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 March 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 May 10,
2000 was 21,478,945.
- --------------------------------------------------------------------------------
SEACHANGE INTERNATIONAL, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at March 31, 2000 and December 31,
1999............................................................ 3
Consolidated Statement of Operations
Three months ended March 31, 2000 and 1999...................... 4
Consolidated Statement of Cash Flows
Three months ended March 31, 2000 and 1999...................... 5
Notes to Consolidated Financial Statements...................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9-12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
SIGNATURES............................................................... 14
EXHIBIT INDEX............................................................ 15
Item 1. Financial Statements
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share-related data)
March 31, December 31,
---------- -------------
2000 1999
---------- -------------
Assets
Current assets
Cash and cash equivalents $ 7,402 $11,318
Accounts receivable, net of allowance for doubtful
accounts of $821 at March 31, 2000 and
$908 at December 31, 1999 20,871 17,840
Inventories 20,333 17,128
Prepaid expenses and other current assets 2,218 1,568
Deferred income taxes 2,243 2,243
------- -------
Total current assets 53,067 50,097
Property and equipment, net 11,416 10,538
Other assets 864 884
Goodwill and intangibles, net 682 785
------- -------
$66,029 $62,304
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Current portion of equipment line of credit
and obligations under capital lease $ 1,714 $ 1,048
Accounts payable 14,560 15,038
Accrued expenses 2,229 3,499
Customer deposits 2,273 2,092
Deferred revenue 7,042 4,380
Income taxes payable and other current liabilities 507 675
------- -------
Total current liabilities 28,325 26,732
------- -------
Long-term equipment line of credit and
obligations under capital lease 2,304 1,231
------- -------
Commitments (Note 8)
Stockholders' Equity
Common stock, $.01 par value; 50,000,000
shares authorized; 21,432,989 shares and
21,285,855 shares issued at March 31, 2000 and
December 31, 1999, respectively 214 213
Additional paid-in capital 36,382 35,634
Accumulated deficit (1,094) (1,440)
Treasury stock, 60,750 shares (1) (1)
Accumulated other comprehensive loss (101) (65)
------- -------
Total stockholders' equity 35,400 34,341
------- -------
$66,029 $62,304
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
3
SeaChange International, Inc.
Consolidated Statement of Operations
(in thousands, except share data)
Three months ended March 31,
---------------------------
2000 1999
------- -------
Revenues
Systems $ 16,672 $ 16,924
Services 5,299 3,887
----------- -----------
21,971 20,811
----------- -----------
Costs of revenues
Systems 9,196 9,873
Services 4,162 3,444
----------- -----------
13,358 13,317
----------- -----------
Gross profit 8,613 7,494
----------- -----------
Operating expenses
Research and development 4,486 4,120
Selling and marketing 2,221 1,996
General and administrative 1,424 1,388
----------- -----------
8,131 7,504
----------- -----------
Income (loss) from operations 482 (10)
Interest income, net 26 11
----------- -----------
Income before income taxes 508 1
Provision for income taxes 162 33
----------- -----------
Net income (loss) $ 346 $ (32)
=========== ===========
Basic and Diluted earnings (loss) per share $ .02 $ --
=========== ===========
Shares used in calculating:
Basic earnings per share 21,337,000 20,611,000
=========== ===========
Diluted earnings per share 23,017,000 20,611,000
=========== ===========
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
(in thousands)
For the three months
ended March 31,
-------------------
2000 1999
------- -------
Cash flows from operating activities
Net income (loss) $ 346 $ (32)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,084 1,043
Inventory valuation allowance -- 288
Changes in assets and liabilities:
Accounts receivable (3,031) (443)
Inventories (3,082) 1,186
Prepaid expenses and other current assets (666) (23)
Accounts payable (478) 121
Accrued expenses (1,270) 51
Customer deposits 181 (93)
Deferred revenue 2,662 1,605
Income taxes payable and other current liabilities (73) 15
------- -------
Net cash provided by (used in) operating
activities (4,327) 3,718
------- -------
Cash flows from investing activities
Purchases of property and equipment (1,982) (334)
------- -------
Net cash used in investing activities (1,982) (334)
------- -------
Cash flows from financing activities
Proceeds from borrowings under equipment line of
credit 2,000 --
Repayments under line of credit and equipment line of
credit (215) (2,122)
Repayment of obligation under capital lease (46) (16)
Proceeds from issuance of common stock 654 211
------- -------
Net cash provided by (used in) financing
activities 2,393 (1,927)
------- -------
Net increase (decrease) in cash and cash equivalents (3,916) 1,457
Cash and cash equivalents, beginning of period 11,318 5,442
------- -------
Cash and cash equivalents, end of period $ 7,402 $ 6,899
======= =======
Supplemental disclosure of cash flow information:
Income taxes paid $ 236 $ 15
Interest paid $ 68 $ 17
Supplemental disclosure of noncash activity:
Transfer of items originally classified as inventories
to fixed assets $ 123 $ 56
Transfer of items originally classified as fixed assets
to inventories $ -- $ 737
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 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 period ended
March 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. Customer deposits
represent advance payments from customers for systems.
