and training, 50 in finance and administration and 94 in research and development. None of these employees is represented by a labor union.
Patents and Proprietary Rights
The Company's success depends upon its ability to protect its proprietary software technology and operate without infringing the rights of others. It relies on a combination of patent, trademark and trade secret laws to establish and protect its proprietary rights in its technology.
The Company currently has seven patents. The names Chyron, Scribe, Chyron Scribe, Chyron Scribe Junior, Chyron SuperScribe, iNFiNiT!, MAX!>, MAXINE!, CODI, I2, Chyron Care, Intelligent Interface, Intelligent Interface (I2), CMX, CMX AEGIS, CMX OMNI, Aurora, Liberty, PROCION and PROCION INNOVATIVE CONTROL SOLUTIONS are registered trademarks of the Company. The Company also has rights in trademarks and service marks which are not federally registered. The Company does not have registered copyrights on any of its intellectual property. The duration of patents in the United States is 20 years from priority or 17 years from issuance. As a result, the Company's existing patents will begin to expire commencing in the year 1998.
Government Regulations
The United States Federal Communications Commission has issued regulations relating to shielding requirements for electromagnetic interface in electronic equipment. The Company's products are in compliance with these regulations.
ITEM 2.
ITEM 2. FACILITIES
The executive offices and principal office of the Company and its graphics business are located in Melville, New York pursuant to a lease that expires on June 30, 2004. This facility consists of approximately 47,000 square feet and is used for manufacturing, research and development, marketing and the executive offices. The Company also leases approximately 15,000 square feet in Santa Clara, California for research and development. This lease expires on October 31, 1997. In the United Kingdom, the Company's executive office is located in Reading, United Kingdom where it owns an approximately 19,000 square foot facility. This facility is used for manufacturing, research and development and marketing. The Company occupies additional facilities in the United Kingdom in Reading and Andover, used primarily for research and development and manufacturing, which total approximately 28,000 square feet pursuant to leases which expire from October 31, 1997 through September 24, 2020. Currently, the Company is considering expanding its Andover facility but has not made any lease commitments. The Company currently utilizes 90% to 100% of the space of all of its facilities. Management currently believes that, other than the Andover facility, each facility is suitable for its existing operations and does not foresee the need for any significant expansion of its current facilities.
ITEM 3.
ITEM 3. LITIGATION
The Company is a party to Percival Hudgins & Company, Inc. v. Chyron Corporation v. John Percival, pending in the United States District Court, North District of Georgia (Atlanta), Civil Action No. 1 95-CV-CAM. This is a breach of contract action for an alleged success fee in connection with the sale of Common Stock by Pesa and Sepa to the new investment group. Plaintiff alleges that such transaction was subject to the terms of its engagement letter with the Company. Plaintiff seeks damages of approximately $600,000 together with counsel fees. The Company has answered, denying all material allegations, and has asserted a third party claim against plaintiff's principal, alleging that he, as a director of the Company while his investment banking firm was engaged by the Company, breached his fiduciary duties to the Company and is liable for any amounts that might be awarded to plaintiff, together with counsel fees. Plaintiff has recently amended the complaint to add a claim for quantum meruit. Discovery is continuing.
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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 24, 1997, at a Special Meeting of Shareholders, the Company's shareholders' ratified a one-for-three reverse stock split of its common stock which was effective February 10, 1997. 77,162,761 shares were voted for the proposal, 2,876,490 shares were voted against the proposal and 169,212 shares abstained.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS
Principal Market
Chyron's common stock is traded on the New York Stock Exchange ("NYSE") under the ticker symbol "CHY". The approximate number of holders of record of the Company's common stock at December 31, 1996 was 8,100.
The following table sets forth the high and low reported sales price for the common stock adjusted to reflect the reverse stock split.
Price Range of Common Stock High Low Year Ended December 31, 1996 Fourth Quarter............. $15.375 $ 8.25 Third Quarter.............. 19.875 12.00 Second Quarter............. 18.750 9.375 First Quarter.............. 10.125 6.375
Year Ended December 31, 1995 Fourth Quarter............. $8.625 $5.250 Third Quarter.............. 9.000 2.438 Second Quarter............. 3.000 1.500 First Quarter.............. 2.250 1.125
On March 14, 1997, the closing price of the Company's common stock as reported on the NYSE was $6.50.
The Company has not declared or paid any cash dividend since November 27, 1989. The Company currently plans to retain its future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. During the term of its loan agreement with Fleet Bank (formerly NatWest Bank), the Company is prohibited from paying dividends in excess of 25% of its net income for the then current fiscal year.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts)
Year Ended December 31, 1996(1) 1995 1994 1993 1992 Statement of Operations Data: Net sales................. $82,608 $53,971 $42,762 $37,391 $29,715 Cost of products sold..... 39,941 22,746 18,912 16,816 12,512 Gross profit.............. 42,667 31,225 23,850 20,575 17,203
Operating expenses: Selling, general and administrative............ 22,349 17,066 14,301 13,452 11,300 Research and development.. 5,253 4,105 4,163 3,573 2,964 Management fee............ 2,911 1,139 800 891 West Coast restructuring charge (recapture)........ (1,339) 12,716 Total operating expenses.. 27,602 22,743 32,319 17,825 15,155
Operating income (loss)... 15,065 8,482 (8,469) 2,750 2,048 Interest and other expense, net.............. 1,666 536 525 714 445 Income (loss) before provision for income taxes..................... 13,399 7,946 (8,994) 2,036 1,063 Income tax/equivalent provision................. 4,745 470 760 598
Net income (loss)......... $ 8,654 $ 7,476 $(8,994) $ 1,276 $ 1,005 Net income (loss) per common share(2)........... $ 0.27 $ 0.25 $ (0.31) $ 0.05 $ 0.04 Weighted average number of common and common equivalent shares outstanding(2)............ 32,327 30,382 28,962 25,295 23,514
December 31, 1996 1995 1994 1993 1992 Balance Sheet Data: Cash and cash equivalents. $ 4,555 $ 5,012 $ 1,555 $ 213 $ 403 Working capital........... 41,867 28,221 12,103 13,256 11,692 Total assets.............. 91,403 44,332 28,644 38,516 35,623 Long-term obligations..... 16,324 4,911 4,829 200 3,000 Shareholders' equity...... 53,946 29,983 13,776 22,627 17,882
(1) Includes the operations of Pro-Bel since its acquisition by the Company on April 12, 1996. The acquisition was accounted for as a purchase. See Note 2 to the Consolidated Financial Statements. (2) Adjusted to reflect the Reverse Stock Split which was ratified by the Company's shareholders on January 24, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may publish forward looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: product concentration in a mature market, dependence on the emerging digital market, rapid technological changes, highly competitive environment, new product introductions, seasonality, fluctuations in quarterly operations results, expansion into new markets and the Company's ability to implement successfully its acquisition and alliance strategy.
Overview
The Company develops, manufactures, markets and supports a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. The Company introduced the iNFiNiT!, its flagship product, in late 1990. Subsequently, the Company has introduced a broad range of graphics products such as the MAX!> and MAXINE!, CODI, LIBERTY, WiNFiNiT! and IMAGESTOR!. These products superimpose text, logos and other graphics onto a primary video image or create an independent image to be televised by itself. The Company expects that revenue from its current graphics and character generator systems will continue to constitute a substantial percentage of its net sales in the near future. The Company's Pro-Bel signal management systems interconnect video, audio and data signals to and from equipment within a studio's control room or edit suite, as well as to and from signal transmission sites.
The Company's net sales have increased from $29.7 million in 1992 to $82.6 million in 1996, while gross profit has increased from $17.2 million in 1992 to $42.7 million in 1996. Net income was $1.0 million in 1992 and $8.7 million in 1996.
The Company was incorporated under the laws of the State of New York on April 8, 1966. The Company filed for Chapter 11 protection in September 1990 and emerged from Chapter 11 in December 1991. In 1994, the Company restructured its West Coast operations, resulting in a charge of approximately $12.7 million. In 1995, a new investor group obtained control, a new executive management team was put in place, a new Board of Directors was elected and a new business strategy was adopted.
The Company's current business strategy includes the following key elements: (i) maintain and enhance its leadership position in current markets; (ii) provide upgrades to existing equipment; (iii) cross sell products to its existing customers; (iv) address low-end and emerging markets; (v) expand it global presence; (vi) pursue strategic acquisitions and alliances; and (vii) utilize open platforms. The Company intends to continue to serve its worldwide customer base by introducing products which address the requirements to improve the production and presentation of video, audio and other data. The Company also intends to continue to upgrade its current high performance systems, invest in the development of new options and enhancements for its products and provide complete system solutions to its customers.
Acquisition of Pro-Bel
On April 12, 1996, the Company acquired Pro-Bel, located in Reading, United Kingdom. Pro-Bel develops, manufactures and markets signal management systems and control and automation systems. The aggregate consideration of $19.1 million consisted of $6.9 million in cash, $5.3 million in two-year promissory notes and 1,048,735 restricted shares of Common Stock valued at $6.9 million.
The acquisition of Pro-Bel was accounted for as a purchase. Accordingly, the cost was allocated to the net tangible assets acquired based upon their estimated fair values. The excess of cost over the estimated fair value of the net tangible assets acquired amounted to $6.9 million, which is being amortized over 12 years using the straight-line method.
