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 September 30, 1997
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 registration 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: (508) 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 November 6,
1997 was 12,960,614.
- --------------------------------------------------------------------------------
SEACHANGE INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at December 31, 1996 and September 30, 1997.................. 3
Consolidated Statement of Income
Three and Nine months ended September 30, 1996 and 1997...... 4
Consolidated Statement of Cash Flows
Nine months ended September 30, 1996 and 1997................ 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 7-9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............ 10
Item 6. Exhibits and Reports on Form 8-K..................... 10
SIGNATURES............................................................. 11
EXHIBIT INDEX.......................................................... 12
EXHIBITS
2
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share-related data)
December 31, September 30,
1996 1997
------------- ---------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 23,394 $ 13,403
Accounts receivable, net of allowance for doubtful accounts
of $173 at December 31, 1996 and $285 at September 30, 1997 7,426 14,457
Inventories 9,153 14,024
Other current assets 825 1,715
------------- ---------------
Total current assets 40,798 43,599
Property and equipment, net 4,705 5,342
Other assets 532 82
------------- ---------------
$ 46,035 $ 49,023
============= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,305 $ 7,365
Accrued expenses 1,809 1,859
Customer deposits 2,899 299
Deferred revenue 2,192 2,968
------------- ---------------
Total current liabilities 14,205 12,491
------------- ---------------
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 12,859,234 shares
and 12,939,034 shares issued at December 31, 1996
and September 30, 1997, respectively 129 129
Additional paid-in capital 26,167 26,629
Retained earnings 5,534 9,774
------------- ---------------
Total stockholders' equity 31,830 36,532
------------- ---------------
$ 46,035 $ 49,023
============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except share-related data)
Three months ended Nine months ended
September 30, September 30,
--------------------------------------- ----------------------------------------
1996 1997 1996 1997
------------------ ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Systems $ 11,738 $ 13,188 $ 34,644 $ 50,168
Services 1,188 2,063 2,636 4,987
----------- ----------- ----------- -----------
12,926 15,251 37,280 55,155
----------- ----------- ----------- -----------
Cost of revenues:
Systems 6,665 7,889 21,095 28,425
Services 1,055 1,953 2,871 4,961
----------- ----------- ----------- -----------
7,720 9,842 23,966 33,386
----------- ----------- ----------- -----------
Gross profit 5,206 5,409 13,314 21,769
----------- ----------- ----------- -----------
Operating expenses:
Research and development 1,256 3,159 3,242 8,325
Selling and marketing 1,125 1,431 3,035 4,541
General and administrative 648 792 1,510 2,588
----------- ----------- ----------- -----------
3,029 5,382 7,787 15,454
----------- ----------- ----------- -----------
Income from operations 2,177 27 5,527 6,315
Interest income, net 37 136 137 523
----------- ----------- ----------- -----------
Income before income taxes 2,214 163 5,664 6,838
Provision for income taxes 788 61 2,116 2,598
----------- ----------- ----------- -----------
Net income $ 1,426 $ 102 $ 3,548 $ 4,240
=========== =========== =========== ===========
Net income per share $ 0.12 $ 0.01 $ 0.31 $ 0.32
=========== =========== =========== ===========
Weighted average common shares and
equivalent common shares outstanding 11,590,450 13,344,863 11,587,933 13,388,634
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH FLOWS
(in thousands)
Nine months ended
September 30,
-----------------------------
1996 1997
---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 3,548 $ 4,240
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,022 1,975
Inventory valuation allowance 794 1,130
Compensation expense associated with stock options 36 45
Deferred income taxes (446) (138)
Changes in assets and liabilities:
Accounts receivable (2,059) (7,031)
Inventories (8,107) (6,880)
Prepaid expenses and other assets (91) (763)
Accounts payable 2,709 60
Accrued expenses (695) 250
Customer deposits 2,167 (2,600)
Deferred revenue 833 776
Income taxes payable (503) --
-------- --------
Net cash used in operating activities (792) (8,936)
-------- --------
Cash flows from investing activities
Purchases of software (450) --
Purchases of property and equipment (1,166) (1,472)
-------- --------
Net cash used in investing activities (1,616) (1,472)
-------- --------
Cash flows from financing activities
Proceeds from issuance of common stock 5 417
Purchase of treasury stock (2,022) --
Repayments of note receivable from stockholders 290 --
-------- --------
Net cash (used in) provided by financing activities (1,727) 417
-------- --------
Net decrease in cash and cash equivalents (4,135) (9,991)
Cash and cash equivalents, beginning of period 6,184 23,394
-------- --------
Cash and cash equivalents, end of period $ 2,049 $ 13,403
======== ========
Supplemental disclosure of noncash activity
Transfer of items originally classified as inventories to
fixed assets $ 2,246 $ 879
Purchase of treasury stock in lieu of cash payment of
notes receivable from stockholders $ 505 $ --
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-RELATED DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of SeaChange International, Inc. and its wholly-owned subsidiaries
("Company"). The Company believes that the unaudited consolidated financial
statements reflect all adjustments (consisting of only normal recurring
adjustments), necessary for a fair presentation 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-month and nine-
month periods ended September 30, 1997 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, 1996, included in the Company's Annual Report on Form
10-K.