3. EARNINGS PER SHARE
For the three months ended March 31, 1999, common shares of 416,000,
issuable upon the exercise of stock options and unvested restricted common
stock of 306,000, are antidilutive because the Company recorded a net loss
for the period, and therefore, have been excluded from the diluted earnings
per share computation.
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------------------------
Weighted average shares used in calculating earnings per share-
Basic............................................................ 21,337,000 20,611,000
Dilutive stock options.............................................. 1,680,000 -
--------------------------
Weighted average shares used in calculating earnings per share-
Diluted............................................................ 23,017,000 20,611,000
========== ==========
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:
MARCH 31, DECEMBER 31,
2000 1999
--------------------------
Components and assemblies $17,797 $14,739
Finished products 2,536 2,389
--------------------------
$20,333 $17,128
======= =======
5. COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2000 and 1999, the Company's
comprehensive income (loss) was as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------------------------
Net income (loss) $ 346 $ (32)
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment, net
of tax of $12 and $6, respectively (24) 11
---------------------
Other comprehensive income (expense) (24) 11
---------------------
Comprehensive income (loss) $ 322 $ (21)
===== =====
6. NEW 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. The Company will
adopt SFAS 133 as required by SFAS 137, "Deferral of the Effective Date of
FASB Statement No. 133", in fiscal year 2001. To date the Company has not
utilized derivative instruments or hedging activities and, therefore, the
adoption of SFAS 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 will be required in the
Company's second 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 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
7. SEGMENT INFORMATION
The Company has four reportable segments: digital advertising insertion,
broadcast systems, interactive television systems (ITV) and services. The
digital advertising insertion 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, near video on demand, and other video programming for the
broadcast television industry. The ITV segment comprises products to
provide long-form video storage and delivery for television operators and
telecommunication companies for the residential market and pay-per-view
markets for the hospitality and commercial property markets. The service
segment provides installation, training, product maintenance and technical
support for all of the above systems and content which is distributed by
the ITV product segment. The Company does not measure the assets allocated
to the segments. The Company has changed its reportable segments from the
prior year and has reclassed prior year amounts to conform to these current
segments. The Company measures results of the segments based on the
respective gross profits. There were no intersegment sales or transfers.
Long-lived assets are principally located in the United States. The
following summarizes the revenues and cost of revenues by reportable
segment:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------------------------
Revenues
Digital advertising insertion $10,838 $12,493
Broadcast 3,305 4,105
ITV 2,529 326
Services 5,299 3,887
------- -------
$21,971 $20,811
======= =======
Costs of revenues
Digital advertising insertion $ 5,993 $ 7,305
Broadcast 1,980 2,335
ITV 1,223 233
Services 4,162 3,444
------- -------
$13,358 $13,317
======= =======
The following summarizes revenues by geographic locations:
Revenues
United States $18,359 $17,498
Canada and South America 1,531 856
Europe 1,861 1,623
Rest of world 220 834
------- -------
$21,971 $20,811
======= =======
Single customers accounted for 17% and 15% of revenues in the three months
ended March 31, 2000 and 17%, 16% and 14% of revenues in the three months
ended March 31, 1999.
8. LEGAL PROCEEDINGS
One of our customers is subject to a lawsuit whereby a third party has made
a claim of patent infringement against our customer, which claim is
believed to relate to such customer's use of our products. Our customer has
requested that we indemnify it from such liability to the extent such
liability is related to the customer's use of our products. We do not
believe that the charge of infringement against the customer's products
based on use of our products has any merit, and we plan to oppose the
allegations vigorously.