Investment in RT-SET
On February 29, 1996, the Company purchased a 19% interest in Real Time Synthesized Entertainment Technology, Ltd. ("RT-SET"), which develops, markets and sells real time virtual studio set software and proprietary communications hardware and is located in Israel. The Company purchased shares of RT-SET Convertible Preferred Stock in exchange for 800,000 restricted shares of Common Stock. In addition, the Company was granted certain call option rights which, if and when exercised, allows the Company to purchase up to a 51% interest in RT-SET in exchange for the issuance of additional shares of Common Stock. In accordance with the purchase agreement, the 800,000 shares of Common Stock were to be held in escrow and released in two tranches, subject to certain conditions. One-third of such shares was released from escrow in June 1996 and the remainder will be released upon a public offering of RT-SET's equity or upon RT-SET achieving two consecutive years of profitability. Prior to any public offering by RT-SET or achievement of the aforementioned profitability, the Company has the right to recover the remaining two- thirds of its shares held in escrow in exchange for its interest in RT- SET. The transaction has been recorded as the purchase of a right to acquire a 19% interest in RT-SET which was diluted to 17% as a result of a subsequent investment by a third party. RT-SET shall retain the voting rights with respect to the escrowed shares while such shares are held by the escrow agent. The acquisition was recorded at the estimated fair value of the restricted shares of Common Stock released from escrow.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales increased 53.1% to $82.6 million in 1996 from $53.9 million in 1995. Over 85% of the $28.7 million increase was attributable to the inclusion, since April 1996, of Pro-Bel's sales; Chyron's graphic products showed modest growth. The Company's net sales consist of product sales, upgrades and enhancements and rental income as well as customer service revenue.
Gross Profit. Gross profit increased to $42.7 million in 1996 from $31.2 million in 1995. This increase was primarily attributable to the 53.1% increase in net sales. Gross margin as a percentage of net sales decreased to 51.6% in 1996 from 57.9% in 1995. This decrease was caused primarily by the inclusion since April 1996 of net sales of Pro-Bel products, which historically have had lower gross margins. The gross margin for the Chyron product lines decreased slightly, primarily as a result of the product mix for the year. Customer service costs are included in selling, general and administrative expenses and are not material.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 31.0% to $22.3 million in 1996 from $17.1 million in 1995. As a percentage of net sales, selling, general and administrative expenses decreased to 27.0% in 1996 from 31.6% in 1995. The increase in dollars was primarily due to the inclusion of Pro- Bel's operations since April 1996 and the accounting for the acquisition under the purchase method resulting in amortization of excess purchase price over net tangible assets and increased depreciation, as well as increased costs as a direct result of increased sales volume. The decrease as a percentage of net sales was affected by the incurrence in 1995 of $443,000 of one-time legal and investment banking fees (incurred with respect to the undertaking of the Special Transaction Committee of the Board of Directors, which was appointed in connection with the potential change in control of the Company) and $430,000 of severance costs for former management.
Research and Development Expenses. Research and development expenses increased 27.9% to $5.3 million in 1996 from $4.1 million in 1995. This increase was primarily due to the inclusion of Pro-Bel's research and development expenditures since April 1996. Research and development expenses related to Chyron's product lines decreased in 1996 in part due to an increase of approximately $800,000 in the amount of software capitalized and an increased percentage of research and development undertaken internally instead of by outside consultants.
Interest and Other Expense, Net. Interest and other expense, net, increased 210.8% to $1,666,000 in 1996 from $536,000 in 1995. In conjunction with the Pro-Bel acquisition, the Company entered into various agreements with a bank, issued promissory notes (payable in pounds sterling) to the shareholders of Pro-Bel and assumed Pro-Bel's existing bank debt, all of which led to an increase of $866,000 in interest expense for the year. Net foreign currency transaction losses of $264,000 have been recognized in 1996 due to the change in the exchange rate from date of acquisition of Pro-Bel to December 31, 1996.
Income Before Provision for Income Taxes. Income before provision for income taxes increased 68.6% to $13.4 million in 1996 from $7.9 million in 1995, primarily due to the improved operating income of Chyron coupled with the addition of the operating income generated by Pro-Bel.
Income Taxes/Equivalent Provision. Income taxes/equivalent provision increased to $4.7 million in 1996 from $470,000 in 1995, primarily because in 1995 an income tax benefit of approximately $2.2 million was realized as a result of the 1994 West Coast restructuring. The increase was also due to increased income before income taxes in 1996.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Net Sales. Net sales increased 26.2% to $54.0 million in 1995 from $42.8 million in 1994. This increase was primarily due to increased sales of the Company's character generator lines. The iNFiNiT! product line showed the largest dollar growth at $6.4 million, or approximately 41%, with the MAX!> line showing the largest percentage growth at approximately 65%, or $4.7 million. Increases in net sales also reflect growth in the Company's MAXINE! product line, sales of which grew $2.4 million, or approximately 39%, over the prior year. The growth in sales has been both domestically and abroad. These increases were partially offset by the lack of sales from products discontinued in connection with the West Coast restructuring.
Gross Profit. Gross profit increased 30.9% to $31.2 million in 1995 from $23.9 million in 1994. This increase was primarily due to the 26.2% increase in net sales. Gross margin as a percentage of net sales increased to 57.9% in 1995 from 55.9% in 1994 mainly due to increased manufacturing efficiencies and management's cost reduction efforts.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 19.3% to $17.1 million in 1995 from $14.3 million in 1994. This increase was primarily due to (i) legal and investment banking fees of $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 in control of the Company, (ii) the accrual of $430,000 of severance payments for former management and (iii) increases due to increases in costs related to the 26.2% increase in net sales. These increases were offset by cost cutting measures instituted by the Company as part of the West Coast restructuring in 1994 resulting in a decrease in selling, general and administrative expenses as a percentage of net sales to 31.7% in 1995 from 33.4% in 1994.
Research and Development Expenses. Research and development expenses decreased 1.4% to $4.1 million in 1995 from $4.2 million in 1994. This decrease was primarily due to benefits recognized as part of the Company's West Coast restructuring in the third quarter of 1994, which eliminated costs related to the Company's unprofitable product lines. Exclusive of 1994 costs related to unprofitable product lines, research and development expenses increased by $359,000 in 1995. This increase was primarily 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 products. Research and development expenses include the amortization of software development costs, which increased by $82,000 in 1995 due to the release of new options in 1995 for the Company's character generator product lines.
Management Fee. In December 1991, the Company entered into a management agreement (the "Management Agreement") with an affiliate of Sepa to provide business and technical services to the Company. This agreement was subsequently transferred to Sepa. In December 1995, the Company (under its new management) agreed to terminate the Management Agreement upon payment to Sepa of $2.0 million. Pursuant to the original Management Agreement, the Company would have paid $1.5 million in both 1996 and 1997.
West Coast Restructuring (Recapture). As of September 30, 1994, the Company'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 management to redirect its product lines to a broader base market and to reengineer its research and development focus, the Company initiated a plan to restructure the West Coast operations.
Consequently, the Company decided to eliminate unprofitable product lines such as CMX 6000, Cinema, Gemini, LSI and the 3500 and 3600 series product lines, reduce the West Coast workforce by 30% (or 12 employees), write-down to estimated net realizable value certain assets directly attributable to the initiative and focus, dispose of certain assets, accrue losses for the restructuring period of October 1, 1994 through March 31, 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 and subsequently a recapture of $1.3 million of such charge in 1995. The specific components of the restructuring charge broken-out between asset write downs and cash outlays were as follows (in thousands):
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 Total................................. $12,716
The cash outlays required by the restructuring were funded by the Company's profitable product lines. Cash outlays estimated for the six month restructuring period were $3.8 million, of which $1.0 million was made by December 31, 1994. The loss on the lease was to be funded over the remaining lease term of 31 months subsequent to the restructuring period. In 1995, a sublease was obtained. The Company's graphics division had been funding the operating losses of CMX and Aurora out of its working capital since CMX and Aurora began their trend of unprofitability.
Operating results as a result of the West Coast restructuring were projected to benefit by a savings of over $2.0 million for 1995, principally due to a reduction in annual salaries and employee 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. The Company believes such savings have been substantially realized.
Interest and Other Expense, Net. Interest and other expense, net, increased 2.1% to $536,000 in 1995 from $525,000 in 1994. This increase was primarily due to an increase in the average prime rate of interest in 1995 and additional interest expense related to the Company's capital lease obligations entered into in December 1994. This increase was offset by earnings on the Company's cash equivalents.
Income Before Provision for Income Taxes. Income before provision for income taxes was $7.9 million for 1995, an improvement of $16.9 million over the $9.0 million loss in the prior year. Net income for 1995 included a $2.0 million charge related to the termination of the Company's Management Agreement with Sepa, which is further described in Note 16 to the Consolidated Financial Statements, and a recapture of $1.3 million of the prior year's $12.7 million restructuring charge. For details of 1995 activity related to the West Coast restructuring, see Note 17 to the Consolidated Financial Statements. Exclusive of the management fee charge in 1995 and amounts related to the West Coast restructuring change in 1994 and 1995, income before provision for income taxes increased $5.0 million due primarily to increases in net sales and gross margins for 1995 coupled with increased efficiencies and cost saving measures as well as the benefit of the West Coast restructuring commencing in the third quarter of 1994.
Income Taxes/Equivalent Provision. A total income tax/equivalent provision of $470,000, or 5.9%, was recorded in 1995 and included a tax benefit of approximately $1.0 million which was recognized as a result of the reduction in the valuation allowance provided on deferred tax assets. The valuation allowance was reduced because management believed that the Company would generate sufficient future taxable income from ordinary and recurring operations to realize the deferred tax assets. At December 31, 1995, the Company had recorded a valuation allowance of approximately $5.4 million. At December 31, 1996, the valuation allowance was released in its entirety.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash on hand of $4.5 million, working capital of $41.9 million and an unused borrowing commitment available of $3.9 million.
To finance the acquisition of Pro-Bel, the Company incurred additional debt of $7.2 million and used cash on hand of $6.9 million. In connection with the acquisition of Pro-Bel, the Company issued promissory notes to the shareholders of Pro-Bel for 3.5 million pounds sterling ($5.9 million, converted at the December 31, 1996 exchange rate) in conjunction with the acquisition (see Note 2 to Consolidated Financial Statements). The promissory notes are secured by an irrevocable letter of credit from a bank. The amount of this irrevocable letter of credit is included as an outstanding borrowing in the formula used to calculate borrowing availability for the Company's facility with Fleet Bank described below. Interest through April 15, 1997 is equal to LIBOR as of April 15, 1996 (6.46%) and is payable quarterly. Interest through April 15, 1998 is equal to LIBOR as of April 15, 1997. The notes are due on or before April 15, 1998 and are subordinated to any obligations to a bank or financial institution currently existing or subsequently entered into. The notes can be prepaid without penalty subsequent to November 1, 1996. See Note 10 to Consolidated Financial Statements.