2. NET INCOME PER SHARE
Net income per share was determined by dividing net income by the weighted
average number of common shares and common share equivalents outstanding
during the period. Common share equivalents issued subsequent to September
1995, which are comprised of common stock options and Series B convertible
preferred stock, have been included in the calculation for the three-month
and nine-month periods ended September 30, 1996 pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share."
SFAS 128 establishes new standards for computing and presenting earnings
per share and will be effective for the Company's interim and annual
periods ending after December 15, 1997. Early adoption of the Statement is
not permitted. SFAS 128 requires restatement of all previously reported
earnings per share data that are presented. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company has calculated the basic earnings per share to be $0.01 and
$0.33 for the three-month and nine-month periods ended September 30, 1997,
respectively. The presentation of basic earnings per share amounts for the
comparable periods in 1996, while the Company was privately held, is not
meaningful. The Company has calculated the fully diluted earnings per share
to be $0.01 and $0.12 for the three-month periods ended September 30, 1997
and 1996, respectively, and $0.32 and $0.31 for the nine-month periods
ended September 30, 1997 and 1996, respectively.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Components and assemblies $ 6,525 $ 12,852
Finished products 2,628 1,172
------- --------
$ 9,153 $ 14,024
======= ========
6
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: 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
publicly available documents 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 dated March 28, 1997. Any forward-looking statements should
be considered in light of those factors.
RESULTS OF OPERATIONS
REVENUES. The Company's systems revenues consist primarily of sales of its
digital video insertion products, including its digital ad insertion products as
well as its movie system products, a new version of which was introduced in the
quarter ended September 30, 1997. Systems revenues increased by 12% to $13.2
million for the quarter ended September 30, 1997, from $11.7 million in the
comparable quarter in 1996. Systems revenues increased by 45% to $50.2 million
for the nine-month period ended September 30, 1997, from $34.6 million in the
comparable period in 1996. The increase in systems revenues for the quarter
ended September 30, 1997 compared to the same period in 1996 resulted primarily
from $2.5 million of movie system sales during the quarter. The increase in
systems revenues for the nine-month period ended September 30, 1997, resulted
primarily from the increase in the number of digital video insertion systems
sold to television operators primarily in the United States. The Company does
not expect sales of its digital ad insertion products to grow over the next
twelve months as compared to the $57.7 million in such revenue for the twelve
months ended September 30, 1997, primarily due to anticipated spending by U.S.
cable operators and slowness in the development of the international market for
such products. The Company anticipates any future growth in systems revenue to
come from its movie system products, a new version of which was introduced in
the quarter ended September 30, 1997, and its broadcast products which are
expected to be introduced in the first half of 1998.
The Company's services revenues consist of fees for installation, training,
product maintenance and technical support services. The Company's services
revenues increased by 74% to $2.1 million for the quarter ended September 30,
1997, from approximately $1.2 million in the comparable quarter in 1996. The
Company's services revenues increased by 89% to $5.0 million for the nine-month
period ended September 30, 1997, from $2.6 million in the comparable period in
1996. The increase in services revenues primarily resulted from the increase in
product sales and renewals of maintenance and support contracts related to the
growing installed base of systems.
For the quarters and nine-month periods ended September 30, 1997 and 1996,
certain customers accounted for more than 10% of the Company's total revenues.
Individual customers accounted for 20%, 17% and 12% of total revenues in the
quarter ended September 30, 1997 and 36% and 12% of total revenues in the
quarter ended September 30, 1996. Individual customers accounted for 27%, 17%
and 12% of total revenues in the nine-month period ended September 30, 1997 and
30%, 13% and 11% in the nine-month period ended September 30, 1996.
International revenues accounted for approximately 14% and 8% of total
revenues in the quarters ended September 30, 1997 and 1996, respectively.
International revenues accounted for approximately 11% and 7% of total revenues
in the nine-month periods ended September 30, 1997 and 1996, respectively. The
Company expects that international sales will continue to increase as a
percentage of the Company's business in the future. As of September 30, 1997,
all sales of the Company's products and substantially all purchases from the
Company's vendors have been made in United States dollars and the Company
expects this practice to continue in the
7
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.
