SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3197974
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
124 Acton Street, Maynard, MA 01754
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 897-0100
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months (or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO _______
-----
The number of shares outstanding of the registrant's Common Stock on December
12, 2000 was 22,015,967.
- --------------------------------------------------------------------------------
SEACHANGE INTERNATIONAL, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at October 31, 2000 and December 31, 1999 .............. 3
Consolidated Statement of Operations
Three and nine months ended October 31, 2000 and
September 30, 1999.................................... 4
Consolidated Statement of Cash Flows
Nine months ended October 31, 2000 and
September 30, 1999.................................... 5
Notes to Consolidated Financial Statements ............. 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........ 11-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................. 16
Item 6. Exhibits and Reports on Form 8-K............... 17
SIGNATURES....................................................... 18
EXHIBIT INDEX.................................................... 19
2
Item 1. Financial Statements
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share-related data)
October 31, December 31,
----------- ------------
2000 1999
---- ----
Assets
Current assets
Cash and cash equivalents $ 7,244 $11,318
Accounts receivable, net of allowance for doubtful
accounts of $638 at October 31, 2000 and
$908 at December 31, 1999 23,457 17,840
Inventories 23,468 17,128
Prepaid expenses and other current assets 3,947 1,568
Deferred income taxes 3,399 2,243
------- -------
Total current assets 61,515 50,097
Property and equipment, net 14,171 10,538
Other assets 907 884
Goodwill and intangibles, net 2,605 785
------- -------
$79,198 $62,304
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Current portion of equipment line of credit
and obligations under capital lease $ 2,335 $ 1,048
Accounts payable 14,927 15,038
Accrued expenses 1,972 3,499
Customer deposits 3,873 2,092
Deferred revenue 6,701 4,380
Income taxes payable 437 675
------- -------
Total current liabilities 30,245 26,732
------- -------
Long-term equipment line of credit and
obligations under capital lease 4,024 1,231
------- -------
Commitments and contingencies (Note 8)
Stockholders' Equity
Common stock, $.01 par value; 100,000,000
shares authorized; 21,956,614 and
21,285,855 shares issued at October 31, 2000 and
December 31, 1999, respectively 220 213
Additional paid-in capital 47,907 35,634
Accumulated deficit (3,033) (1,440)
Treasury stock, 60,750 shares (1) (1)
Accumulated other comprehensive loss (164) (65)
------- -------
Total stockholders' equity 44,929 34,341
------- -------
$79,198 $62,304
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
3
SeaChange International, Inc.
Consolidated Statement of Opens
(in thousands, except per share data)
Three months ended Nine months ended
------------------ -----------------
October 31, September 30, October 31, September 30,
---------- ------------ ---------- -------------
2000 1999 2000 1999
---- ----- ---- ----
Revenues
Systems $18,306 $17,507 $55,233 $51,874
Services 5,916 4,202 16,892 12,320
------- ------- ------- -------
24,222 21,709 72,125 64,194
------- ------- ------- -------
Costs of revenues
Systems 9,635 9,895 29,835 29,848
Services 4,582 3,813 13,271 10,890
------- ------- ------- -------
14,217 13,708 43,106 40,738
------- ------- ------- -------
Gross profit 10,005 8,001 29,019 23,456
------- ------- ------- -------
Operating expenses
Research and development 5,101 3,979 14,456 12,373
Selling and marketing 3,169 2,154 8,284 6,181
General and administrative 1,675 1,332 4,977 4,080
------- ------- ------- -------
9,945 7,465 27,717 22,634
------- ------- ------- -------
Income from operations 60 536 1,302 822
Interest income (expense), net (54) (13) (30) 6
------- ------- ------- -------
Income before income taxes 6 523 1,272 828
Provision for income taxes 2 231 407 168
------- ------- ------- -------
Net income $ 4 $ 292 $ 865 $ 660
======= ======= ======= =======
Basic and diluted earnings per share $ 0.00 $ 0.01 $ 0.04 $ 0.03
======= ======= ======= =======
Shares used in calculating:
Basic earnings per share 21,855 20,978 21,668 20,876
======= ======= ======= =======
Diluted earnings per share 23,218 22,063 23,170 21,607
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
4
SeaChange International, Inc.