Since the Pro-Bel acquisition, the Company's consolidated financial statements include the Pro-Bel accounts, as adjusted for purchase accounting. At the date of acquisition, inventory increased by $7.8 million, accounts receivable increased by $6.9 million and accounts payable increased by $9.5 million which, in sum with other current assets acquired and current liabilities assumed, increased working capital by $6.8 million. Additionally, at the date of acquisition, property and equipment increased by $8.8 million, excess of cost over net tangible assets acquired of $6.9 million was recorded and $3.6 million of Pro-Bel debt was assumed.
On March 28, 1996 and April 16, 1996, the Company entered into agreements with Fleet Bank (formerly NatWest Bank) to obtain a revolving credit facility of $10.0 million and a term loan of $8.0 million, respectively. The entire facility is secured by certain of the Company's assets. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Additionally, an over-advance is available above the borrowing formula in an amount not to exceed $3.0 million. Interest on the revolving credit facility is equal to adjusted LIBOR plus 175 basis points or prime (8.25% at December 31, 1996) and is payable monthly. The term loan is payable in quarterly installments of $500,000, commencing June 1, 1996. Interest on the term loan is equal to adjusted LIBOR plus 200 basis points or prime and is payable monthly. See Note 10 to Consolidated Financial Statements.
Pro-Bel has a commercial mortgage term loan with Barclay's Bank Plc. ("Barclays"). The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR (6% at December 31, 1996) plus 2%. The loan (including interest) is payable in quarterly installments of 80,600 pounds sterling ($136,000, converted at the December 31, 1996 exchange rate). See Note 10 to Consolidated Financial Statements.
On February 1, 1996, Pro-Bel entered into an agreement with Barclays to obtain a trade finance facility of 750,000 pounds sterling ($1,267,000, converted at the December 31, 1996 exchange rate). The facility is secured by Pro-Bel's accounts receivable. Interest is equal to the bank's base rate plus 2% (8% at December 31, 1996) on advances against accounts receivable in pounds sterling and equal to the Barclays currency call loan rate plus 2% (8% at December 1, 1996) on advances against foreign accounts receivable. Interest is payable quarterly, in arrears. See Note 10 to Consolidated Financial Statements.
On February 1, 1996, Pro-Bel entered into an agreement with Barclays to obtain an overdraft facility of 750,000 pounds sterling. Interest is equal to the bank's base rate plus 2.5% (8.5% at December 31, 1996) and is payable quarterly commencing in March 1996. The facility has a sublimit for overdraft on Pro-Bel's wholly owned subsidiary, Trilogy Broadcast Limited, of 160,000 pounds sterling ($270,000, converted at the December 31, 1996 exchange rate). This facility is payable upon written demand by the bank and any undrawn portion may be cancelled by the bank at any time. See Note 10 to Consolidated Financial Statements.
In January 1997, Pro-Bel entered into an agreement with Barclays whereby Barclays agreed to provide an overdraft facility of up to 3.0 million pounds sterling through December 31, 1997 to Pro-Bel and its subsidiaries. The overdraft facility provides for interest at 1.5% per annum over the bank's base rate. Interest is payable quarterly, in arrears. This facility replaces the trade finance facility of up to 750,000 pounds sterling and the overdraft facility of up to 750,000 pounds sterling in place at December 31, 1996. All monies under the facility are repayable upon written demand and are secured by accounts receivable. See Note 10 to Consolidated Financial Statements.
At December 31, 1996, the Company had operating lease commitments for equipment and factory and office space totaling $12.7 million, of which $1.0 million is payable within one year. See Note 10 to Consolidated Financial Statements.
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of the inflation, the Company has experienced increased costs of materials, supplies, salaries and benefits and increased general and administrative expenses. The Company attempts to pass on increased costs and expenses by developing more useful and cost effective products for its customers that can be sold at more favorable profit margins.
REPORT OF INDEPENDENT AUDITORS
February 3, 1997
To the Board of Directors and Shareholders of Chyron Corporation
In our opinion, the consolidated financial statements as of December 31, 1996 and 1995 and for each of the two years in the period ended December 31, 1996 listed in the index appearing under Item 14(a)(1) and (2) on page 56 present fairly, in all material respects, the financial position of Chyron Corporation and its subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1, on January 24, 1997, the Company's shareholders ratified a one-for-three reverse stock split. The consolidated financial statements for the year ended December 31, 1994 have been restated to reflect retroactive application of this reverse stock split. We have audited the adjustments described in Note 1 that were applied to restate the 1994 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied to the 1994 consolidated financial statements.
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors Chyron Corporation and Subsidiary
We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1994 of Chyron Corporation and subsidiary. Our audit also included the consolidated financial statement schedule listed in the Index at Item 14(a) for the year ended December 31, 1994. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit prior to the restatement discussed in Note 1.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Chyron Corporation and subsidiary for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young, LLP
Melville, New York February 17, 1995
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHYRON CORPORATION CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts)
December 31, Assets 1996 1995 Current assets: Cash and cash equivalents............. $ 4,555 $ 5,012 Accounts and notes receivable......... 25,237 13,967 Inventories........................... 23,502 11,645 Prepaid expenses...................... 865 578 Deferred tax asset.................... 6,015 6,457 Other................................. 2,826 Total current assets................ 63,000 37,659 Property and equipment................. 12,701 3,300 Excess of cost over net tangible asset acquired........................ 6,439 Investment in RT-SET................... 2,161 Software development costs............. 2,176 1,716 Deferred tax asset..................... 4,709 1,403 Other.................................. 217 254 TOTAL ASSETS........................... $91,403 $44,332
Liabilities and Shareholders Equity Current Liabilities: Accounts payable and accrued expenses. $15,828 $ 8,120 Management fee payable................ 1,000 Reserve for West Coast restructuring.. 158 Current portion of long-term debt..... 5,080 Capital lease obligations............. 225 160 Total current liabilities........... 21,133 9,438 Long-term debt......................... 15,163 4,741 Capital lease obligations.............. 118 170 Other.................................. 1,043 Total liabilities.................... 37,457 14,349
Commitments and contingencies (See Note 15) Shareholders' equity: Preferred stock, par value without designation; Authorized - 1,000,000 shares; Issued - none Common stock, par value $.01; Authorized - 150,000,000 shares; Issued and outstanding, 32,384,635 and 30,023,798 shares at 1996 and 1995, respectively.......................... 324 300 Additional paid-in capital............. 43,124 28,340 Retained earnings...................... 9,997 1,343 Cumulative translation adjustment...... 501 Total shareholders equity............ 53,946 29,983 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $91,403 $44,332
See Notes to Consolidated Financial Statements
CHYRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994
Net sales............................ $82,608 $53,971 $42,762 Cost of products sold................ 39,941 22,746 18,912 Gross profit......................... 42,667 31,225 23,850
Operating expenses: Selling, general and administrative. 22,349 17,066 14,301 Research and development............ 5,253 4,105 4,163 Management fee...................... 2,911 1,139 West Coast restructuring charge (recapture)......................... (1,339) 12,716 Total operating expenses............. 27,602 22,743 32,319
Operating income (loss).............. 15,065 8,482 (8,469) Interest and other expense, net...... 1,666 536 525 Income (loss) before provision for income taxes........................ 13,399 7,946 (8,994) Income taxes/equivalent provision.... 4,745 470 Net income (loss).................... $ 8,654 $ 7,476 $(8,994)
Net income (loss) per common share... $ .27 $ .25 $ (.31) Weighted average number of common and common equivalent shares outstanding......................... 32,327 30,382 28,962
See Notes to the Consolidated Financial Statements
CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................... $8,654 $7,476 $(8,994) Adjustments to reconcile net income (loss) to net cash provided by operating activities: West Coast restructuring (recapture).. (1,339) 11,766 Depreciation and amortization......... 3,120 2,067 2,037 Utilization of deferred tax asset..... 2,335 354 Loss on abandonment of leasehold improvements.......................... 350 Changes in operating assets and liabilities: Accounts and trade notes receivable... (3,505) (742) 567 Inventories........................... (3,303) (6,181) 2,879 Prepaid expenses...................... (117) 1,320 (1,184) Other assets.......................... (464) Accounts payable and accrued expenses. (2,865) 1,112 (1,913) Management fee payable................ (1,000) 1,000 Reserve for West Coast restructuring.. (1,327) Net cash provided by operating activities............................ 2,855 3,740 5,508
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Pro-Bel and Investment in RT-SET............................. (7,191) Acquisition of property and equipment. (1,802) (710) (660) Capitalized software development...... (1,268) (207) (1,383) Other................................. 52 28 102 Net cash (used in) investing activities............................(10,209) (889) (1,941)
CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligations. (262) (106) Payments of revolving credit agreement............................. (5,644) (4,500) (1,985) Net proceeds from new credit facility. 11,976 4,741 Proceeds from exercise of common stock purchase warrants, net.......... 239 471 43 Proceeds from exercise of stock options............................... 552 Payments of Chapter 11 claims and other reorganization items............ (283) Net cash (used in) provided by financing activities.................. 6,861 606 (2,225) Effect of foreign currency rate fluctuations on cash and cash equivalents........................... 36 Change in cash and cash equivalents... (457) 3,457 1,342 Cash and cash equivalents at beginning of year............................... 5,012 1,555 213 Cash and cash equivalents at end of year.................................. $4,555 $5,012 $ 1,555
SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid......................... $1,636 $ 555 $ 548 Income taxes paid..................... $2,920 $ 116 $ 71
See Notes to Consolidated Financial Statements
CHYRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Non-cash investing and financing activities:
On February 29, 1996, the Company effectively acquired an option to acquire a 19% interest in RT-SET Ltd. in exchange for 800,000 shares of Chyron common stock. See Note 3 to the Consolidated Financial Statements.