GROSS PROFIT. Systems gross profit as a percentage of systems revenues was
40.2% and 43.2% for the quarters ended September 30, 1997 and 1996,
respectively. Systems gross profit as a percentage of systems revenues was 43.3%
and 39.1% for the nine-month periods ended September 30, 1997 and 1996,
respectively. The decrease in systems gross profit in the quarter ended
September 30, 1997 is primarily attributable to the Company not achieving
expected manufacturing efficiencies as a result of less than expected
manufacturing volume. The increase in systems gross profit between the nine-
month periods ended September 30, 1997 and 1996 resulted from design
improvements in the second generation video insertion product and lower costs of
certain purchased components and subassemblies.
Services gross profit as a percentage of services revenue was 5.3% for the
quarter ended September 30, 1997 compared to 11.2% for the quarter ended
September 30, 1996. Services gross profit as a percentage of services revenue
was .5% for the nine-month period ended September 30, 1997 compared to a loss of
8.9% for the nine-month period ended September 30, 1996. Fluctuations in the
services gross profit resulted from the timing of providing product and
maintenance support and other services to the growing installed base of systems
and as a result of the costs associated with the Company building a service
organization to support the installed base of systems. The Company expects
that it will continue to experience fluctuations in gross profit as a percentage
of service revenue based on the timing of the service revenue in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation of development personnel, including independent
contractors, depreciation of equipment and an allocation of related facility
expenses. Research and development expenses increased to $3.2 million, or 21% of
total revenues in the quarter ended September 30, 1997, from approximately $1.3
million, or 9% of total revenues in the comparable quarter in 1996. Research and
development expenses increased to $8.3 million, or 15% of total revenues in the
nine-month period ended September 30, 1997, from $3.2 million, or 10% of total
revenues in the comparable period in 1996. These increases were primarily
attributable to the hiring and contracting of additional development personnel.
All internal software research and development costs have been expensed by the
Company. The Company expects that research and development expenses will
continue to increase in dollar amount as the Company continues its development
of new and existing products for the remainder of 1997.
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
compensation of selling and marketing personnel, including sales commissions and
travel expenses, and certain promotional expenses. Selling and marketing
expenses increased to $1.4 million, or 9% of total revenues in the quarter ended
September 30, 1997, from $1.1 million, or 9% of total revenues in the comparable
quarter in 1996. Selling and marketing expenses increased to $4.5 million, or
8% of total revenues in the nine-month period ended September 30, 1997, from
$3.0 million, or 8% of total revenues in the comparable period in 1996. The
increases in the dollar amounts were attributable to the hiring of additional
selling and marketing personnel, expanded promotional activities, increased
international selling efforts and an increase in commissions resulting from
increased revenues. The Company expects that selling and marketing expenses
will continue to increase in dollar amount as the Company hires additional
personnel and expands selling and marketing activities for the remainder of
1997.
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 facility expenses. General and administrative expenses increased to
approximately $792,000, or 5% of total revenues in the quarter ended September
30, 1997, from approximately $648,000, or 5% of total revenues in the comparable
quarter in 1996. General and administrative expenses increased to $2.6 million,
or 5% of total revenues in the nine-month period ended September 30, 1997, from
approximately $1.5 million, or 4% of total revenues in the comparable period in
1996. The increases were attributable to increased staffing to support the
Company's growth, and costs associated with being a public company. The Company
believes that its general and administrative expenses will continue to increase
in dollar amount as a result of an expansion of the Company's administrative
staff to support its growing operations.
INTEREST INCOME. Interest income was approximately $136,000 and $37,000 in
the quarters ended September 30, 1997 and 1996, respectively. Interest income
was approximately $523,000 and $137,000 in the nine-
8
month periods ended September 30, 1997 and 1996, respectively. The increases in
interest income during these periods primarily resulted from tax-exempt interest
earned on a higher invested balance during these periods.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37.4% and
35.6% for the quarters ended September 30, 1997 and 1996, respectively. The
Company's effective tax rate was 38.0% and 37.4% for the nine-month periods
ended September 30, 1997 and 1996, respectively. The Company anticipates its
effective tax rate to be 38.0% for the year ended December 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
From inception through November 1996, the Company funded its operations
primarily through cash provided by operations and the private sale of equity
securities. In November 1996, in connection with the initial public offering of
the Company's Common Stock, the Company received proceeds of $24.1 million.
Cash and cash equivalents at September 30, 1997 was $13.4 million, a $10.0
million decrease from the December 31, 1996 balance of $23.4 million. Working
capital increased to $31.1 million at September 30, 1997 from $26.6 million at
December 31, 1996.
