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, 1998
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
November 6, 1998 was 13,731,517.
- - --------------------------------------------------------------------------------
Exhibit Index at Page 14
SEACHANGE INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at September 30, 1998 and December 31, 1997 .............................. 3
Consolidated Statement of Operations
Three and Nine months ended September 30, 1998 and 1997 .................. 4
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 and 1997 ............................ 5
Notes to Consolidated Financial Statements ............................... 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ......................... 8-11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ........................ 12
Item 6. Exhibits ......................................................... 12
SIGNATURES ........................................................................ 13
EXHIBIT INDEX ..................................................................... 14
2
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,388 $ 2,973
Marketable securities - 9,310
Accounts receivable, net of allowance for doubtful accounts
of $737 at September 30, 1998 and $559 at December 31, 1997 14,062 12,535
Inventories 18,505 13,713
Prepaid expenses 5,683 2,336
Deferred income taxes 1,091 1,091
------------ ------------
Total current assets 43,729 41,958
Property and equipment, net 6,501 8,303
Goodwill and intangibles, net, and other assets 1,475 1,689
------------ ------------
$ 51,705 $ 51,950
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,973 $ 8,765
Accrued expenses 2,884 2,718
Customer deposits 1,344 2,049
Deferred revenue 4,010 3,851
Income taxes payable 192 85
------------ ------------
Total current liabilities 20,403 17,468
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 13,712,874
shares and 13,593,594 shares issued at September 30, 1998
and December 31, 1997, respectively 137 136
Additional paid-in capital 31,977 31,218
Retained earnings (accumulated deficit) (682) 3,114
Treasury stock, 9,000 shares of common stock at September 30, 1998
and December 31, 1997 - -
Cumulative translation adjustment (130) 14
------------ ------------
Total stockholders' equity 31,302 34,482
------------ ------------
$ 51,705 $ 51,950
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------- -------------------------------------
1998 1997 1998 1997
------------------ ------------------ ----------------- ----------------
REVENUES:
Systems $ 14,240 $ 13,188 $ 42,254 $ 50,168
Services 3,548 2,063 10,283 4,987
------------------ ------------------ ----------------- ----------------
17,788 15,251 52,537 55,155
------------------ ------------------ ----------------- ----------------
COSTS OF REVENUES:
Systems 8,897 7,889 26,087 28,425
Services 3,755 1,953 9,906 4,961
------------------ ------------------ ----------------- ----------------
12,652 9,842 35,993 33,386
------------------ ------------------ ----------------- ----------------
Gross profit 5,136 5,409 16,544 21,769
------------------ ------------------ ----------------- ----------------
OPERATING EXPENSES:
Research and development 3,897 3,159 11,800 8,325
Selling and marketing 1,928 1,431 5,854 4,541
General and administrative 1,174 792 4,457 2,588
Restructuring of operations - - 676 -
------------------ ------------------ ----------------- ----------------
6,999 5,382 22,787 15,454
------------------ ------------------ ----------------- ----------------
Income (loss) from operations (1,863) 27 (6,243) 6,315
Interest income, net 20 136 199 523
------------------ ------------------ ----------------- ----------------
Income (loss) before income taxes (1,843) 163 (6,044) 6,838
Provision (benefit) for income taxes (770) 61 (2,248) 2,598
------------------ ------------------ ----------------- ----------------
Net income (loss) $ (1,073) $ 102 $ (3,796) $ 4,240
================== ================== ================= ================
Basic earnings (loss) per share $ (0.08) $ 0.01 $ (0.31) $ 0.42
Diluted earnings (loss) per share $ (0.08) $ 0.01 $ (0.31) $ 0.32
Shares used in calculating:
Basic earnings (loss) per share 12,917,766 10,624,806 12,204,529 10,042,534
Diluted earnings (loss) per share 12,917,766 13,344,863 12,204,529 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 AND CASH EQUIVALENTS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
Cash flows from operating activities
Net income (loss) $ (3,796) $ 4,240
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 3,376 1,975
Inventory valuation allowance 970 1,130
Other 47 (93)
Changes in assets and liabilities:
Accounts receivable (1,527) (7,031)
Inventories (5,249) (6,880)
Prepaid expenses and other assets (3,442) (763)
Accounts payable 3,183 60
Accrued expenses 166 250
Customer deposits (705) (2,600)
Deferred revenue 159 776
Income taxes payable 107 -
------------ ------------
Net cash used in operating activities (6,711) (8,936)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,897) (1,472)
Proceeds from sale and maturity of marketable securities 10,212 -
Purchases of marketable securities (902) -
------------ ------------
Net cash provided by (used in) investing activities 7,413 (1,472)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 713 417
------------ ------------
Net cash provided by financing activities 713 417
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,415 (9,991)
Cash and cash equivalents, beginning of period 2,973 23,394
------------ ------------
Cash and cash equivalents, end of period $ 4,388 $ 13,403
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Transfer of items originally classified as fixed assets to
inventories $ 513 $ -
Transfer of items originally classified as inventories to
fixed assets $ 584 $ 879
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 wholly owned
subsidiaries. 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, 1998 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, 1997, included in the Company's Annual
Report on Form 10-K for such fiscal year.