9. SUBSEQUENT EVENTS
In April, the Company's Board of Directors voted to change the Company's
fiscal accounting year to begin on February 1 and end on January 31. The
Company had been operating under a fiscal year that began on January 1 and
ended December 31.
In May, the Company and Microsoft Corporation entered into a binding letter
of intent to collaborate on extending Microsoft Windows Media Technologies
from broadband Internet delivery to cable and broadcast television systems.
As part of the agreement, Microsoft Corporation will make a minority
investment in the Company.
8
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 digital advertising insertion,
broadcast and interactive television systems and related services and movie
content to television operators, telecommunications companies, the hospitality
and commercial property markets 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, the Company's Board of Directors voted to change the Company's fiscal
accounting year to begin on February 1 and end on January 31. The Company had
been operating under a fiscal year that began on January 1 and ended December
31.
In May, the Company and Microsoft Corporation entered into a binding letter
of intent to collaborate on extending Microsoft Windows Media Technologies from
broadband Internet delivery to cable and broadcast television systems. As part
of the agreement, Microsoft Corporation will make a minority investment in the
Company.
9
Revenues
Systems. The Company's systems revenues consist of sales of its digital
video insertion, broadcast and interactive television system products.
Systems revenues decreased 1% from $16.9 million in the three months ended
March 31, 1999 to $16.7 million in the three months ended March 31, 2000.
The decreased systems revenues in the three months ended March 31, 2000
compared to the same period in 1999 resulted from a decrease of $1.7 million
and $800,000 in digital advertising insertion and broadcast systems revenues,
respectively, offset by a $2.2 million increase in interactive television
systems revenues. The Company expects future systems revenue growth, if any,
to come principally from its broadcast and interactive television products.
For the three month periods ended March 31, 2000 and 1999, certain customers
accounted for more than 10% of the Company's total revenues. Single
customers accounted for 17% and 15% of total revenues in three months ended
March 31, 2000 and 17%, 16% and 14% of total revenues in the three months
ended March 31, 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 16% of total revenues in the
three month periods ended March 31, 2000 and 1999. The Company expects that
international sales will remain a significant portion of the Company's
business in the future. As of March 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 support services and movie content
fees. The Company's services revenues increased 36% to $5.3 million in three
months ended March 31, 2000 from $3.9 million in the three months ended March
31, 1999. This increase in services revenues primarily resulted from the
renewals of maintenance and support contracts, price increases on certain
annual maintenance contracts and the impact of a growing installed base of
systems.
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 7% from $9.9 million in the three months ended
March 31, 1999 to $9.2 million in the three months ended March 31, 2000. In
the three months ended March 31, 2000, the decrease in costs of systems
revenues reflects lower systems revenue and a higher margin product mix.
Systems gross profit as a percentage of systems revenues was 45% and 42% in
the three months ended March 31, 2000 and 1999, respectively. The increase in
systems gross profit in the three month ended March 31, 2000 was primarily
due to lower material and labor costs as a percentage of systems revenue.
The gross profits in the three months ended March 31, 1999 were impacted by
an increase of approximately $288,000 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 support services provided by the Company and costs associated with
providing movie content. Costs of services revenues increased 21% from $3.4
million in the three months ended March 31, 1999 to $4.2 million in the three
months ended March 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 digital advertising
insertion, broadcast and interactive television systems and costs associated
with providing movie content. Services gross profit as a percentage of
services revenue was 22% in the three months ended March 31, 2000 and 11% in
the three months ended March 31, 1999. Improvements in the services gross
profit in the three months ended March 31, 2000 reflects the increase in the
installed base of systems under service contracts, the impact of price
increases on certain annual maintenance contracts and the completion of
certain high margin support 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.
10
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 9% from $4.1 million in the three months ended March 31, 1999 to
$4.5 million in the three months ended March 31, 2000. The increase in the
dollar amount in the three months ended March 31, 2000 was primarily
attributable to the hiring and contracting of additional development
personnel which reflects the Company's continuing investment in new products.
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 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 11%
to $2.2 million in the three months ended March 31, 2000 from $2.0 million in
the three months ended March 31, 1999. The increase was primarily due to
the hiring of additional sales personnel for the Company's broadcast and
interactive television products.