Consolidated Statement of Cash Flows
INCREASE IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
For the nine months ended
---------------------------
October 31, September 30,
---------- ------------
2000 1999
---- ----
Cash flows from operating activities
Net income $ 865 $ 660
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,546 3,019
Inventory valuation allowance 149 558
Changes in operating assets and liabilities:
Accounts receivable (6,528) (1,950)
Inventories (3,204) (188)
Prepaid expenses, other current assets and other assets (2,455) 1,524
Accounts payable 4,476 1,371
Accrued expenses (804) (327)
Customer deposits 1,445 432
Deferred revenue 409 1,213
Income taxes payable 107 148
---------- ------------
Net cash provided by (used in) operating activities (1,994) 6,460
---------- ------------
Cash flows from investing activities
Purchases of property and equipment (7,367) (1,918)
Increase in intangible assets (2,209) --
---------- ------------
Net cash used in investing activities (9,576) (1,918)
---------- ------------
Cash flows from financing activities
Proceeds from borrowings under construction loan 1,044 --
Proceeds from borrowings under equipment line of credit 4,324 1,116
Repayments under equipment line of credit (1,017) (2,245)
Repayments of obligation under capital lease (181) (250)
Proceeds from issuance of common stock 11,923 931
---------- ------------
Net cash provided by (used in) financing activities 16,093 (448)
---------- ------------
Net increase in cash and cash equivalents 4,523 4,094
Cash and cash equivalents, beginning of period 2,721 5,442
---------- ------------
Cash and cash equivalents, end of period $ 7,244 $ 9,536
========== ============
Supplemental disclosure of noncash activity:
Transfer of items originally classified as inventories to
fixed assets $ -- $ 2,576
Transfer of items originally classified as fixed assets to
inventories $ 497 $ 109
Equipment acquired under capital leases $ -- $ 336
The accompanying notes are an integral part of these
consolidated financial statements.
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of SeaChange International, Inc. and its subsidiaries. The Company
believes that the unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments), necessary
for a fair statement of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated. The
results of operations for the three and nine month periods ended October
31, 2000 are not necessarily indicative of results expected for the full
fiscal year or any other future periods. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes for the year ended December 31,
1999, included in the Company's Annual Report on Form 10-K for such fiscal
year.
2. Revenue Recognition
Revenues from sales of systems are recognized upon shipment provided title
and risk of loss has passed to the customer, there is evidence of an
arrangement, fees are fixed and determinable and collection of the related
receivable is probable. Installation and training revenue is deferred and
recognized as these services are performed. Revenue from technical support
and maintenance contracts is deferred and recognized ratably over the
period of the related agreements, generally twelve months. Customers are
billed for installation, training and maintenance at the time of the
product sale. Revenue from content fees, primarily movies, is recognized in
the period earned based on noncancelable agreements.
3. Earnings Per Share
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the periods indicated:
Three months ended Nine months ended
October 31, September 30, October 31, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------
Weighted average shares used in calculating earnings
per share- Basic....................................... 21,855,000 20,978,000 21,668,000 20,876,000
Dilutive stock options.................................. 1,363,000 1,085,000 1,502,000 731,000
----------------------------------------------------------------
Weighted average shares used in calculating earnings
per share- Diluted...................................... 23,218,000 22,063,000 23,170,000 21,607,000
========== ========== ========== ==========
6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
4. Inventories
Inventories consist of the following:
October 31, December 31,
2000 1999
---------------------------------
Components and assemblies $19,185 $ 14,739
Finished products 4,283 2,389
---------------------------------
$23,468 $ 17,128
======= ========
5. Comprehensive Income (Loss)
For the three months and nine months ended October 31, 2000 and
September 30, 1999, the Company's comprehensive income (loss) was as
follows:
Three months ended Nine months ended
October 31, September 30, October 31, September 30,
------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------
Net income $ 4 $ 292 $ 865 $ 660
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment, net of
tax of ($8), $--, ($33) and $2, respectively (18) 1 (72) 4
------------------------------------------------------
Other comprehensive income (expense) (18) 1 (72) 4
------------------------------------------------------
Comprehensive income (loss) $ (14) $ 293 $ 793 $ 664
===== ===== ===== =====
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in
other contracts, collectively referred to as derivatives, and for
hedging activities. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", an amendment to SFAS No. 133. This accounting standard
amended the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and hedging activities. To date the
Company has not utilized derivative instruments or hedging activities
and, therefore, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of
operations.
7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The application of the guidance in SAB 101 is required in the
Company's fourth quarter of its current fiscal year. The effects of
applying this guidance, if any, will be reported as a cumulative effect
adjustment resulting in a change in accounting principle. The Company's
evaluation of SAB 101 is not yet complete.
7. Segment Information
The Company has three reportable segments: broadband systems, broadcast
systems and services. The broadband systems segment provides products to
digitally manage, store and distribute digital video for television
operators and telecommunications companies. The broadcast systems segment
provides products for the storage, archival, on-air playback of advertising
and other video programming for the broadcast television industry. The
service segment provides installation, training, product maintenance and
technical support for all of the above systems and content which is
distributed by the broadband product segment. The Company does not measure
the assets allocated to the segments. The Company measures results of the
segments based on the respective gross profits. There were no inter-segment
sales or transfers. Long-lived assets are principally located in the United
States. The Company has changed its reportable segments from the prior
quarter and prior year-end and has reclassed prior period amounts to
conform to these current segments. The following summarizes the revenues
and cost of revenues by reportable segment:
Three months ended Nine months ended
-------------------------------------- ----------------------------------
October 31, September 30, October 31, September 30,
2000 1999 2000 1999
-------------- ---------------- --------------- ----------------
Revenues
Broadband $11,065 $12,648 $38,728 $39,689
Broadcast 7,241 4,859 16,505 12,185
Services 5,916 4,202 16,892 12,320
---------- ----------- ----------- -----------
Total $24,222 $21,709 $ 72,125 $64,194
---------- ----------- ----------- -----------
Costs of revenues
Broadband $5,610 $7,024 $20,742 $23,004
Broadcast 4,025 2,871 9,093 6,844
Services 4,582 3,813 13,271 10,890
---------- ----------- ----------- -----------
Total $14,217 $13,708 $43,106 $40,738
---------- ----------- ----------- -----------
The following summarizes revenues by geographic locations:
Revenues
United States $16,882 $15,385 $58,109 $48,660
Canada and South America 1,075 1,993 2,868 4,342
Europe 2,864 3,385 5,123 8,375
Asian Pacific and 3,401 946 6,025 2,817
rest of world
------- ------- ------- -------
$24,222 $21,709 $72,125 $64,194
------- ------- ------- -------
For the three and nine months ended October 31, 2000 and September 30, 1999
certain customers each accounted for more than 10% of the company's
revenue. Individual customers each accounted for 12% of revenues in the
three months ended October 31, 2000;
8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data
10% in the nine months ended October 31, 2000; and 17% and 12% in the nine
months ended September 30, 1999. No individual customer accounted for more
than 10% of revenues in the three months ended September 30, 1999.