On April 12, 1996, the Company acquired the issued and outstanding shares of Pro-Bel. The consideration in addition to cash included 1,048,735 shares of Chyron common stock valued at $6,868,000 and notes payable of $5,349,000 (3.5 million pounds sterling valued at the exchange rate at the date of acquisition). See Note 2 to the Consolidated Financial Statements.
CHYRON CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Cumu- Retained lative Addi- Earnings Trans- tional Accumu- lation Paid-in lated Adjust- Shares Amount Capital Deficit) ment
Balance at December 31, 1993. 28,871 $289 $19,477 $2,861 Net loss..................... (8,994) Exercise of warrants......... 93 1 42 Conversion of subordinated notes......................... 167 1 99
Balance at December 31, 1994.. 29,131 291 19,618 (6,133) Net income.................... 7,476 Exercise of warrants.......... 726 7 464 Conversion of subordinated notes......................... 167 2 98 Benefit of utilization of net operating loss carryforward under Fresh Start Reporting... 1,360 Income tax equivalent benefit from reduction of deferred tax asset valuation allowance. 6,800
Balance at December 31, 1995.. 30,024 300 28,340 1,343 Net income.................... 8,654 Exercise of warrants.......... 398 4 235 Exercise of stock options..... 114 1 551 Issuance of stock in connection with acquisition of Pro-Bel, Ltd.................. 1,049 11 6,857 Issuance of stock in connection with investment in RT-SET........................ 800 8 1,942 Cumulative translation adjustment.................... $501 Income tax equivalent benefit from reduction of deferred tax asset valuation allowance..... 5,199
Balance at December 31, 1996.. 32,385 $324 $43,124 $9,997 $501
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chyron Corporation and its wholly-owned subsidiaries("Chyron" or the "Company") develops, manufactures, markets and supports a broad range of equipment, software and systems that facilitate the production and enhance the presentation of live and pre-recorded video, audio and other data. Chyron's wholly-owned subsidiary, Pro-Bel Limited ("Pro-Bel"), develops, manufactures and markets signal management systems and control and automation systems.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On April 12, 1996, the Company acquired Pro-Bel and its subsidiaries (see Note 2). The Company's other subsidiaries are inactive.
Restatement and Reclassification
On January 24, 1997, the Company's shareholders ratified a one-for-three reverse stock split. Net income (loss) per share, weighted average number of common and common equivalent shares outstanding, common stock issued and outstanding, additional paid-in-capital and all other common stock transactions presented in these consolidated financial statements have been restated to reflect the one-for-three reverse stock split. In addition, certain prior year amounts have been reclassified to conform to the current year presentation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the periods presented.
Cash and Cash Equivalents
Cash includes cash on deposit and amounts invested in a highly liquid money market fund. Cash equivalents consist of short term investments convertible into cash within three months or less. The carrying amount of cash and cash equivalents approximates their fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market. The need for inventory obsolescence provisions is evaluated quarterly by the Company and, when appropriate, provisions for technological obsolescence, non-profitability of related product lines and excess quantities on hand are made. Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization are provided on the straight line method over the following estimated useful lives:
Buildings................. 35 years Machinery and Equipment... 3-10 years Furniture and Fixtures.... 5-10 years Leasehold Improvements.... Shorter of the life of improvement or remaining life of the lease
Revenue Recognition
Net sales, which include revenue derived from product sales and upgrades as well as service revenue, are recorded upon shipment of product or performance of service. Customer service costs are included in selling, general and administrative expenses and are not material.
Income Taxes
In connection with the Company's emergence in 1991 from its reorganization proceeding under Chapter 11 of the United States Bankruptcy Code, the Company adopted "Fresh Start Reporting" in accordance with AICPA Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Reporting 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. The income tax equivalent provision does not affect the Company's tax liability.
The Company's net deferred tax assets represent the tax benefit to be derived from the pre- and post- reorganization net deductible temporary differences.
Translation of Foreign Currencies
The functional currency for the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currency to U.S. dollars is performed for asset and liability accounts using period-end exchange rates and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are recorded in the cumulative translation adjustment account which is included in shareholders' equity. Transaction gains or losses are included in interest and other expenses.
Net Income (Loss) Per Share
Net income (loss) 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 equivalents. Fully diluted net income (loss) per share is not presented since such presentation would not be materially different from primary net income (loss) per share.
Common Stock Equivalents
In December 1991, the Company issued to Pesa, Inc. ("Pesa"), a Delaware corporation, and its then majority shareholder, $5 million of Convertible Subordinated Notes ("Notes"). The Notes were convertible into shares of common stock at a conversion price of $.60 per share. As of December 31, 1995, all of the Notes have been so converted. See Note 11.
In January 1992, shareholders of the Company, other than Pesa, received one warrant for every two shares of common stock held when the Company issued 1,931,851 Common Stock Purchase Warrants. Each warrant entitled its holder to purchase one share of common stock at $.60 per share. As of December 31, 1996, a total of 1,736,182 Common Stock Purchase Warrants had been exercised. The remaining warrants expired on January 31, 1996.
During 1995 and 1996, respectively, the Company's Board of Directors granted to certain employees 1,041,666 and 425,000 Incentive Stock Options for the purchase of Chyron common stock and to non-employee members of the Board of Directors 30,000 and 29,999 Non-Incentive Stock Options for the purchase of Chyron common stock. The exercise price of each stock option granted is the quoted closing market price at the date of such grant. The options vest over three years and expire five years from the date of grant. See Note 12.
Stock-Based Compensation Plans
The Company elected to continue following Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its employee stock options, rather than adopt the alternate method of accounting provided under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Under APB 25, the Company does not recognize compensation expense on stock options granted to employees because the exercise price of each option is equal to the market price of the underlying stock on the respective date of grant. See Note 12.
2. ACQUISITION OF PRO-BEL LIMITED
On April 12, 1996, the Company acquired all of the issued and outstanding capital stock of Pro-Bel Limited, located in Reading, United Kingdom in exchange for $6.9 million in cash, 3.5 million British pounds sterling ($5.3 million) in notes and 1,048,735 shares of restricted Chyron common stock valued at $6.9 million.
The acquisition of Pro-Bel was accounted for as a purchase. Accordingly, the cost of the acquisition was allocated to the net assets acquired based upon their estimated fair values. The excess of cost over the estimated fair value of net tangible assets acquired amounted to $6,928,000, which is being amortized over 12 years using the straight line method. Amortization in 1996 amounted to $489,000. The Company evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned excess of cost over the value of net tangible assets acquired or its carrying amount. In making such determinations, the Company evaluates undiscounted cash flows of the underlying business which gave rise to such amount.
The following unaudited pro forma statements of operations include the operating results of the Company and Pro-Bel for the years ended December 31, 1996 and 1995, assuming the acquisition of Pro-Bel had been made as of January 1, 1996 and 1995, respectively (in thousands except per share amounts).
Pro Forma Statement of Operations for the Year Ended December 31, 1996 (Unaudited)
Pro Forma Adjustment (a) Increase/ Pro-Bel Chyron (Decrease) Consolidated
Net sales................ $10,366 $82,608 $92,974 Cost of products sold.... 5,596 39,941 $784 (b) 46,321 Gross profit............. 4,770 42,667 (784) 46,653
Operating expenses: Selling, general and administrative......... 2,580 22,349 285 (c) 25,214 Research and development. 591 5,253 (50)(d) 5,794 Total operating expenses. 3,171 27,602 235 31,008
Operating income......... 1,599 15,065 (1,019) 15,645 Interest and other expense, net........... 80 1,666 280 (e) 2,026 Income before provision for income tax......... 1,519 13,399 (1,299) 13,619 Income/taxes equivalent provision.............. 340 4,745 (99)(f) 4,986 Net income............... $1,179 $8,654 ($1,200) $8,633
Net income per common share.................. $ .27 $ .27 Weighted average number of common and common equivalent shares outstanding............ 32,327 32,623
Pro Forma Statement of Operations for the Year Ended December 31, 1995 (Unaudited)
Pro Forma Adjustment (g) Increase/ Pro-Bel Chyron (Decrease) Consolidated
Net sales................ $28,763 $53,971 $82,734 Cost of products sold.... 15,902 22,746 $698 (b) 39,346 Gross profit............. 12,861 31,225 (698) 43,388
Operating expenses: Selling, general and administrative......... 9,064 17,066 741 (c) 26,871 Research and development. 1,548 4,105 (167)(d) 5,486 Management fee........... 2,911 2,911 West Coast restructuring (recapture)............ (1,339) (1,339) Total operating expenses. 10,612 22,743 574 33,929
Operating income......... 2,249 8,482 (1,272) 9,459 Interest and other expense, net........... 461 536 1,052 (e) 2,049 Income before provision for income tax......... 1,788 7,946 (2,324) 7,410 Income taxes/equivalent provision.............. 782 470 (373)(f) 879 Net income............... $1,006 $7,476 ($1,951) $6,531
Net income per common share.................. $ .25 $ .21 Weighted average number of common and common equivalent shares outstanding............ 30,382 31,431
Notes to Unaudited Pro Forma Consolidated Statement of Operations: (a) Results of operations from January 1, 1996 through the date of acquisition at the average exchange rate for the period. (b) Reflects the increase in depreciation expense for the step up in basis of property, plant and equipment acquired and the increase in cost of products sold for the step up in basis of inventory acquired. (c) Reflects the increase in depreciation expense for the step up in basis of property, plant and equipment acquired and the amortization of excess of cost over net tangible assets acquired. (d) Reflects the decrease in research and development expense due to the capitalization of certain of Pro-Bel's software development costs, net of the amortization of such costs for the year. (e) Reflect additional interest expense on indebtedness incurred in connection with the acquisition of Pro-Bel. (f) Reflects the estimated income tax effect on the acquisition financing. (g) Results of operations for the twelve months ended October 31, 1995, as this was Pro-Bel's operating period prior to the acquisition by Chyron, at the average exchange rate for the period.