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 remained
relatively flat at $1.4 million in the three months ended March 31, 2000 and
1999.
Interest Income, net. Interest income, net was approximately $26,000 and
$11,000 in the three months ended March 31, 2000 and 1999, respectively. The
increase in interest income, net in the three months ended March 31, 2000
primarily resulted from higher average invested cash balances offset by
interest expense on borrowings.
Provision for Income Taxes. The Company's effective tax provision rate was
32% in the three months ended March 31, 2000.
The Company had net deferred tax assets of $2.9 million at March 31, 2000.
The Company has made the determination it is more likely than not
that it will realize the benefits of the net deferred tax assets.
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
decreased $3.9 million from $11.3 million at December 31, 1999 to $7.4
million at March 31, 2000. Working capital increased from approximately $23.4
million at December 31, 1999 to approximately $24.7 million at March 31,
2000.
Net cash used in operating activities was approximately $4.3 million for the
three months ended March 31, 2000. Net cash provided by operating activities
was approximately $3.7 million for the three months ended March 31,1999. The
net cash used in operating activities in the three months ended March 31,
2000 was the result of the net income adjusted for non-cash expenses
including depreciation and amortization and the 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 $3.0
million and an increase in inventories of $3.1 million. These items that used
cash from operations were offset by an increase in deferred revenue of $2.7
million.
Net cash used in investing activities was approximately $2.0 million and
$300,000 for the three months ended March 31, 2000 and 1999, respectively.
Investment activity consisted primarily of capital expenditures related to
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 $2.4 million for
the three months ended March 31, 2000. Net cash used in financing activities
was approximately $1.9 million for the three months ended March 31, 1999. In
the three months ended March 31, 2000, the cash provided by financing
included $2.0 million of borrowings under the equipment line of credit and
$700,000 received in connection with the issuance of common stock pursuant to
the exercise of stock options. During the same period, cash used in
financing activities included approximately $300,000 in principal payments
under the Company's equipment line of credit and capital lease obligations.
11
The Company had a $6.0 million revolving line of credit and a $5.0 million
equipment line of credit with a bank. The revolving line of credit expired in
March 2000 and the ability of the Company to make purchases applied to the
equipment line of credit expired in March 2000. The Company is currently in
the process of renewing both lines of credit. Borrowings under 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 bank's base rate plus .5%. 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% (9.5% at March 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 March 31, 2000 the Company
was in compliance with all covenants. As of March 31, 2000, there were no
borrowings against the line of credit and borrowings outstanding under the
equipment line of credit were $3.5 million.
The Company believes that existing funds together with proceeds to be
received from the Company's sale of its Common Stock to Microsoft Corporation
pursuant to a binding letter of intent 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 March 31,
2000.
Effects of Inflation
Management believes that financial results have not been significantly
impacted by inflation and price changes.
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. The
Company will adopt SFAS 133 as required by SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133", in fiscal year 2001. To date the
Company has not utilized derivative instruments or hedging activities and,
therefore, the adoption of SFAS 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 will be required in the Company's second 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not
expect the application of FIN 44 to have a material impact on the Company's
financial position or results of operations.
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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 March 31, 2000, the Company had $3,475,000
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 $33,000.
The carrying amounts reflected in the consolidated balance sheet of cash and
cash equivalents, trade receivables, and trade payables approximates fair value
at March 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 March 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 our customers is subject to a lawsuit whereby a third party has made a
claim of patent infringement against our customer, which claim is believed to
relate to such customer's use of our products. Our customer has requested that
we indemnify it from such liability to the extent such liability is related to
the customer's use of our products. We do not believe that the charge of
infringement against the customer's products based on use of our products has
any merit, and we plan to oppose the allegations vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
(b) Reports on Form 8-K
On January 14, 2000, the Company filed a Form 8-K with the SEC with
disclosure therein under Items 2, 5 and 7 of Form 8-K relating to the
Company's acquisition on December 30, 1999 of all of the outstanding
capital stock of Digital Video Arts, Ltd. and the Company's three for two
stock split in the form of a dividend on December 27, 1999.
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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: May 15, 2000
SEACHANGE INTERNATIONAL, INC.
by: /s/ William L. Fiedler
----------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer;
Authorized Officer)
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SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
15