2. EARNINGS PER SHARE
For the three and nine months ended September 30, 1998, potential common
stock of 227,388 and 258,008, respectively, of common shares issuable upon
the exercise of stock options and 755,550 and 1,370,800, respectively, of
unvested restricted common shares are antidilutive because the Company
recorded a net loss for the periods and, therefore, have been excluded from
the diluted earnings per share computations.
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
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------------
Weighted average number of shares outstanding 12,917,766 10,624,806 12,204,529 10,042,534
Unvested restricted common shares - 2,272,800 - 2,846,000
Dilutive stock options - 447,257 - 500,101
---------- ---------- ---------- ----------
Shares used in calculating diluted earnings per
share 12,917,766 13,344,863 12,204,529 13,388,635
========== ========== ========== ==========
3. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------------------------------
Components and assemblies $16,076 $11,932
Finished products 2,429 1,781
------- -------
$18,505 $13,713
======= ========
6
4. RESTRUCTURING OF OPERATIONS
In March 1998, the Company recorded a charge for the restructuring of
operations of $676,000. The charge for the restructuring included $569,000
related to the termination of 13 employees as part of a planned
consolidation of the operations of SeaChange Asia Pacific Operations Pte.
Ltd., formerly IPC Interactive Pte. Ltd. (SC Asia), a Singapore
corporation, which, together with its wholly owned U.S. subsidiary,
GuestServe Networks, Inc., formerly IPC Interactive, Inc. (GSN), was
acquired in December 1997. The restructuring charge also included a
provision of $60,000 related to the planned vacating of premises at GSN and
$47,000 of compensation expense associated with stock options for certain
terminated employees. At March 31, 1998, all employees terminated in
connection with such restructuring had been notified by the Company.
Accrued expenses at September 30, 1998 include $20,000 as a result of the
restructuring charge. During the quarter ended September 30, 1998, the
Company paid $66,000 related to the restructuring charge.
5. STOCK OPTION REPRICING
On January 23, 1998, the Compensation and Option Committee of the Board of
Directors of the Company (the Committee) determined that, because certain
stock options held by employees of the Company had an exercise price
significantly higher than the fair market value of the Company's common
stock, such stock options were not providing the desired incentive and
retentive effect for employees. Accordingly, the Committee granted those
employees whose options were between $15.00 and $24.63 per share an
opportunity to cancel their existing options for new options on a one for
one basis, with a new five-year vesting schedule beginning on January 23,
1998. Employees whose options were above $24.63 were offered an
opportunity to cancel their existing options for new options on a two for
three basis, with no change in their original vesting schedule. As a
result of this stock option repricing, new options were granted to purchase
212,779 shares of common stock and the average exercise price of such
options was reduced from $22.19 per share to $8.25 per share, the fair
market value of the Company's common stock at the close of the market on
January 22, 1998. With the exception of one executive officer, the
Company's directors and executive officers were not eligible to participate
in this stock option repricing. During the execution of the stock option
repricing plan, the Company's stock price was below $8.25 per share and,
therefore, no compensation charge was recorded as a result of the stock
option repricing.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). The Company adopted SFAS 130 and 131 on
January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income and its components in the consolidated financial
statements. There were no material differences between net income and
comprehensive income for the three and nine-month periods ended September
30, 1998. SFAS 131 establishes standards for reporting information on
operating segments and will first be applicable to its December 31, 1998
year end financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). SFAS 133 will become effective during 1999. To date the
Company has not utilized derivative instruments or hedging activities and,
therefore, the adoption of SFAS 133 will not have an impact on the
Company's reported financial condition or results of operations.