These pro forma results have been prepared for comparative purposes only and include adjustments as a result of applying purchase accounting and conversion to generally accepted accounting principles in the United States. The pro forma financial information is not necessarily indicative of the operating results that would have occurred if the acquisition had taken place on the aforementioned dates or of future results of operations of the consolidated entities.
3. INVESTMENT IN RT-SET
On February 29, 1996, the Company effectively purchased an option to acquire a 19% interest in Real Time Synthesized Entertainment Technology, Ltd. ("RT-SET"), located in Tel Aviv, Israel. RT-SET develops, markets and sells real time virtual studio set software and proprietary communications hardware that operate on Silicon Graphics systems. In form, Chyron purchased shares of RT-SET Convertible Preferred Stock, which are convertible into RT-SET common stock, in exchange for 800,000 shares of Chyron restricted common stock. In accordance with the purchase agreement, the 800,000 of Chyron common stock were to be held in escrow and released in tranches of one-third and two-thirds, subject to certain conditions. During 1996, the first of these conditions was met, which resulted in the release of 266,666 shares of Chyron restricted common stock to RT-SET. Upon the satisfaction of the remaining conditions, the remaining 533,334 escrowed shares will be released. If the conditions are not met or at Chyron's option, the remaining shares of Chyron restricted common stock held in escrow will be returned to the Company in exchange for the RT-SET Convertible Preferred Stock held by the Company. Accordingly, the transaction has been recorded as the purchase of a right to acquire a 19% interest in RT-SET. RT-SET retains the voting rights with respect to the escrowed Chyron shares while such shares are held by the escrow agent. The acquisition was recorded at the estimated fair value of the Chyron restricted common stock released from escrow. In addition, Chyron was granted certain call option rights which, if and when exercised, will result in the Company owning up to a 51% interest in RT- SET.
4. CONTROL OF REGISTRANT
On May 26, 1995, Pesa, Inc. ("Pesa") the former parent of the Company, sold 3,333,333 shares of common stock of Chyron to CC Acquisition Company A, a Delaware limited liability company ("CCACA"). On July 25, 1995, Pesa sold 16,471,571 shares to the entities listed below. Additionally, on July 25, 1995, Sepa Technologies, Ltd., a Georgia limited liability company ("Sepa"), and an affiliate of Pesa, sold 1,666,667 shares to the entities listed below.
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 3,333,333 shares and (ii) CCACA and CCACB agreed to acquire an additional 16,471,571 shares and (2) CCACA entered into a stock purchase agreement with Sepa (the "Sepa Agreement") pursuant to which CCACA agreed to acquire 1,666,667 shares and the voting rights and right of first refusal with respect to an additional 3,000,000 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 100,000 shares, which shares were acquired by Leubert from Sepa and which reduced from 3,000,000 to 2,900,000 the number of shares covered by the Company's right of first refusal 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 Pesa Agreement to acquire 6,666,666 shares, (ii) CCACA assigned its rights under the Sepa Agreement to acquire 1,666,667 shares, (iii) CCACA assigned its right of first refusal to acquire 1,800,000 of the 3,000,000 shares 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 5,882,946 shares.
The closing, as contemplated by the Pesa Agreement and the Sepa Agreement, occurred on July 25, 1995. Consequently, at closing CCAC beneficially owned in the aggregate 7,255,297 shares and the WPG/Westpool Investor Group beneficially owned in the aggregate 13,968,629 shares. Beneficial ownership does not include 3,000,000 shares for which the voting rights have been assigned to CCAC and the WPG/Westpool Investor Group.
As a consequence of the above transactions, the principal shareholders as of July 25, 1995 were as follows:
Name of Owner Number of Shares Date of Acquisition
CCACA 3,333,333 May 26, 1995 CCACB 3,921,964 July 25, 1995 CDA 5,923,538 July 25, 1995 CDAO 1,428,373 July 25, 1995 WPGII 1,471,852 July 25, 1995 WPGIII 1,223,848 July 25, 1995 WIT 2,328,103 July 25, 1995 Lion 1,102,788 July 25, 1995 C.M. Diker 490,127 July 25, 1995 Others 247,645 July 25, 1995
Pesa was 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. ("Amper"). On June 24, 1994, Amper sold all of its shares of stock of Electronica to Sepa. On August 2, 1994, Sepa acquired 4,666,666 shares of Chyron common stock from certain foreign shareholders. Consequently, Sepa directly and indirectly through Pesa became the beneficial owner of 24,471,570 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.
5. ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable are stated net of an allowance for doubtful accounts of $2,850,000 and $3,134,000 at December 31, 1996 and 1995, respectively. The provision for doubtful accounts amounted to $nil, $466,000 and $729,000 for 1996, 1995, and 1994, respectively. The carrying amounts of accounts and notes receivable approximate their fair values.
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 in, and dealers serving, the broadcast video industry and non-broadcast display markets. At December 31, 1996 and 1995, receivables included approximately $12.5 million and $2.7 million, respectively, due from foreign customers.
6. INVENTORIES
Inventories consist of the following (in thousands):
December 31, 1996 1995
Finished goods........ $12,879 $ 3,345 Work-in-process....... 5,271 5,250 Raw materials......... 5,352 3,050 $23,502 $11,645
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, 1996 1995
Land..................... $ 878 $ 53 Building................. 1,794 Machinery and equipment.. 11,593 4,441 Furniture and fixtures... 2,386 1,501 Leasehold improvements... 715 299 17,366 6,294 Less: Accumulated depreciation and amortization............ 4,665 2,994 $12,701 $3,300
Machinery and equipment at December 31, 1996 and 1995 includes $818,000 and $473,000, respectively, of assets held under capital lease obligations. Accumulated depreciation and amortization at December 31, 1996 and 1995 includes $381,000 and $278,000, respectively, attributable to assets held under capital lease obligations. See Note 15.
Depreciation expense, which includes amortization of capital lease assets, was $1,671,000, $1,054,000 and $1,106,000 in 1996, 1995 and 1994, respectively.
8. SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized and amortized over their estimated economic life, ranging from 3 to 5 years, commencing when each product is available for general release. The following amounts were capitalized, amortized and written off (in thousands):
1996 1995 1994
Amounts capitalized........ $1,420 $207 $1,383 Less: Amortization (included in Research and Development expense)....... (960) (1,013) (931) West Coast restructuring write-down to net realizable value........... (1,991) Net (decrease) increase in software development costs. $460 ($806) ($1,539)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
December 31, 1996 1995
Accounts payable....... $ 7,500 $2,818 Compensation (including pension liability)..... 3,644 3,136 Other accrued items.... 3,459 2,003 Income taxes payable... 1,225 163 $15,828 $8,120
The carrying amounts of accounts payable and accrued expenses approximate their fair values.
10. LONG-TERM DEBT
Long term debt consists of the following (in thousands):
December 31, 1996 1995
Term loan, maturing April 16, 2000(a) $6,500 Revolving credit facility, maturing March 28, 1999(a) 2,730 Revolving credit facility, maturing April 27, 1997(b) $4,741 Commercial mortgage term loan, maturing March 28, 2010(c) 2,097 Promissory notes, payable on or before April 15, 1998(d) 5,917 Trade finance facility, maturing December 31, 1996 replaced with debt maturing December 31, 1997(e) 1,209 Overdraft facility, maturing December 31, 1996 replaced with debt maturing December 31, 1997(f) 1,790 20,243 4,741 Less amounts due in one year 5,080 $15,163 $4,741
(a) On March 28, 1996 and April 16, 1996, the Company entered into agreements with a bank to obtain a revolving credit facility of $10 million and a term loan of $8 million, respectively. The entire facility is secured by Chyron's accounts receivable and inventory and the common stock of Pro-Bel. Borrowings are limited to amounts computed under a formula for eligible accounts receivable and inventory. Additionally, an over-advance is available above the borrowing formula in an amount not to exceed $3 million. Interest on the revolving credit facility is equal to adjusted LIBOR plus 175 basis points or prime (8.25% at December 31, 1996) and is payable monthly. The term loan is payable in quarterly installments of $500,000, commencing June 1, 1996. Interest on the term loan is equal to adjusted LIBOR plus 200 basis points or prime and is payable monthly. The Company must pay a commitment fee equal to 1/4 of 1% per annum on the average daily unused portion of the credit facility. The commitment fee is payable on the last day of each quarter commencing June 30, 1996. This agreement contains, among other provisions, requirements for maintaining defined levels of net worth, leverage, capital expenditures, lease payments and various financial ratios. The Company is prohibited by the agreement from paying cash dividends in excess of 25% of its net income for the then current fiscal year.
(b) At December 31, 1995, the Company had $4.7 million outstanding with a financial institution under a secured revolving credit facility. Interest was payable monthly at the prime rate (8.5% at December 31, 1995) plus 2% per annum. The facility was due to expire on April 27, 1997, but was replaced by the banking facility described in (a) above in conjunction with the financing of the acquisition of Pro-Bel. (c) Pro-Bel has a commercial mortgage term loan with a bank. The loan is secured by a building and property located in the United Kingdom. Interest is equal to LIBOR (6% at December 31, 1996) plus 2%. The loan (including interest) is payable in quarterly installments of 80,600 pounds sterling ($136,000, converted at the December 31, 1996 exchange rate).
(d) On April 12, 1996, the Company issued promissory notes to the shareholders of Pro-Bel for 3.5 million pounds sterling ($5,919,000, converted at the December 31, 1996 exchange rate) in conjunction with the acquisition (See Note 2). The promissory notes are secured by an irrevocable letter of credit from a bank. The amount of this irrevocable letter of credit is included as an outstanding borrowing in the formula used to calculate borrowing availability for the facilities described in (a) above. Interest through April 15, 1997 is equal to LIBOR as of April 15, 1996 (6.46%) and is payable quarterly. Interest through April 15, 1998 is equal to LIBOR as of April 15, 1997. The notes are due on or before April 15, 1998 and are subordinated to any obligations to a bank or financial institution currently existing or subsequently entered into. The notes can be prepaid without penalty subsequent to November 1, 1996.