8. Legal Proceedings
One of the Company's customers is subject to a lawsuit in Civil Action
No.00-CV-195, pending in the federal courts in the Eastern District of
Virginia, whereby a third party has made a claim of patent infringement
against the Company's customer, which claim is believed to relate at least
in part to such customer's use of the Company's products. On May 19, 2000,
the Company filed a motion seeking to intervene in the action between its
customer and the third party, and to transfer the case to the District
Court of Massachusetts. On June 23, 2000, the Court granted the Company's
intervention motion and deferred ruling on the issue of transfer. Also on
June 23, 2000, the Company filed its Intervenor Complaint in the action
seeking, among other things, a declaratory judgment of non-infringement,
invalidity and unenforceability regarding U.S. Patents Nos. 4,814,883 and
5,200,825. In addition, the Company has agreed to indemnify its customer
for claims brought against the customer that are related to the customer's
use of the Company's products. On October 23, 2000, the Court denied the
Company's motion to transfer. While there are no direct allegations pending
against the Company in connection with this matter at this time. On
November 29, 2000, the third party filed a motion to amend its pleading to
add claims against the Company seeking equitable relief and attorneys fees
for willful patent infringement. The court has not yet ruled on the third
party's motion to amend. This dispute has a scheduled trial date commencing
April 11, 2001.
On June 13, 2000, the Company filed a lawsuit against one of its
competitors, nCube Corp., for patent infringement. On September 25, 2000
the court upheld the validity of the Company's patent. At this time the
Company is awaiting the court's decision regarding a permanent injunction.
Damages will be determined in future proceedings.
On June 14, 1999, the Company filed a complaint against an investment
banker, an investment bank and a competitor that alleges that the
competitor conspired with the investment bankers to injure the business and
reputation of the Company in the marketplace and to drive down the price of
the Company's stock to benefit them. In addition, the complaint alleges
that the competitor, through its employees, provided the investment bankers
with inside information to further these efforts. On June 14, 2000, one of
the defendants in this suit filed a counterclaim under seal against the
Company seeking unspecified damages.
The Company cannot be certain of the outcome of the foregoing litigation,
but does plan to oppose allegations against it and assert its claims
against other parties vigorously.
9. Fiscal Year Change
In April 2000, the Company's Board of Directors voted to change the
Company's fiscal accounting year from December 31 to January 31, such that
the current fiscal accounting year began on February 1, 2000 and will end
on January 31, 2001. The following unaudited condensed consolidated
financial data summarizes the operating results and selected balance sheet
information of the Company for the comparable three and nine months periods
ended October 31, 1999 (in thousands, except per share data):
9
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data
Three months Nine months
ended ended
October 31, October 31,
1999 1999
------------- -----------
Revenues $ 20,030 $ 63,947
Gross profit 6,544 22,471
Operating expenses 7,521 22,704
Loss from operations (977) (233)
Loss before taxes (989) (238)
Net income (loss) (614) 200
Basic earnings (loss) per common
share $ (0.03) $ 0.01
Diluted earnings (loss) per common
share $ (0.03) $ 0.01
Weighted average common shares
outstanding- basic 20,983 21,036
Weighted average common shares
outstanding- diluted 20,983 22,030
Working capital $ 20,535 $ 20,535
Total assets 52,772 52,772
Deferred revenue 4,617 4,617
Long-term liabilities 1,405 1,405
Total liabilities 22,402 22,402
Total stockholders' equity 30,370 30,370
10. Construction Loan
In October 2000, the Company entered into an agreement with a bank to
finance $1.2 million of the construction costs related to the purchase and
renovation of a manufacturing mill in New Hampshire that had been
previously purchased in February 2000. During the construction period,
interest is accrued and payable at a per annum rate of 8.875%. Upon
occupancy of the building by the Company, the loan will convert to two
promissory notes whereby the Company will pay principal and interest based
upon a fixed interest rate per annum using a five and ten year amortization
schedule (8.875% at October 31, 2000). Borrowings under the loan are
secured by the land and buildings of the renovated mill. The loan agreement
requires that the Company provide the bank with certain periodic financial
reports and comply with certain financial ratios. At October 31, 2000, the
Company was in compliance with all covenants. As of October 31, 2000,
borrowings outstanding under the loan were $1.0 million.