7
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, general market conditions and Year 2000 issues,
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; the ability of the Company to compete
successfully in the future; and the risks associated with the Year 2000 issue
including, without limitation, those risks listed under "Year 2000 Issue/Year
2000 Readiness Disclosure--Risks Associated with Year 2000 Issue".
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 dated March 31, 1998. Any forward-looking statements
should be considered in light of those factors.
YEAR 2000 ISSUE/YEAR 2000 READINESS DISCLOSURE
Overview. The Company is in the process of analyzing and addressing what
is known as the Year 2000 Issue. The Year 2000 Issue has arisen because many
existing computer programs use only two digits to identify a year in the data
field. These programs were designed and developed without considering the
impact of the upcoming change in the century and, accordingly, could misconstrue
dates such as "00" as the year 1900 rather than 2000. The failure of computer
programs and systems to properly recognize dates beginning in the year 2000
could adversely affect the Company's business activities.
The Company's Year 2000 Compliance Program. The Company has initiated its
Year 2000 Compliance Program, the purpose of which is: to identify important
systems that are not yet Year 2000 compliant; to initiate replacement or
remedial action to assure that key systems will continue to operate in the Year
2000 and to test the replaced or remediated systems; to identify and contact key
suppliers, vendors, customers and business partners to evaluate their ability to
maintain normal operations in the Year 2000; and to develop appropriate
contingency plans for dealing with foreseeable Year 2000 complications. The
Company has appointed a Year 2000 Committee that is responsible for the
Company's Year 2000 Compliance Program and that reports the results and status
of the Company's Year 2000 efforts to the Board of Directors. The Company
expects to substantially complete its Year 2000 Compliance Program activities by
the end of 1999.
Information Technology Systems. The Company's critical internal
information technology ("IT") systems consist of its Electronic Mail system,
Corporate Communications system, Manufacturing database, desktop and file
management systems, Software Development tools and I/S Management tools. The
Company also uses a Call Center Management software tool for use in the
Company's customer service department. The Company has contacted the vendors of
these systems and obtained assurances that these IT systems are currently in
material Year 2000 compliance. To the extent that some employees may be using
older versions of these systems that may not be compliant, the Company intends
to upgrade such systems to achieve material Year 2000 compliance. The Company
is expecting to obtain written statements confirming such compliance from these
vendors. The Company is still in the process of evaluating other areas of its
existing internal IT systems at this time and will seek further assurances from
its vendors as necessary. The Company plans to test its critical IT systems
during 1999. The Company intends to evaluate the need for contingency plans for
these internal IT systems given the assurances of compliance the Company has
received for these systems. While the Company will work diligently with all of
its IT system providers, there is no guarantee that these IT systems providers
will meet Year 2000 compliance. The failure of any such IT system to be Year
2000 compliant could have a negative effect on the business activities of the
Company.
Non-Information Technology Systems. The Company is conducting an
assessment of its non-information technology systems (such as building security,
voice mail, telephone and other systems containing embedded microprocessors) and
is in the process of determining the nature and extent of any work that may be
required to make any non-IT systems Year 2000 compliant. The Company intends to
make Year 2000 compliance inquiries to the vendors of these systems, track the
responses to its inquiries and have the inquiry process completed during the
first half of 1999.