(e) On February 1, 1996, Pro-Bel entered into an agreement with a bank to obtain a trade finance facility of 750,000 pounds sterling ($1,267,000, converted at the December 31, 1996 exchange rate). The facility is secured by Pro-Bel's accounts receivable. Interest is equal to the bank's base rate plus 2% (8% at December 31, 1996) on advances against accounts receivable in pounds sterling and equal to the Barclays Bank PLC currency call loan rate plus 2% (8% at December 31, 1996) on advances against foreign accounts receivable. Interest is payable quarterly, in arrears.
(f) On February 1, 1996, Pro-Bel entered into an agreement with a bank to obtain an overdraft facility of 750,000 pounds sterling ($1,276,000 converted at the December 31, 1996 exchange rate). Interest is equal to the bank's base rate plus 2.5% (8.5% at December 31, 1996) and is payable quarterly commencing in March 1996. The facility has a sublimit for overdraft on Pro-Bel's wholly owned subsidiary, Trilogy Broadcast Limited, of 160,000 pounds sterling ($270,000, converted at the December 31, 1996 exchange rate). This facility is payable upon written demand by the bank and any undrawn portion may be cancelled by the bank at any time.
In January 1997, Pro-Bel entered into an agreement with Barclays Bank PLC whereby Barclays agreed to provide an overdraft facility of up to 3.0 million pounds sterling through December 31, 1997 to Pro-Bel and its subsidiaries. The overdraft facility provides for interest at 1.5% per annum over the bank's base rate. Interest is payable quarterly, in arrears. This facility replaces the trade finance facility of up to 750,000 pounds sterling and the overdraft facility of up to 750,000 pounds sterling in place at December 31, 1996. The maturity dates of such facilities were extended by the lenders to coincide with the new Barclays agreement. All monies under the facility are repayable upon written demand and are secured by accounts receivable.
Aggregate maturities of long term debt in the next five years are as follows (in thousands):
The carrying amounts of long-term debt instruments approximate their fair values.
1997........ $5,080 1998........ 7,437 1999........ 4,826 2000........ 607 2001........ 115
Net interest expense was $1,402,000, $536,000 and $525,000 in 1996, 1995 and 1994.
11. CONVERTIBLE SUBORDINATED NOTES PAYABLE
In 1991, the Company issued to Pesa 4-year Convertible Subordinated Notes in the principal amount of $5.0 million maturing on January 31, 1996 and bearing interest (payable annually in arrears) at the prime rate, adjusted annually each December. The Notes were convertible into 8,333,333 shares of common stock of the Company at a conversion rate of $.60 cents per share. As of December 31, 1996, all of the Notes had been converted into shares of common stock of the Company.
12. 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 1,666,666 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, November 21, 1995 and September 18, 1996 the Board of Directors granted Incentive Stock Options for the purchase of 991,666, 50,000, and 425,000 shares, respectively, to certain employees; the exercise price per option share is $4.875, $5.625, and $12.75, respectively, the quoted closing market prices at the dates of grant. The Incentive Stock Options granted on September 18, 1996 have been cancelled and reissued as of March 7, 1997. Additionally, on July 31, 1995, November 21, 1995, February 22, 1996, July 31, 1996 and September 18, 1996, the non-employee members of the Board of Directors received Non-Incentive Stock Options for the purchase of 26,666, 3,333, 6,666, 20,000 and 3,333 shares, respectively, at exercise prices of $5.625, $5.625, $9.375, $16.125 and $12.75, respectively, the quoted closing market prices at the dates of grant. Subsequent to the grant dates, 86,000 Incentive Stock Options were forfeited. The options to employees vest over three years at 33 1/3% per annum and expire five years after the grant date. Options granted to directors vest immediately.
If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS 123, the Company's net income and net income per share would be reduced to the pro forma amounts indicated below:
1996 1995 Net Income (in thousands): As reported $8,654 $7,476 Pro forma $7,560 $7,125
Earnings per common share: As reported $.27 $.25 Pro forma $.23 $.24
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period for purposes of future pro forma disclosures, and additional options may be granted in future years. The fair value of these options was estimated at the date of grant using the Black- Scholes option-pricing model with the following weighted average assumptions for both 1996 and 1995: dividend yield of 0; expected volatility of 50% and expected life of 4 years. The weighted average risk free interest rates for 1996 and 1995 were 6.54% and 6.11%, respectively. The weighted average fair values of options granted during 1996 and 1995, for which the exercise price equaled the market price on the grant dates, were $12.849 and $4.936 per option, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the Company's employees' stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements' opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.
Transactions involving stock options are summarized as follows:
Weighted Average Stock Options Exercise Price of Outstanding Options Outstanding
Balance, January 1, 1995 Granted 984,999 $4.936 Exercised
Balance, December 31, 1995 984,999 4.936 Granted 454,999 7.436 Exercised (113,018) 7.652
Balance, December 31, 1996 $1,326,980 $7.652
The following table summarizes information concerning currently outstanding and exercisable stock options:
Weighted Outstanding Average Exercisable Exercise at December Contractual at December Price 31, 1996 Life 31, 1996
$ 4.875 795,314 3.6 years 265,104 5.625 76,667 3.8 years 43,334 9.375 6,666 4.2 years 6,666 16.125 20,000 4.6 years 20,000 12.750 428,334 4.8 years 3,333
13. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1996 1995 1994 Current: Federal.................. $1,308 $ $ State.................... 629 50 Foreign.................. 473 Tax equivalent provision. 420 2,410 470 Deferred: Federal.................. 2,664 State.................... (150) Foreign.................. (39) Tax equivalent provision Release of valuation reserve.................. (140) 2,335 Total...................... $4,745 $470 $
The effective income tax rate differed from the Federal statutory rate as follows (in thousands):
1996 1995 1994 Amount % Amount % Amount %
Federal income tax provision (benefit) at statutory rate..... $4,689 35.0 $2,702 34.0 ($3,058) (34.0) State income taxes, net of federal tax benefit............... 409 3.0 33 .4 Permanent differences. 36 .3 Benefit from post reorganization temporary differences on tax equivalent provision............. (140) (1.1) (1,351) (17.0) Foreign income tax benefit............... 8 .1 Benefit of lower tax rates on U.S. Federal Provision............. (121) (.9) Effect of valuation allowance of deferred tax assets............ (150) (1.1) (940) (11.8) 3,058 34.0 Other, net............ 14 .1 26 .3 $4,745 35.4 $ 470 5.9 $
The Company has deferred tax assets and deferred tax liabilities as presented in the table below. The net deferred tax assets were subject to a valuation allowance, which was $nil and $5.4 million at December 31, 1996 and 1995, respectively. This valuation allowance is primarily attributable to pre-Chapter 11 reorganization net operating loss carryforwards and pre-Chapter 11 reorganization deductible temporary differences. As a result of current and projected future profitability, the allowance was partially reduced in 1995 and eliminated in 1996.
Deferred tax assets (deductible temporary differences) prior to the allocation of the valuation allowance consisted of the following (in thousands): December 31, 1996 1995 Post-reorganization net operating loss carryforward.............. $ 276 $ 280 Pre-reorganization net operating loss carryforward.............. 4,631 7,250 Pre-reorganization deductible temporary differences.......... 4,555 4,555 Restructuring reserve............ 55 Other............................ 2,030 2,000 Total deferred tax assets...... $11,492 $14,140
Deferred tax liabilities (taxable temporary differences) consisted of the following (in thousands):
December 31, 1996 1995 Pre-reorganization taxable temporary differences.......... $ 85 $ 85 Software development costs....... 683 585 Other............................ 210 Total deferred tax liabilities. $768 $880
At December 31, 1996, the Company had net operating loss carryforwards ("NOL") of approximately $15.0 million for tax purposes. Under U.S. income tax rules, the utilization of the NOL is subject to annual limitations as a result of the changes in control of the Company at December 27, 1991 and July 25, 1995. However, despite these restrictions, the Company expects to fully utilize all of its remaining NOL prior to expiration.
14. BENEFIT PLANS
Chyron Corporation has a domestic defined benefit pension plan (the "U.S. Pension Plan") covering substantially all U.S. employees meeting minimum eligibility requirements. Benefits paid to retirees are based upon age at retirement, years of credited service and average compensation. Pension expense is actuarially determined using the projected unit credit method. The Company's policy is to fund the minimum contributions required under the Employees Retirement Income Security Act. The assets held by the U.S. Pension Plan at December 31, 1996 include government securities, corporate bonds and mutual funds.
The net periodic pension cost and its components are as follows (in thousands):
1996 1995 1994
Service cost...................... $414 $383 $437 Interest cost on projected benefit obligation...................... 267 292 312 Actual return on plan assets...... (206) (227) (269) Net amortization.................. (43) (15) Net periodic pension cost......... $432 $433 $480
A reconciliation of the funded status of the U.S. Pension Plan to the amounts included in the Company's balance sheet is as follows (in thousands):
December 31, 1996 1995 1994 Accumulated pension benefit obligation: Vested................................. $2,234 $2,265 $2,431 Non-vested............................. 29 79 63 Total.................................. $2,263 $2,344 $2,494
Projected benefit obligation........... $3,803 $4,138 $4,532 Plan assets at fair value.............. 2,709 2,609 3,352 projected benefit obligation in excess of assets............................ 1,094 1,529 1,180
Less items not yet recognized in net periodic pension cost: Unrecognized net gain (loss) from past experience and changes in assumptions.......................... 841 49 (35) Pension liability...................... $1,935 $1,578 $1,145
In each year presented, the expected long-term rate of return on U.S. Pension Plan assets was 9%. The weighted average discount rates used to determine the accumulated benefit obligation was 8.0% in 1996, 7.5% in 1995 and 8.0% in 1994. The rate of compensation increase used was 5% for all years presented.