11. Subsequent Event
On December 1, 2000, the Company and Comcast Cable Communications, Inc.
("Comcast") entered into a video-on-demand purchase agreement for the
Company's interactive television video servers and related services. In
connection with the execution of this commercial agreement, the Company
entered into a common stock and warrant purchase agreement, dated as of
December 1, 2000, with Comcast SC Investment, Inc. ("Comcast SC"), whereby
Comcast SC agreed to purchase, subject to certain closing conditions
including registration of the shares purchased thereby, 466,255 shares of
the Company's common stock for approximately $10 million and Comcast SC
will receive a warrant to purchase 100,000 shares, exercisable at $21.445
per share, of the Company's common stock. Under the terms of the purchase
agreement, Comcast has committed to purchase the Company's equipment
capable of serving a minimum of one million cable subscribers by
approximately December 2002. In addition, Comcast may earn up to an
additional 450,000 incentive common stock purchase warrants through
December 2003 based on the number of cable subscribers in excess of one
million who are served by the Company's equipment which has been purchased
by Comcast. The Company will determine the intrinsic value, if any, of the
common stock purchase and will measure the fair value of the 100,000 common
stock purchase warrants at the closing date and will record these amounts
as contra-equity. The contra-equity amount will be amortized in future
periods as an offset to gross revenue in proportion to the revenue
recognized with respect to the first one million subscribers Comcast has
committed to under the agreement. The fair value of the additional
incentive common stock purchase warrants will also be recorded as an offset
to gross revenue as the warrants are earned by Comcast, if any.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Factors That May Affect Future Results
Any statements contained in this Form 10-Q that do not describe
historical facts, including without limitation statements concerning expected
revenues, earnings, product introductions and general market conditions, may
constitute forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Any such forward-looking statements
contained herein are based on current expectations, but are subject to a number
of risks and uncertainties that may cause actual results to differ materially
from expectations. The factors that could cause actual future results to differ
materially from current expectations include the following: the Company's
ability to integrate the operations of acquired subsidiaries; fluctuations in
demand for the Company's products and services; the Company's ability to manage
its growth; the Company's ability to develop, market and introduce new and
enhanced products and services on a timely basis; the rapid technological change
which characterizes the Company's markets; the Company's significant
concentration of customers; the Company's dependence on certain sole source
suppliers and third-party manufacturers; the risks associated with international
sales as the Company expands its markets; and the ability of the Company to
compete successfully in the future. Further information on factors that could
cause actual results to differ from those anticipated is detailed in various
filings made by the Company from time to time with the Securities and Exchange
Commission, including but not limited to, those appearing under the caption
"Certain Risk Factors" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. Any forward-looking statements should be considered in
light of those factors.
Overview
The Company develops, markets, licenses and sells broadband and broadcast
systems and related services and movie content to television operators,
telecommunications companies and broadcast television companies. Revenues from
systems sales are recognized upon shipment provided title and risk of loss has
passed to the customer, there is evidence of an arrangement, fees are fixed and
determinable and collection of the related receivables is probable. Installation
and training revenue is deferred and recognized as these services are performed.
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the period of the related agreements, generally twelve
months. Customers are billed for installation, training and maintenance at the
time of the product sale. Revenue from content fees, primarily movies, is
recognized in the period earned based on noncancelable agreements.
The Company has experienced fluctuations in the number of orders being placed
from quarter to quarter. The Company believes this is principally attributable
to the buying patterns and budgeting cycles of television operators and
broadcast companies, the primary buyers of digital advertising insertion systems
and broadcast systems, respectively. The Company expects that there will
continue to be fluctuations in the number and value of orders received and that
at least in the near future, the Company's revenue and results of operations
will reflect these fluctuations.
The Company's results are significantly influenced by a number of factors,
including the Company's pricing, the costs of materials used in the Company's
products and the expansion of the Company's operations. The Company prices its
products and services based upon its costs as well as in consideration of the
prices of competitive products and services in the marketplace. The costs of the
Company's products primarily consist of the costs of components and
subassemblies that have generally declined over time. As a result of the growth
of the Company's business, operating expenses of the Company have increased in
the areas of research and development, selling and marketing, customer service
and support and administration.
In April 2000, the Company's Board of Directors voted to change the Company's
fiscal accounting year from December 31 to January 31, such that the Company's
current fiscal year began on February 1, 2000 and will end on January 31, 2001.
The Company has not recast the comparable prior year periods as there are no
seasonal or other factors that affect the comparability of the periods
presented.
11
Three Months Ended October 31, 2000 Compared to the Three Months Ended September
30, 1999
Revenues
Systems. The Company's systems revenues consist of sales of its digital
advertising and interactive television systems (collectively "broadband
systems") and broadcast systems. Systems revenues increased 5% from $17.5
million in the three months ended September 30, 1999 to $18.3 million in the
three months ended October 31, 2000. This increase in systems revenues resulted
from a decrease of $1.6 million and an increase of $2.4 million in broadband and
broadcast systems revenues, respectively. The Company expects future systems
revenue growth, if any, to come from both its broadband and broadcast system
products.