Net cash used in operating activities was $8.9 million in the nine-month
period ended September 30, 1997 compared to cash used in operating activities of
approximately $792,000 in the comparable period in 1996. Net cash used in
operating activities during the nine-month period ended September 30, 1997 was
primarily due to increased accounts receivable and inventories and a decrease in
customer deposits partially offset by an increase in net income adjusted for
non-cash expenses including depreciation and amortization and inventory
valuation allowance. Accounts receivable increased from $7.4 million at December
31, 1996 to $14.5 million at September 30, 1997, an increase of $7.0 million, or
95%. The increase in accounts receivable is attributable to a number of orders
in the quarter, whereby the required deposit was not collected by September 30,
1997 and the complexity of customers coordinating payments within their
organizations. The Company's customers typically require coordination and
agreement between their corporate headquarters, regional and local operators
prior to remitting payment for capital expenditures. Inventories increased from
$9.2 million at December 31, 1996 to $14.0 million at September 30, 1997, an
increase of $4.8 million, or 53%. The increase in inventories is primarily
attributable to the purchase of inventories during the quarter ended September
30, 1997 in anticipation of greater revenues than were recognized. Customer
deposits decreased from $2.9 million at December 31, 1996 to approximately
$299,000 at September 30, 1997, a decrease of $2.6 million, or 90%, resulting
from a higher level of deposits at December 31, 1996 from customers in advance
of the Company's ability to fulfill such orders.
Net cash used in investing activities was $1.5 million and $1.6 million in
the nine-month periods ended September 30, 1997 and 1996, respectively.
Investing activities consisted primarily of purchases of property and equipment
to support the Company's growth.
Net cash provided by financing activities was approximately $417,000 for
the nine-month period ended September 30, 1997 compared with net cash used in
financing activities of $1.7 million during the comparable period in 1996. For
the nine-month period ended September 30, 1997, cash provided by financing
activities consisted of proceeds from the issuance of common stock upon the
exercise of employee stock options. For the nine-month period ended September
30, 1996, cash used in financing activities consisted primarily of the
repurchase of shares of the Company's common stock from certain employees and
directors of the Company, net of the repayment of notes receivable from
stockholders.
The Company has a $6.0 million revolving line of credit with a bank which
expired in September 1997. The renewal of the line of credit has been approved
by the bank and is in the process of being executed. Borrowings under the line
of credit are secured by substantially all of the Company's assets. The loan
agreement relating to the line of credit requires that the Company provide the
bank with certain periodic financial reports and comply with certain financial
ratios. As of September 30, 1997, the Company had not borrowed against the
line.
The Company believes that its existing cash, together with available
borrowings under the line of credit, when renewed, are sufficient to meet the
Company's requirements for at least the next twelve months.
9
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) Use of Proceeds
On November 4, 1996, the Company's Registration Statement on Form S-1 (File
No. 333-12233) became effective. The Company has filed an initial report
on Form SR on February 11, 1997, disclosing the sale of securities and the
use of proceeds through December 31, 1996, and Amendment No. 1 to Form SR
on August 11, 1997, disclosing the use of proceeds through June 30, 1997.
The net proceeds from this offering were $24,069,800. As of September 30,
1997, no information has changed from Amendment No. 1 except for the use of
proceeds. The following describes the use of proceeds from the effective
date November 4, 1996 through September 30, 1997.
Direct or Indirect
Use of Proceeds: Payment to Others
------------------
Purchase and installation of machinery and equipment $ 1,472,000
Working capital $ 11,321,800
Temporary Investment (specify): Amount
------
Money Market $ 1,278,000
Municipal Bonds and Notes $ 9,998,000
None of the above payments were made to directors, officers or to persons
owning 10% or more of any class of equity securities of the Company, other
than in the ordinary course of business, or to the affiliates of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
Exhibit 10: Amended and Restated 1996 Employee Stock Purchase Plan
Exhibit 11: Computation of Net Income Per Share
Exhibit 27: Financial Data Schedule (For SEC Edgar
Filing Only; Intentionally Omitted)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
10
SIGNATURES
Pursuant to the requirements 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: November 13, 1997
SEACHANGE INTERNATIONAL, INC.
by:
/s/ William C. Styslinger, III
--------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director
/s/ Joseph S. Tibbetts, Jr.
-----------------------------
Joseph S. Tibbetts, Jr.
Vice President, Finance and Administration,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
11
SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
EXHIBIT NUMBER Description Page
-------------- ------------ ----
10 Amended and Restated 1996 Employee Stock Purchase Plan 13-20
11 Computation of Net Income Per Share 21
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted) 22
12