Third Party Suppliers, Vendors and Customers. The Company's Year 2000
Compliance Program also includes an investigation of the Year 2000 compliance of
its major suppliers, vendors, customers and business partners. For example, all
of the Company's products and services incorporate third party software and
hardware. The Company is in the process of evaluating its product components.
The Company has identified and contacted most of its third party suppliers of
hardware and software components regarding Year 2000 compliance. The Company
has learned that some features or functions of such third party components are
not Year 2000 compliant. However, in certain cases the Company does not use
such features or functions in its products and, to that extent, the Company
believes the non-compliance of such features and functions will not have a
negative impact on its products. In those cases where the non-compliance of
third party components does affect features or functions used by the Company in
its products, the Company intends to install upgrades (most of which are
currently available) to achieve material compliance. In addition, the Company
is in the process of testing its application software. To date, the Company has
found its application software to be Year 2000 compliant. Given the number of
components and the complexity of the software incorporated in the Company's
products and services, the Company believes that in the course of conducting its
Year 2000 Compliance Program it could reasonably discover that the Year 2000
problem may affect its software or components. However, the Company regularly
develops software updates to its product offerings as a natural course of
business and the Company does not expect that these Year 2000 updates will be
excessively complex or expensive to implement. Still, there can be no
assurances that there will be no service interruption on the part of any of the
Company's third party suppliers due to the Year 2000 problem and this could have
a material adverse effect on the Company.
Year 2000 Costs and Expenses. To date, the costs associated with the Year
2000 Issue and the Company's Year 2000 Compliance Program have not been
material. The Company will incur costs that include internal resources,
software and equipment upgrades and replacement. Based on currently available
information, the Company believes that the expense associated with its ongoing
efforts will not be material and will be funded through operations, but the
Company has not completed its evaluation of its non-IT systems and its third
party relationships. If unforeseen compliance efforts are required or if
present compliance efforts are not completed on time, or if the cost of any
required updating, modification or replacement of the Company's systems or
equipment exceeds the Company's estimates, the Year 2000 Issue could result in
material costs and have a material adverse effect on the Company.
Contingency Plans. At the present time, the Company has not yet formulated
contingency plans for addressing problems due to the Year 2000 Issue. The
Company has been assured that its critical internal IT systems are compliant by
the vendors of those systems and the Company will evaluate the need for
contingency plans for internal IT systems given those assurances. The Company
is currently in the process of evaluating the Year 2000 Issue with respect to
its non-IT systems and with respect to its major suppliers, vendors, customers
and business partners. As this evaluation process proceeds, the Company will
formulate appropriate contingency plans. The Company expects that any required
contingency planning will be completed no later than the end of 1999.
Risks Associated with Year 2000 Issue. Various statements in this
discussion of Year 2000 are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed above under
"Factors That May Affect Future Results." These statements include statements
of the Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance. These
forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified, the failure of software vendors to deliver
the upgrades and repairs to which they have committed, the wide variety of
information technology systems and components, both hardware and software, that
must be evaluated and the large number of vendors and customers with which the
Company interacts. The Company's assessments of the effects of Year 2000 on the
Company are based, in part, upon information received from third parties and the
Company's reasonable reliance on that information. Therefore, the risk that
inaccurate information is supplied by third parties upon which the Company
reasonably relied must be considered as a risk factor that might affect the
Company's Year 2000 efforts. The Company is attempting to reduce the risks by
utilizing an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
RESULTS OF OPERATIONS
ACQUISITION. On December 10, 1997, the Company acquired all of the
outstanding capital stock of SeaChange Asia Pacific Operations Pte. Ltd.,
formerly IPC Interactive Pte. Ltd. (SC Asia). SC Asia's products together with
the Company's centralized video server platform, provides interactive television
network systems to the hospitality and commercial property markets.
Additionally, SC Asia deploys and operates its interactive network television
systems at customer locations and charges fees for providing services and
content, which are primarily movies. The transaction was accounted for under
the purchase method and, accordingly, the results of operations of the Company
include the operating results of SC Asia from the date of acquisition.