The Company's U.K. subsidiary, Pro-Bel, has a non-contributory defined benefit pension plan (the "U.K. Pension Plan") covering all its permanent employees. Contributions are determined on the basis of valuations using the projected unit method. Pro-Bel's policy is to fund minimum contributions required pursuant to the U.K. Rules and Regulations. The assets held by the U.K. Pension Plan at December 31, 1996 include cash equivalents and free hold properties.
The net periodic pension cost of the U.K. Pension Plan for the period since the acquisition of Pro-Bel (April 12, 1996) through December 31, 1996 and its components under the provisions of SFAS No. 87 are as follows (in thousands):
Service cost-benefit earned during the period $303 Interest cost on projected benefit obligation 285 Actual return on plan assets (457) Net amortization 0 Net periodic pension cost $131
A reconciliation of the funded status of the U.K. Pension Plan to the amounts included in the Company's balance sheet as of December 31, 1996 is as follows (in thousands):
December 31, Accumulated pension benefit obligation: Vested $4,867 Non-vested Total $4,867
Projected benefit obligation $5,739 Plan assets at fair value 7,005 Plan assets at fair value in excess of projected benefit obligation 1,266
Items not yet recognized in net periodic pension cost:
Unrecognized net gain from past experience and changes in assumptions 141 Pension asset $1,407
The expected long-term rate of return on the U.K. Pension Plan assets was 9%. The weighted average discount rate used to determine the accumulated benefit obligation was 8% and the rate of compensation increase used was 5.50% for the period presented.
In 1994, Chyron Corporation adopted a 401(k) Plan exclusively for the benefit of participants and their beneficiaries. All employees of the Company are eligible to participate in the 401(k) Plan except non- resident aliens and employees who are members of a union who bargain separately for retirement benefits during negotiations. An employee may elect to contribute a percentage of his or her current compensation to the 401(k) Plan, subject to a maximum of 20% of compensation or the Internal Revenue Service annual contribution limit ($9,500 in 1996 and $9,240 in 1995), whichever is less. Total compensation that can be considered for contribution purposes is limited to $150,000.
The Company can elect to make a contribution to the 401(k) Plan on behalf of those participants who have made salary deferral contributions. During 1996 and 1995, the Company contributed $51,000 and $29,000, respectively to the 401(k) Plan.
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company was obligated under operating and capital leases covering facility space and equipment as follows (in thousands):
Operating Capital 1997................ $ 1,030 $247 1998................ 890 85 1999................ 885 44 2000................ 880 2001................ 864 2002 and thereafter. 8,173 $12,722 $376
The operating leases contain provisions for maintenance and escalations for real estate taxes. Total rent expense was $826,000, $496,000, and $530,000 for 1996, 1995 and 1994, respectively. The cumulative imputed interest in the capital lease obligation was $33,000 at December 31, 1996.
The Company is a party to Percival Hudgins & Company, Inc. v. Chyron Corporation v. John Percival, pending in the United States District Court, North District of Georgia (Atlanta). This is a breach of contract action for an alleged success fee in connection with the sale of common stock by Pesa and Sepa (See Note 4). Plaintiff alleges that such transaction was subject to the terms of its engagement letter with the Company. Plaintiff seeks damages of approximately $600,000 together with counsel fees. The Company has answered, denying all material allegations, and has asserted a third party claim against plaintiff's principal, alleging that he, as a director of the Company while his investment banking firm was engaged by the Company, breached his fiduciary duties to the Company and is liable for any amounts that might be awarded to plaintiff, together with counsel fees. Plaintiff has recently amended the complaint to add a claim for quantum meruit. Discovery is continuing.
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.
16. RELATED PARTY TRANSACTIONS
Sepa, prior to the change in control discussed in Note 4, was the beneficial owner of 24,471,570 shares of Chyron common stock. Consequent to such ownership, Sepa had 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 were 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 $486,000 in fees for the eighteen month period ending December 31, 1995.
In December 1995, Chyron and Sepa agreed to terminate the Management Agreement upon payment to Sepa of $2 million, which resulted in aggregate savings for the Company of $1 million for the two year period ending December 31, 1997. The $2 million was paid in equal installments in December 1995 and January 1996.
The Company shared certain trade show and facility costs with Pesa and Electronica. Such services amounted to $30,000 and $303,000 for 1995 and 1994, respectively, and were billed to these related parties under a usage based allocation.
A member of the Board of Directors of the Company is a partner of a law firm that rendered various legal services to the Company for which the Company incurred costs of $861,000 and $273,000 during 1996 and 1995, respectively.
17. 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 their inability to meet revenue and operating targets, management implemented a restructuring plan to eliminate a substantial number of the CMX and Aurora product lines and consolidate certain remaining products into the Company's Graphics 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 1995, operating losses of $1,707,000 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 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 $380,000 related to this inventory.
During December 1995, the Company recaptured $603,000 of the original restructuring charge as a result of lower than anticipated costs related to the disposition period. As of December 31, 1995, the amount of the Reserve for West Coast Restructuring of $158,000 represented future rent commitments through 1997.
A summary of activity for 1995 related to the West Coast Restructuring is presented below (in thousands):
Reserve for West Coast West Coast Restructuring Restructuring Recapture Balance at January 1, 1995 Current year operating loss $2,824 $ 0 Sublease agreement 1,707 Realization on asset write-down 356 356 Recapture 380 Balance at December 31, 1995 603 603 $ 158 $1,339 18. SEGMENT INFORMATION
Chyron's business is organized under a group concept that coordinates product development, marketing, advertising, distribution and procurement. The Company has a multi-product approach for filling customer requirements for equipment and systems used in video or film productions. These products include graphics and character generation systems video and audio, signal management systems and electronic paint and animation systems and software. Customers for the Company's products include broadcasters, video production and post-production companies, cable television distributors and operators, industrial users, governments and governmental agencies and domestic and international dealers serving the video production and display industries for non-broadcast and broadcast markets. As a result, the Company operates as one business segment.
The Company's operations are located primarily in the United States and Europe. Foreign operations prior to 1996 and interarea sales were not significant. Net sales, operating profit and identifiable assets by geographic areas consist of the following (in thousands):
December 31, 1996 1996 Net Operating Identifiable Sales Profit Assets
United States $55,446 $12,764 $52,988 Europe 24,281 1,611 38,375 Other 2,881 690 40 Total $82,608 $15,065 $91,403
During 1996, 1995 and 1994, net export sales from the United States were approximately $9,580,000, $7,511,000 and $6,623,000, respectively.
During 1996, foreign exchange losses of $264,000 are included in other expenses.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 1995, the Company dismissed Ernst & Young, LLP as its principal accountants and retained Price Waterhouse LLP. On October 25, 1995, the Company filed a Form 8-K related to the Change in the Registrant's Certifying Public Accountants which is incorporated herein by reference.
PART III
Item 10
Item 10 (Directors and Executive Officers of the Registrant), Item 11
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements of Chyron Corporation and subsidiaries are included in Part II, Item 8:
Report of Independent Auditors - Price Waterhouse, LLP - page 21
Report of Independent Auditors - Ernst & Young, LLP - page 22
Consolidated Balance Sheets at December 31, 1996 and 1995 - page 24
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 - page 25
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 - page 26
Consolidated Statements of Shareholder's Equity for the Year Ended December 31, 1996, 1995 and 1994 - page 28
Notes to the Consolidated Financial Statements - page 29-53
(2) Financial Statement Schedules
The following Consolidated Financial Statement schedules of Chyron Corporation and subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994 - page 64
All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is not included in the Consolidated Financial Statements or notes hereto.
(3) Financial Statement Exhibits
See list of exhibits to the Financial Statements in Section (c) below:
(b) Reports on Form 8-K
1. Form 8-K was filed on October 25, 1995 for the Change in the Registrant's Certifying Public Accountant **********
2. Form 8-K was filed on April 26, 1996 for the acquisition of Pro-Bel, Limited ***********
3. Form 8-K was filed on March 14, 1996 for the acquisition of RT-SET, Limited ************
4. Form 8-K/A was filed on June 21, 1996 which amended the Form 8-K filed on April 26, 1996 to include the financial exhibits related to the acquisition of Pro-Bel Limited - *************
(c) Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation or succession.
(a) First Amended Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code, dated October 28, 1991 (with First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code attached as Exhibit A thereto) - ***
3. Articles of Incorporation and By-Laws.
(a) Restated Certificate of Incorporation of Chyron Corporation - **
(b) Amended and Restated By-Laws of Chyron Corporation, adopted February 17, 1995 - *********
(c) Amendment of Certificate of Incorporation of Chyron Corporation, adopted January 24, 1997 - page 225
4.Instruments defining rights of security holders, including debentures.