For the three-month periods ended October 31, 2000 and September 30, 1999,
certain individual customers accounted for more than 10% of the Company's total
revenues. A single customer accounted for 12% of total revenues in three months
ended October 31, 2000. No individual customer accounted for more than 10% of
total revenues in the three months ended September 30, 1999. The Company
believes that revenues from current and future large customers will continue to
represent a significant proportion of total revenues.
International sales accounted for approximately 30% and 29% of total revenues in
the three month period ended October 31, 2000 and September 30, 1999,
respectively. The Company expects that international sales will remain a
significant portion of the Company's business in the future. As of October 31,
2000, substantially all sales of the Company's products were made in United
States dollars. The Company does not expect to change this practice in the
foreseeable future. Therefore, the Company has not experienced, nor does it
expect to experience in the near term, any material impact from fluctuations in
foreign currency exchange rates on its results of operations or liquidity. If
this practice changes in the future, the Company will reevaluate its foreign
currency exchange rate risk.
Services. The Company's services revenues consist of fees for installation,
training, product maintenance, technical and engineering support services and
movie content. The Company's services revenues increased approximately 41% to
$5.9 million in three months ended October 31, 2000 from $4.2 million in the
three months ended September 30, 1999. This increase in services revenues
primarily resulted from the renewals of maintenance and support contracts, price
increases on certain annual maintenance contracts, the impact of a growing
installed base of systems and a higher level of product development and
technical support contracts.
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of purchased
components and subassemblies, labor and overhead relating to the final assembly
and testing of complete systems and related expenses. Costs of systems revenues
decreased 3% from $9.9 million in the three months ended September 30, 1999 to
$9.6 million in the three months ended October 31, 2000. In the three months
ended October 31, 2000, the decrease in costs of systems revenues reflects a
reduction in material costs and an increase in sales of products with a higher
gross margin.
Systems gross profit as a percentage of systems revenues was 47% and 44% in the
three months ended October 31, 2000 and September 30, 1999, respectively. The
increase in systems gross profit in the three month ended October 31, 2000 was
primarily due to lower material and other manufacturing costs as a percentage of
systems revenue. The gross profits in the three months ended October 31, 2000
were impacted by an increase of approximately $120,000 in the Company's
inventory valuation allowance. The Company evaluates inventory levels and
expected usage on a periodic basis and provides a valuation allowance for
estimated inactive, obsolete and surplus inventory.
Services. Costs of services revenues consist primarily of labor, materials and
overhead relating to the installation, training, product maintenance and
technical engineering and support services provided by the Company and costs
associated with providing movie content. Costs of services revenues increased
20% from $3.8 million in the three months ended September 30, 1999 to $4.6
million in the three months ended October 31, 2000, primarily as a result of
increased revenues and the costs associated with the Company hiring and training
additional service personnel to provide worldwide support for the growing
installed base of broadband and broadcast systems and costs associated with
providing movie content. Services gross profit as a percentage of services
revenue was 23% in the three months ended October 31, 2000 and 9% in the three
months ended September 30, 1999.
12
Improvements in the services gross profit in the three months ended October 31,
2000 reflect the increase in the installed base of systems under service
contracts, higher volume of technical support contracts, and price increases on
certain annual maintenance contracts. The Company expects that it will continue
to experience fluctuations in gross profit as a percentage of services revenue
as a result of the timing of revenues from product and maintenance support and
other services to support the growing installed base of systems and the timing
of costs associated with the Company's ongoing investment required to build a
service organization to support the installed base of systems and new products.
Research and Development. Research and development expenses consist primarily of
compensation of development personnel, depreciation of equipment and an
allocation of related facilities expenses. Research and development expenses
increased 28% from $4.0 million in the three months ended September 30, 1999 to
$5.1 million in the three months ended October 31, 2000. The increase in the
dollar amount in the three months ended October 31, 2000 was primarily
attributable to the hiring and contracting of additional development personnel
which reflects the Company's continuing investment in new technology. The
Company expects that research and development expenses will continue to increase
in dollar amount as the Company continues its development of new technology and
support of new and existing products.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation expenses, including sales commissions, travel expenses and certain
promotional expenses. Selling and marketing expenses increased 47% to $3.2
million in the three months ended October 31, 2000 from $2.2 million in the
three months ended September 30, 1999. The increase was primarily due to the
hiring of additional sales personnel for the Company's product segments,
increased sales commissions on higher revenues and higher marketing costs.
General and Administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facilities expenses. General and administrative expenses increased 26%
from $1.3 million in the three-month period ended September 30, 1999 to $1.7
million in the three-month period ended October 31, 2000. This increase is
primarily due to increased legal expenses associated with various litigation
matters.
Interest Expense, net. Interest expense, net was approximately $54,000 and
$13,000 in the three months ended October 31, 2000 and September 30, 1999,
respectively. The increase in interest expense, net in the three months ended
October 31, 2000 primarily resulted from an increase in interest expense on
borrowings.