REVENUES. The Company's systems revenues consist primarily of sales of its
digital video insertion, movie system and broadcast products. Systems revenues
increased by 8% to $14.2 million for the quarter ended September 30, 1998, from
$13.2 million in the comparable quarter in 1997. Systems revenues decreased by
16% to $42.3 million for the nine-month period ended September 30, 1998, from
$50.2 million in the comparable period in 1997. The increase in systems
revenues in the quarter ended September 30, 1998 from the comparable period in
1997 resulted primarily from the sale of broadcast products that were initially
introduced during the quarter ended June 30, 1998. The decrease in systems
revenues for the nine-month period ended September 30, 1998 from the comparable
period in 1997 resulted primarily from a decrease in the volume of digital video
insertion systems sold to U.S. cable operators and was partially offset by the
sale of broadcast products. The Company expects sales of its digital ad
insertion products to decrease in the remainder of 1998 compared to the $55.7
million of such revenue for the twelve months ended December 31, 1997, primarily
due to a decrease in spending by U.S. cable operators. U.S. cable operators
have shifted their spending patterns to buy expansions to existing systems and
to buy smaller scale digital ad insertion systems. The Company anticipates
future growth, if any, in systems revenues will come from its movie system and
broadcast products.
The Company's service revenues consist of fees for installation, training
and product maintenance, technical support services and content fees. The
Company's services revenues increased by 72% to $3.5 million for the quarter
ended September 30, 1998, from approximately $2.1 million in the comparable
quarter in 1997. The Company's services revenues increased by 106% to $10.3
million in the nine-month period ended September 30, 1998, from approximately
$5.0 million in the comparable period in 1997. The increase in services
revenues primarily resulted from renewals of maintenance and support contracts
related to the growing installed base of systems and additional service revenues
in the form of content fees as a result of the acquisition of SC Asia.
8
For the quarters and nine-month periods ended September 30, 1998 and 1997,
certain customers accounted for more than 10% of the Company's total revenues.
Individual customers accounted for 43% and 10% of total revenues in the quarter
ended September 30, 1998, and 20%, 17% and 12% of total revenues in the quarter
ended September 30, 1997. Individual customers accounted for 29% and 12% of
total revenues in the nine-month period ended September 30, 1998, and 27%, 17%
and 12% of total revenues in the nine-month period ended September 30, 1997.
International revenues accounted for approximately 6% and 14% of total
revenues in the quarters ended September 30, 1998 and 1997, respectively. The
decrease is primarily attributable to the timing of individual international
sales. International revenues accounted for approximately 12% and 11% of total
revenues in the nine-month periods ended September 30, 1998 and 1997,
respectively. The Company expects that international sales will increase as a
percentage of the Company's business in the future. As of September 30, 1998,
substantially all sales of the Company's products and services have been made in
United States dollars. The Company does not expect to change this practice
significantly 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.
GROSS PROFIT. Systems gross profit as a percentage of systems revenues was
37.5% and 40.2% for the quarters ended September 30, 1998 and 1997,
respectively. Systems gross profit as a percentage of systems revenues was 38.3%
and 43.3% for the nine-month periods ended September 30, 1998 and 1997,
respectively. The decrease in systems gross profit in the quarter and nine-month
periods ended September 30, 1998 is primarily attributable to a shift in the mix
of sales in 1998 to include a greater percentage of sales of certain components
to the installed base and a greater number of sales of the smaller scale digital
ad insertion systems both of which contibuted to a lower gross profit than in
1997.