(a) Warrant Agreement, dated January 3, 1992, between Chyron Corporation and American Stock Transfer & Trust Company, as warrant agent, incorporating the form of warrant certificate as Exhibit A thereto - **
(b) Convertible Note Purchase Agreement, dated as of December 27, 1991, between Chyron Corporation and Pesa, Inc., incorporating the form of convertible note as Exhibit 1 thereto - ***
(c) Registration Rights Agreement, dated December 27, 1991, between Chyron Corporation and Pesa, Inc. - ***
(d) 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 Enterprise Fund II, L.P. Weiss, Peck & Greer Venture Associates, III, L.P., Westpool Investment Trust PLC, Lion Investment 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. **************
10. Material Contracts.
(a) Assignment and Assumption, dated July 1, 1994, effective July 1, 1994, of Management Agreement dated December 27, 1991 and Amended March 10, 1992, between Chyron Corporation and Pesa, Inc. to Sepa Technologies Ltd., Co. - *********
(b) Amended and Restated Management Agreement, dated August 8, 1994, by and between Chyron Corporation and Sepa Technologies Ltd., Co. - *********
(c) Distribution and License Agreement, dated September 22, 1994, between Chyron Corporation and Comunicacion Integral Consultores, S.L. - *********
(d) Termination Agreement, dated November 6, 1995, between Chyron Corporation and Comunicacion Integral Consultores, S.L. - **************
(e) Termination Agreement, dated December 12, 1995, between Chyron Corporation and Sepa Technologies Ltd., Co. - **************
(f) Amendment, dated March 10, 1992, to Management Agreement dated December 27, 1991, between Chyron Corporation and Pesa Electronica, S.A. - *
(g) Assignment, dated March 10, 1992, of Management Agreement, dated December 27, 1991, and Amendment March 10, 1992, between Chyron Corporation and Pesa Electronica, S.A., to Pesa, Inc. - *
(h) Amendment, dated January 31, 1994, effective December 28, 1993, to Management Agreement dated December 27, 1991 and Amendment March 10, 1992 between Chyron Corporation and Pesa, Inc. - ********
(i) Revolving Credit Agreement, dated December 27, 1991, between Chyron Corporation and Extebank - **
(j) Management Agreement, dated as of December 27, 1991, between Chyron Corporation and Pesa Electronica, S.A. - **
(k) Amendment, dated September 19, 1988, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Isaac Hersly (previously filed as Exhibit 8 to current report on Form 10-Q dated November 6, 1987 and incorporated herein in its entirety by reference thereto) - **
(l) Amendment, dated October 25, 1987, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Isaac Hersly, as amended - **
(m) Amendment, dated October 21, 1991, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Isaac Hersly, as amended - **
(n) Amendment, dated February 23, 1994, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Isaac Hersly, as amended - ********
(o) Resignation Agreement, dated July 12, 1994, between Chyron Corporation and John A. Poserina - *******
(p) Amendment, dated September 19, 1988, to Employment Agreement dated September 1, 1987, between Chyron Corporation and John A. Poserina (previously filed as Exhibit 7 to current report on Form 10-K dated November 6, 1987 and incorporated herein in its entirety by reference hereto) - **
(q) Amendment, dated October 25, 1989, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and John A. Poserina, as amended - **
(r) Amendment, dated October 21, 1991, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and John A. Poserina, as amended - **
(s) Amendment, dated September 19, 1988, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Paul J. Rozzini (previously filed as Exhibit 10 to current report on Form 10-K dated November 6, 1987 and incorporated herein in its entirety by reference thereto) - **
(t) Amendment, dated October 25, 1989, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Paul J. Rozzini, as amended - **
(u) Amendment, dated October 21, 1991, to Employment Agreement, dated September 1, 1987, between Chyron Corporation and Paul J. Rozzini, as amended - **
(v) Employment Agreement, dated March 10, 1993, between Chyron Corporation and Paul M. Yarmolich - *****
(w) Employment Agreement, dated December 24, 1993, between Chyron Corporation and Mark C. Gray - ******
(x) Employment Agreement, dated March 31, 1994, between Chyron Corporation and Patrick A. Burns - *********
(y) Employment Agreement, dated October 19, 1994, effective November 1, 1994, between Chyron Corporation and Peter J. Lance - *********
(z) Employment Agreement, dated February 8, 1995, between Chyron Corporation and James F. Duca - *********
(aa) Employment Agreement, dated February 7, 1995, between Chyron Corporation and Patricia Arundell Lampe - *********
(bb) Employment Agreement, dated July 26, 1995, between Chyron Corporation and Michael Wellesley-Wesley - **************
(cc) Severance Agreement, dated October 25, 1995, between Chyron Corporation and Peter J. Lance - **************
(dd) License Agreement between Softimage, Inc. and Chyron Corporation and Aurora Systems dated February 23, 1993 - ********
(ee) Distribution Agreement between Softimage, Inc. and Chyron Corporation and Aurora Systems dated February 23, 1993 - ********
(ff) Research and Development, Updated and Support Agreement between Softimage, Inc. and Chyron Corporation and Aurora Systems dated February 23, 1993 - ********
(gg) Loan Agreement between Chyron Corporation and NatWest Bank N.A. (currently known as Fleet Bank), dated March 28, 1996 - page 67
(hh) Loan Agreement between Pro-Bel Limited and Barclays Bank, PLC dated December 19, 1996 effective January 1997 - page 102
(ii) Indemnification Agreement between Chyron Corporation and Roi Agneta dated November 19, 1996 - page 128
(jj) Indemnification Agreement between Chyron Corporation and Sheldon Camhy dated November 19, 1996 - page 135
(kk) Indemnification Agreement between Chyron Corporation and James Coppersmith dated November 19, 1996 - page 142
(ll) Indemnification Agreement between Chyron Corporation and Daniel DeWolf dated November 19, 1996 - page 149
(oo) Indemnification Agreement between Chyron Corporation and Charles M. Diker dated November 19, 1996 - page 156
(pp) Indemnification Agreement between Chyron Corporation and Donald P. Greenberg dated November 19, 1996 - page 163
(qq) Indemnification Agreement between Chyron Corporation and Ray Hartman dated November 19, 1996 - page 170
(rr) Indemnification Agreement between Chyron Corporation and Roger Henderson dated November 19, 1996 - page 177
(ss) Indemnification Agreement between Chyron Corporation and Isaac Hersly dated November 19, 1996 - page 184
(tt) Indemnification Agreement between Chyron Corporation and Alan J. Hirschfield dated November 19, 1996 - page 191
(uu) Indemnification Agreement between Chyron Corporation and Patricia Lampe dated November 19, 1996 - page 198
(vv) Indemnification Agreement between Chyron Corporation and Wesley W. Lang, Jr. dated November 19, 1996 - page 205
(ww) Indemnification Agreement between Chyron Corporation and Eugene M. Weber dated November 19, 1996 - page 212
(xx) Indemnification Agreement between Chyron Corporation and Michael Wellesley-Wesley dated November 19, 1996 - page 219
* Incorporated herein in its entirety by reference to the Transition Report for the Period July 1, 1991 to December 31, 1991 on Form 10-K dated March 30, 1992.
** Incorporated herein in its entirety by reference to the Annual Report for the Fiscal Year Ended June 30, 1991 on Form 10-K dated January 31, 1992.
*** Incorporated herein in its entirety by reference to the report on Form 8-K dated December 27, 1991.
**** Incorporated herein in its entirety by reference to the report on Form 8-K dated March 12, 1993.
***** Incorporated herein in its entirety by reference to the report on Form 8-K dated May 10, 1993.
****** Incorporated herein in its entirety by reference to the report on Form 8-K dated January 19, 1994.
******* Incorporated herein in its entirety by reference to the report on Form 8-K dated July 22, 1994.
******** Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1993 on Form 10-K dated March 30, 1994.
********* Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1994 on Form 10-K dated March 24, 1995.
********** Incorporated herein in its entirety by reference to the report on Form 8-K dated October 25, 1995.
*********** Incorporated herein in its entirety by reference to the report on Form 8-K dated April 26, 1996.
************ Incorporated herein in its entirety by reference to the report on Form 8-K dated March 14, 1996.
************* Incorporated herein in its entirety by reference to the report on Form 8-K/A dated June 21, 1996.
************** Incorporated herein in its entirety by reference to the Annual Report for the fiscal year ended December 31, 1995 on Form 10-K dated March 14, 1996.
d) Financial Statement Schedule
Schedule II
CHYRON CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Column A Col B Col C Col D Col E
Balance at Additions Balance Begin- Changes to at ning Costs End of and Other Deduc- of Description Period Expenses Accounts tions Period
Reserves and allowances deducted from asset accounts:
YEAR ENDED DECEMBER 31, 1996 Uncollectible amounts....... $ 3,134 $ $ $ 284 $ 2,850 Inventory reserves.......... 12,233 192 12,041 Deferred tax assets......... 5,400 5,400 0 $20,767 $ $ $ 5,876 $14,891
YEAR ENDED DECEMBER 31, 1995 Uncollectible amounts....... $ 2,204 $ 745 $ 185 $ $ 3,134 Inventory reserves.......... 12,515 1,153 1,435 12,233 Deferred tax assets......... 14,500 9,100 5,400 $29,219 $1,898 $ 185 $10,535 $20,767
YEAR ENDED DECEMBER 31, 1994 Uncollectible amounts....... $ 2,624 $2,333 $ $ 2,753 $ 2,204 Inventory reserves.......... 10,293 5,300 430 3,508 12,515 Deferred tax assets......... 11,500 3,100 100 14,500 $24,417 $7,633 $3,530 $ 6,361 $29,219
UNDERTAKING
The Company undertakes to provide without charge to each shareholder entitled to notice of and to vote at the Annual Meeting of Shareholders, to be held May 14, 1997, at which directors are to be elected, upon the written request of any such shareholder, a copy of the Company's Annual Report on Form 10-K, for the year ended December 31, 1996, required to be filed with the Securities and Exchange Commission, including the financial statements and the schedules thereto. The Company does not undertake to furnish without charge copies of all exhibits to its Form 10-K, but will furnish any exhibit upon the payment of twenty ($.20) cents per page or a minimum charge of $5.00. Such written requests should be directed to Ms. Judy Mauro, Director of Corporate Communications, Chyron Corporation, 5 Hub Drive, Melville, New York 11747. Each such request must set forth a good faith representation that as of March 26, 1997 the person making the request was a beneficial owner of securities entitled to vote at the Annual Meeting of Shareholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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
/s/ Michael Wellesley-Wesley Michael Wellesley-Wesley Chairman of the Board of Directors and Chief Executive officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated.
/s/ Sheldon Camhy Director March 19, 1997 (Sheldon Camhy)
/s/ S. James Coppersmith Director March 19, 1997 (S. James Coppersmith)
/s/ Charles Diker Director March 20, 1997 (Charles Diker)
/s/ Douglas Greenberg Director March 20, 1997 (Douglas Greenberg)
/s/ Raymond Hartman Director March 20, 1997 (Raymond Hartman)
/s/ Isaac Hersly Director March 20, 1997 (Isaac Hersly)
/s/ Alan Hirschfield Director March 20, 1997 (Alan Hirschfield)
/s/ Wesley Lang Director March 20, 1997 (Wesley Lang)
/s/ Eugene Weber Director March 20, 1997 (Eugene Weber)
/s/ Patricia Lampe Chief Financial (Patricia Lampe) Officer March 20, 1997