Provision for Income Taxes. The Company's effective tax provision rate was 32%
and 44% in the three months ended October 31, 2000 and September 30, 1999,
respectively. The effective tax provision for the three months ended October 31,
2000 was favorably impacted by the utilization of research and development tax
credits.
The Company had net deferred tax assets of $3.4 million at October 31, 2000 and
$2.2 million at December 31, 1999. The Company has made the determination it is
more likely than not that it will realize the benefits of the net deferred tax
assets.
Nine Months Ended October 31, 2000 Compared to the Nine Months Ended September
30, 1999
Revenues
Systems. Systems revenues increased 6% from $51.9 million in the nine months
ended September 30, 1999 to $55.2 million in the nine months ended October 31,
2000. This increased systems revenues resulted primarily from increased
broadcast revenue of $4.3 million offset by a decrease in broadband revenue of
$1.0 million. The Company expects future systems revenue growth, if any, to come
from both its broadband and broadcast system products.
For the nine months ended October 31, 2000 and September 30, 1999, certain
individual customers accounted for more than 10% of the Company's total
revenues. A single customer accounted for 10% of revenues for the nine months
ended October 31, 2000 and 17% and 12% of revenues in the nine months ended
September 30, 1999. The Company believes that revenues from current and future
large customers will continue to represent a significant portion of total
revenues.
International sales accounted for approximately 20% and 24% of total revenues
for the nine months ended October 31, 2000 and September 30, 1999, respectively.
The Company expects that international sales will remain a significant portion
of revenues of the Company in the future. As of October 31, 2000, substantially
all sales of the Company's products were made in United States dollars. The
Company does not expect any material change to this practice in the foreseeable
future. Therefore, the Company has not experienced, nor does it expect to
experience in the near term, any material impact from fluctuations in foreign
currency exchange rates on its results of operations or liquidity. If this
practice changes in the future, the Company will reevaluate its foreign currency
exchange rate risk.
13
Services. The Company's services revenues increased over 37% from approximately
$12.3 million in the nine months ended September 30, 1999 to $16.9 million in
the nine months ended October 31, 2000. These increases in services revenues
resulted primarily from increased systems revenues, renewals of maintenance and
support contracts, the impact of a growing installed base of systems, and a
higher level of product development and technical support contracts.
Gross Profit
Systems. Costs of systems revenues were $29.8 million in the nine months ended
October 31, 2000 which was unchanged from the nine months ended September 30,
1999.
Systems gross profit as a percentage of systems revenues was 46% and 43% in the
nine months ended October 31, 2000 and September 30, 1999, respectively. The
increase in systems gross profit in 2000 was primarily due to higher systems
revenue and lower material and manufacturing costs as a percentage of systems
revenues. The gross profits in the nine months ended October 31, 2000 was
impacted by an increase of approximately $149,000 in the Company's inventory
valuation allowance. The Company evaluates inventory levels and expected usage
on a periodic basis and provides a valuation allowance for estimated inactive,
obsolete and surplus inventory.
Services. Costs of services revenues increased nearly 22% from approximately
$10.9 million in the nine months ended September 30, 1999 to $13.3 million in
the nine months ended October 31, 2000, primarily as a result of the costs
associated with the Company hiring and training additional service personnel to
provide worldwide support for the growing installed base of broadband and
broadcast systems and costs associated with providing movie content. Services
gross profit as a percentage of services revenue increased to 21% in the nine
months ended October 31, 2000 compared to a gross profit margin of 12% in the
nine months ended September 30, 1999. The Company expects that it will continue
to experience fluctuations in gross profit as a percentage of services revenue
as a result of the timing of revenues from product and maintenance support and
other services to support the growing installed base of systems and the timing
of costs associated with the Company's ongoing investment required to build a
service organization to support the installed base of systems and new products.
Research and Development. Research and development expenses increased 17% from
approximately $12.4 million in the nine months ended September 30, 1999 to $14.5
million in the nine months ended October 31, 2000. The increase in the dollar
amount was primarily attributable to the hiring and contracting of additional
development personnel which reflects the Company's continuing investment in new
products. The Company expects that research and development expenses will
continue to increase in dollar amount as the Company continues to focus on the
development of new technology and support of new and existing products.
Selling and Marketing. Selling and marketing expenses increased 34% from $6.2
million in the nine months ended September 30, 1999 to $8.3 million in the nine
months ended October 31, 2000. This increase is primarily due to the hiring of
additional sales personnel for the Company's broadcast and interactive
television products, increased sales commissions on higher revenues and higher
marketing expenses.
General and Administrative. General and administrative expenses increased 22%
from $4.1 million in the nine months ended September 30, 1999 to $5.0 million in
the nine months ended October 31, 2000. This increase is primarily due to
increased legal expenses associated with various litigation matters.
Interest Income, net. Interest income (expense), net, was approximately
($30,000) and $6,000 in the nine months ended October 31, 2000 and September 30,
1999, respectively. The decrease in 2000 in interest income, net, primarily
resulted from interest expense on borrowings.