Costs of services exceeded services revenue by 5.8% for the quarter ended
September 30, 1998. Services gross profit as a percentage of services revenue
was 5.3% for the quarter ended September 30, 1997. Services gross profit as a
percentage of services revenue was 3.7% and 0.5% for the nine-month periods
ended September 30, 1998 and 1997, respectively. The decrease in services gross
profit in the quarter ended September 30, 1998 is primarily attributable to the
hiring and training of additional service personnel to provide worldwide support
for the movie and broadcast products. Improvements in the services gross profit
in the nine-month period ended September 30, 1998 reflects the increase in the
installed base of systems under service contracts and the gross profit generated
from content fees as a result of the acquisition of SC Asia. 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 generating revenues
from product and maintenance support and other services to support the growing
installed base of systems and the timing of the costs associated with the
Company building 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 facility expenses. Research and development
expenses increased to approximately $3.9 million, or 22% of total revenues in
the quarter ended September 30, 1998, from approximately $3.2 million, or 21% of
total revenues in the comparable quarter in 1997. Research and development
expenses increased to approximately $11.8 million, or 23% of total revenues in
the nine-month period ended September 30, 1998 from approximately $8.3 million,
or 15% of total revenues in the comparable period in 1997. These increases were
primarily attributable to the hiring and contracting of additional development
personnel and the acquisition of SC Asia. All internal software development
costs to date 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.
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 to approximately
$1.9 million, or 11% of total revenues in the quarter ended September 30, 1998,
from approximately $1.4 million, or 9% of total revenues in the comparable
quarter in 1997. Selling and marketing expenses increased to approximately $5.9
million, or 11% of total revenues in the nine-month period ended September 30,
1998 from approximately $4.5 million, or 8% of total revenues in the comparable
period in 1997. These increases were primarily attributable to the hiring of
additional selling and marketing personnel, expanded promotional activities,
increased international selling efforts and the acquisition of SC Asia. 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 1998.
9
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 $1.2 million, or 7% of total revenues in the quarter ended
September 30, 1998, from approximately $792,000, or 5% of total revenues in the
comparable quarter in 1997. General and administrative expenses increased to
approximately $4.5 million, or 9% of total revenues in the nine-month period
ended September 30, 1998 from approximately $2.6 million, or 5% of total
revenues in the comparable period in 1997. The increases were primarily
attributable to increased staffing to support the Company's expanded operations
in 1998 and the acquisition of SC Asia. The Company does not expect that
general and administrative expenses will increase in dollar amount in the
foreseeable future as the Company has centralized the accounting and finance
functions of SC Asia, thereby reducing these related costs for the remainder of
1998.
RESTRUCTURING OF OPERATIONS. In March 1998, the Company recorded a charge
for the restructuring of operations of $676,000. Restructuring of operations
included a provision of $569,000 related to the termination of 13 employees as
part of a planned consolidation of the operations of SC Asia with the Company's
operations, $60,000 related to the planned vacating of the premises at GSN, a
subsidiary of SC Asia, and $47,000 of compensation expense associated with stock
options for certain terminated employees. At March 31, 1998, all the employees
terminated in connection with the restructuring had been notified.
INTEREST INCOME. Interest income was approximately $20,000 and $136,000 in
the quarter ended September 30, 1998 and 1997, respectively. Interest income
was approximately $199,000 and $523,000 in the nine-month periods ended
September 30, 1998 and 1997, respectively. The decreases in interest income
primarily resulted from lower average invested balances in the period ended
September 30, 1998 compared to the comparable period in 1997.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was a benefit
of 37.2% in the nine-month period ended September 30, 1998 and a tax provision
of 38.0% in the nine-month period ended September 30, 1997. The change in the
effective tax rate is attributable to the taxable loss in the nine-month period
ended September 30, 1998 compared to the taxable income in the nine-month period
ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities at September 30, 1998 were
approximately $4.4 million, a $7.9 million decrease from the December 31, 1997
balance of $12.3 million. Working capital was approximately $23.3 million and
$24.5 million at September 30, 1998 and December 31, 1997, respectively.
Net cash used in operating activities was $6.7 million and $8.9 million in
the nine-month periods ended September 30, 1998 and 1997, respectively. Net
cash used in operating activities during the nine-month period ended September
30, 1998 was the result of the net loss adjusted for noncash expenses including
depreciation and amortization, inventory valuation allowance and the changes in
certain assets and liabilities. The significant changes in assets and
liabilities included increases in accounts receivable, inventories and prepaid
expenses and a decrease in customer deposits. These changes were partially
offset by an increase in accounts payable. The increase in accounts receivable
of approximately $1.5 million, or 12%, at September 30, 1998 is primarily
attributable to the increased revenues in the quarter ended September 30, 1998
of $17.8 million, compared to revenues of approximately $12.7 million in the
quarter ended December 31, 1997, an increase of $5.1 million, or 40%. The net
increase in inventories of approximately $4.3 million, or 31% is attributable to
the increase in the number of product lines and lower than anticipated revenues
in the nine-month period ended September 30, 1998. The increase in prepaid
expenses of approximately $3.3 million, or 143% at September 30, 1998, is
attributable to an increase in prepaid income taxes due to the tax benefit
recorded in the nine-month period ended September 30, 1998 and prepayments to
certain vendors for inventory. The decrease in customer deposits of
approximately $705,000, or 34% at September 30, 1998, is the result of the
timing, volume and size of customer orders. The increase in accounts payable of
approximately $3.2 million, or 37% at September 30, 1998, is primarily the
result of the timing of purchases and related payments.
10
Net cash provided by investing activities was approximately $7.4 million in
the nine-month period ended September 30, 1998 and the net cash used in
investing activities was $1.5 million in the nine-month period ended September
30, 1997. During the nine-month period ended September 30, 1998, investing
activities consisted of the sale and maturity of marketable securities which was
partially offset by the purchase of marketable securities and the purchases of
property and equipment to support the Company's growth. During the nine-month
period ended September 30, 1997, investing activities consisted of purchases of
property and equipment to support the Company's growth.
Net cash provided by financing activities was approximately $713,000 and
$417,000 for the nine-month periods ended September 30, 1998 and 1997,
respectively, which consisted of proceeds from the issuance of common stock upon
the exercise of employee stock options and exercises pursuant to the employee
stock purchase plan.
In November 1998, the Company entered into a $9.0 million revolving line of
credit and equipment line with a bank which expires in November 1999. Borrowings
under the lines are secured by substantially all of the Company's assets. Loans
made under the lines will bear interest at a rate per annum equal to the bank's
base rate. The loan agreement relating to the lines requires that the Company
provide the bank with certain periodic financial reports and comply with certain
financial ratios.
The Company believes that existing funds together with available borrowings
under the line of credit and equipment line facility are adequate to satisfy its
working capital and capital expenditure requirements for the foreseeable future.
11
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 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, 1998, no information has changed
from Amendment No. 1 except for the use of proceeds. The following describes the
use of proceeds from November 4, 1996, the effective date, through
September 30, 1998.
Direct or Indirect
Use of Proceeds: Payment to Others
------------------
Purchase and installation of machinery and equipment $ 4,055,000
Working capital $15,626,800
Temporary Investments (specify): Amount
------------------
Money Market and short-term Investments $ 4,388,000
Municipal Bonds and Notes $ -
None of the above payments were made to affiliates of the Company, directors,
officers or persons owning 10% or more of any class of equity securities of the
Company, other than in the ordinary course of business.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.1: Intellectual Property Security Agreement dated as of
November 12, 1998 by and between the Company and Silicon
Valley Bank, a California bank of Corporation ("Silicon
Valley Bank")
Exhibit 10.2: Loan and Security Agreement dated as of November 12, 1998
by and between the Company and Silicon Valley Bank
Exhibit 27: Financial Data Schedule (For SEC Edgar
Filing Only; Intentionally Omitted)
12
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 16, 1998
SEACHANGE INTERNATIONAL, INC.
by:
/s/ William C. Styslinger, III
- - --------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director
/s/ William L. Fiedler
- - ------------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
13
SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
- - -------------- ----------- ----
10.1 Intellectual Property Security Agreement dated as of 15
November 12, 1998 by and between the Company and
Silicon Valley Bank, a California banking
corporation ("Silicon Valley Bank")
10.2 Loan and Security Agreement dated as of November 12, 1998
by and between the Company and Silicon Valley Bank
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)