Provision for Income Taxes. The Company's effective tax provision rate was 32%
and 20% in the nine months ended October 31, 2000 and September 30, 1999,
respectively. The effective tax provision for both periods was favorably
impacted by the utilization of research and development tax credits.
Liquidity and Capital Resources
The Company has financed its operations and capital expenditures primarily with
the proceeds of the Company's common stock, borrowings and cash flows generated
from operations. Cash, cash equivalents and marketable securities increased $4.5
million from $2.7 million at January 31, 2000 to $7.2 million at October 31,
2000. Working capital increased from approximately $19.8 million at January 31,
2000 to approximately $31.8 million at October 31, 2000.
14
Net cash used in operating activities was approximately $2.0 million for the
nine month period ended October 31, 2000. Net cash provided by operating
activities was approximately $6.5 million for the nine months ended September
30, 1999. The net cash used in operating activities in the nine months ended
October 31, 2000 was the result of the net income adjusted for non-cash expenses
including depreciation and amortization of $3.7 million offset by changes in
certain assets and liabilities. The significant net changes in assets and
liabilities that used cash in operations included an increase in accounts
receivable of $6.5 million, an increase in inventories of $3.2 million and an
increase in prepaid expenses and other assets of $2.5 million. These items that
used cash in operations were partially offset by an increase in accounts payable
of $4.5 million and an increase in customer deposits of $1.4 million.
Net cash used in investing activities was approximately $9.6 million and $1.9
million for the nine months ended October 31, 2000 and September 30, 1999,
respectively. Investment activity consisted primarily of capital expenditures
related to construction to expand the current manufacturing facility and the
acquisition of computer equipment, office furniture, and other capital equipment
required to support the expansion and growth of the business.
Net cash provided by financing activities was approximately $16.1 million for
the nine months ended October 31, 2000. Net cash used in financing activities
was approximately $450,000 for the nine months ended September 30, 1999. In the
nine months ended October 31, 2000, the cash provided by financing included
$11.9 million received in connection with the issuance of common stock ($10
million of which was issued to Microsoft Corporation) and $5.4 million in
borrowings under the equipment line of credit and the Company's construction
loan. During the same period, cash used in financing activities included
approximately $1.2 million in principal payments under the Company's equipment
line of credit and capital lease obligations.
In July 2000, the Company renewed its revolving line of credit and equipment
line of credit with a bank. The revolving line of credit which expired in March
2000 was extended until March 2001 and borrowings under the facility increased
to $7.5 million. The equipment line of credit which also expired in March 2000
was extended to provide the Company additional equipment financing of $4.0
million through March 2001. In addition, the Company entered into a $3 million
line of credit facility with the Export-Import Bank of the United States which
allows the Company to borrow money based upon eligible foreign customer account
balances. This facility also expires in March 2001. Borrowings under all the
lines of credit are secured by substantially all of the Company's assets. Loans
made under the revolving line of credit would generally bear interest at a rate
per annum equal to the LIBOR rate plus 2% (9.05% at October 31, 2000). Loans
under the EXIM line of credit bear interest as a rate per annum equal to the
Prime rate (9.5% at October 31, 2000). Loans made under the equipment line of
credit bear interest at a rate per annum equal to the bank's base rate plus 1.0%
(10.5% at October 31, 2000). The loan agreement relating to the lines of credit
requires that the Company provide the bank with certain periodic financial
reports and comply with certain financial ratios including the maintenance of
total liabilities, excluding deferred revenue, to net worth of at least .80 to
1.0. At October 31, 2000 the Company was in compliance with all covenants. As of
October 31, 2000, there were no borrowings against either line of credit and
borrowings outstanding under the equipment line of credit were $4.9 million.
In October 2000, the Company entered into an agreement with a bank to finance
$1.2 million of the construction costs related to the purchase and renovation of
a manufacturing mill in New Hampshire that had been previously purchased in
February 2000. During the construction period, interest is accrued and payable
at a per annum rate of 8.875%. Upon occupancy of the building by the Company,
the loan will convert to two promissory notes whereby the Company will pay
principal and interest based upon a fixed interest rate per annum using a five
and ten year amortization schedule (8.875% at October 31, 2000). Borrowings
under the loan are secured by the land and buildings of the renovated mill. The
loan agreement requires that the Company provide the bank with certain periodic
financial reports and comply with certain financial ratios. At October 31, 2000,
the Company was in compliance with all covenants. As of October 31, 2000,
borrowings outstanding under the loan were $1.0 million.
The Company believes that existing funds together with available borrowings
under the lines of credit and equipment line facility are adequate to satisfy
its working capital and capital expenditure requirements for the foreseeable
future.
The Company had no material capital expenditure commitments as of October 31,
2000.
Effects of Inflation
Management believes that financial results have not been significantly impacted
by inflation and price changes.
15
Recent Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, collectively
referred to as derivatives, and for hedging activities. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", an amendment to SFAS No. 133. This
accounting standard amended the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and hedging activities. To date
the Company has not utilized derivative instruments or hedging activities
and, therefore, the adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The application of the guidance in SAB 101 is required in the
Company's fourth quarter of its current fiscal year. The effects of
applying this guidance, if any, will be reported as a cumulative effect
adjustment resulting in a change in accounting principle. The Company's
evaluation of SAB 101 is not yet complete.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company faces exposure to financial market risks, including adverse
movements in foreign currency exchange rates and changes in interest rates.
These exposures may change over time as business practices evolve and could
have a material adverse impact on the Company's financial results. The
Company's primary exposure has been related to local currency revenue and
operating expenses in Europe and Asia. Historically, the Company has not
hedged specific currency exposures as gains and losses on foreign currency
transactions have not been material to date. At October 31, 2000, the
Company had $5,917,000 outstanding related to variable rate U.S. dollar
denominated debt. The carrying value of these short-term borrowings
approximates fair value due to the short maturities of these instruments.
Assuming a hypothetical 10% adverse change in the interest rate, interest
expense on these short-term borrowings would increase by $56,000.
The carrying amounts reflected in the consolidated balance sheet of cash
and cash equivalents, trade receivables, and trade payables approximates
fair value at October 31, 2000 due to the short maturities of these
instruments.
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. The Company's cash and marketable securities include
cash equivalents, which the Company considers investments to be purchased
with original maturities of three months or less given the short maturities
and investment grade quality of the portfolio holdings at October 31, 2000,
a sharp rise in interest rates should not have a material adverse impact on
the fair value of the Company's investment portfolio. As a result, the
Company does not currently hedge these interest rate exposures.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
One of the Company's customers is subject to a lawsuit in Civil Action
No.00-CV-195, pending in the federal courts in the Eastern District of
Virginia, whereby a third party has made a claim of patent infringement
against the Company's customer, which claim is believed to relate at least
in part to such customer's use of the Company's products. On May 19, 2000,
the Company filed a motion seeking to intervene in the action between its
customer and the third party, and to transfer the case to the District
Court of Massachusetts. On June 23, 2000, the Court granted the Company's
intervention motion and deferred ruling on the issue of transfer. Also on
June 23, 2000, the Company filed its Intervenor Complaint in the action
seeking, among other things, a declaratory judgment of non-infringement,
invalidity and unenforceability regarding U.S. Patents Nos. 4,814,883 and
5,200,825. In addition, the Company has agreed to indemnify its customer
for claims brought against the customer that are related to the customer's
use of the Company's products. On October 23, 2000, the Court denied the
Company's motion to transfer. While there are no direct allegations
16
pending against the Company in connection with this matter at this time. On
November 29, 2000, the third party filed a motion to amend its pleading to
add claims against the Company seeking equitable relief and attorneys fees
for willful patent infringement. The Court has not yet ruled on the third
party's motion to amend. This dispute has a scheduled trial date commencing
April 11, 2001.
On June 13, 2000, the Company filed a lawsuit against one of its
competitors, nCube Corp., for patent infringement. On September 25, 2000,
the court upheld the validity of the Company's patent. At this time the
Company is awaiting the court's decision regarding a permanent injunction.
Damages will be determined in future proceedings.
On June 14, 1999, the Company filed a complaint against an investment
banker, an investment bank and a competitor that alleges that the
competitor conspired with the investment bankers to injure the business and
reputation of the Company in the marketplace and to drive down the price of
the Company's stock to benefit them. In addition, the complaint alleges
that the competitor, through its employees, provided the investment bankers
with inside information to further these efforts. On June 14, 2000, one of
the defendants in this suit filed a counterclaim under seal against the
Company seeking unspecified damages.
The Company cannot be certain of the outcome of the foregoing litigation,
but does plan to oppose allegations against it and assert its claims
against other parties vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1: Certificate of Amendment, filed May 25, 2000 with the
Secretary of State in the State of Delaware, to the Amended
and Restated Certificate of Incorporation of the Company
(filed as Exhibit 4.2 to the Company's registration statement
on Form S-8 (File No. 333-17379) and incorporated herein by
reference).
Exhibit 10.1: Video-on-Demand Purchase Agreement, dated as of December
1, 2000, by and between the Company and Comcast Cable
Communications of Pennsylvania, Inc.
Exhibit 10.2: Loan Agreement, dated as of October 16, 2000, by and between the
Company and the Bank of New Hampshire, N.A.
Exhibit 27: Financial Data Schedule (For SEC Edgar Filing Only; Intentionally
Omitted)
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, SeaChange International, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 15, 2000
SEACHANGE INTERNATIONAL, INC.
by: /s/ William L. Fiedler
----------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer;
Authorized Officer)
18
SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
4.1: Certificate of Amendment, filed May 25, 2000 with the
Secretary of State in the State of Delaware, to the Amended
and Restated Certificate of Incorporation of the Company
(filed as Exhibit 4.2 to the Company's registration statement
on Form S-8 (File No. 333-17379) and incorporated herein by
reference).
10.1: Video-on-Demand Purchase Agreement, dated as of December 1,
2000, by and between the Company and Comcast Cable
Communications of Pennsylvania, Inc.
10.2: Loan Agreement, dated as of October 16, 2000, by and between the
Company and the Bank of New Hampshire, N.A.
27 Financial Data Schedule (For SEC Edgar Filing Only; Intentionally
Omitted)
19