SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(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.
1
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
2
Item 1. Financial Statements
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share-related data)
March 31, 2000 December 31, 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. SeaChange
believes that the unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments), necessary for a
fair presentation of SeaChange'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 SeaChange'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 or determinable and collection of the related receivable is
probable. Installation, project management and training revenue is deferred and
recognized as these services are performed. Revenue from technical support and
maintenance is deferred and recognized ratably over the period of the related
agreements, generally twelve months. Customers are billed for installation,
project management, training and maintenance at the time of the product sale.
Revenue from content fees, primarily movies, is recognized based on the volume
of monthly purchases that are made by hotel guests. Revenue from product
development contract services is recognized based on the time and materials
incurred to complete the work.
SeaChange's transactions frequently involve the sales of systems and services
under multiple element arrangements. Systems sales always include one year of
free technical support and maintenance services. Revenue under multiple element
arrangements is allocated to all elements except systems based upon the fair
value of those elements. The amounts allocated to training, project management,
technical support and maintenance and content fees is based upon the price
charged when these elements are sold separately and unaccompanied by the other
elements. The amount allocated to installation revenue is based upon hourly
rates and the estimated time required to complete the service. The amount
allocated to systems is done on a residual method basis. Under this method, the
total arrangement value is allocated first to undelivered elements, based on
their fair values, with the remainder being allocated to systems revenue.
Installation, training and project management services are not essential to the
functionality of systems as these services do not alter the equipment's
capabilities, are available from other vendors and the systems are standard
products.
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 SeaChange 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, SeaChange'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. SeaChange 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 SeaChange has not utilized
derivative instruments or hedging activities and, therefore, the adoption of
SFAS 133 is not expected to have a material impact on SeaChange's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 is required in SeaChange'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 from a change in accounting principle.
SeaChange'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. SeaChange does not expect the
application of FIN 44 to have a material impact on SeaChange'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
SeaChange 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. SeaChange does not measure the assets allocated to
the segments. SeaChange has changed its reportable segments from the prior year
and has reclassed prior year amounts to conform to these current segments.
SeaChange 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
8. LEGAL PROCEEDINGS
On March 17, 2000, Beam Laser Systems, Inc. and Frank L. Beam instituted a claim
(Civil Action No. 2:00-CV-195) in the federal courts in the Eastern District of
Virginia against one of SeaChange's customers, Cox Communications, Inc. Beam
Laser is seeking both an injunction and monetary damages from the defendants in
that case. The defendants have made a counterclaim against Beam Laser seeking a
declaration of non-infringement, invalidity and unenforceability of the two
patents held by Beam Laser that are at question. In addition, SeaChange has
agreed to indemnify its customer for claims brought against the customer that
are related to the customer's use of SeaChange's products.
On June 14, 1999, SeaChange filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure the business and reputation of SeaChange in the
marketplace. The complaint further alleges that Mr. Putterman and Lathrop
Investment Management, Inc. defamed SeaChange through false postings on an
Internet message board. The complaint seeks unspecified amounts of compensatory
and punitive damages.
SeaChange cannot be certain of the outcome of the foregoing litigation, but does
plan to oppose allegations against it and assert its claims against other
parties vigorously. In addition, as these claims are in the early stages of
discovery and certain claims for damages are as yet unspecified, SeaChange is
unable to estimate the impact to its business, financial condition, and results
of operations or cash flows.
9. SUBSEQUENT EVENTS
In April 2000, SeaChange's Board of Directors voted to change SeaChange's fiscal
accounting year from December 31 to January 31, such that SeaChange's current
fiscal year began on February 1, 2000 and will end on January 31, 2001.
On May 8, 2000, SeaChange and Microsoft Licensing, Inc. entered into a licensing
and development agreement whereby Microsoft agreed to license to SeaChange
certain technology to be used by SeaChange in connection with the development by
SeaChange of plug-ins for the streaming media server software update currently
being developed by Microsoft to its Windows NT/Windows 2000 operating system.
Under the terms of the agreement, SeaChange is also entitled to use the
Microsoft technology to enhance SeaChange's software to use the updated
streaming media server software being developed by Microsoft. The parties
intend that SeaChange will be able to promote and ship the enhanced SeaChange
software as its primary streaming media system for all Microsoft Windows 2000-
based SeaChange systems.
In addition to the ability to use the technology owned by Microsoft and licensed
to SeaChange pursuant to the licensing and development agreement Microsoft
agreed pursuant to the terms of an investment term sheet, dated as of May 8,
2000, by and between SeaChange and Microsoft Corporation to purchase 277,162
shares of SeaChange's common stock for $10 million and to purchase approximately
$10 million of additional shares of SeaChange's common stock upon the
satisfaction of certain commercial milestones. The initial share purchase for
$10 million was completed by SeaChange and Microsoft on May 23, 2000.
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: SeaChange's ability
to integrate the operations of acquired subsidiaries; fluctuations in demand for
SeaChange's products and services; SeaChange's ability to manage its growth;
SeaChange's ability to develop, market and introduce new and enhanced products
and services on a timely basis; the rapid technological change which
characterizes SeaChange's markets; SeaChange's significant concentration of
customers; SeaChange's dependence on certain sole source suppliers and third-
party manufacturers; the risks associated with international sales as SeaChange
expands its markets; and the ability of SeaChange 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 SeaChange
from time to time with the Securities and Exchange Commission, including but not
limited to, those appearing under the caption "Certain Risk Factors" in
SeaChange'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
9
SeaChange develops, manufactures and sells systems that automate the management
and distribution of both short-form video streams, such as advertisements, and
long-form video streams, such as movies or other feature presentations, each of
which requires precise, accurate and continuous execution, and the related
services and movie content to television operators, telecommunications companies
and broadcast television companies. 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 or determinable
and collection of the related receivable is probable. Installation, project
management and training revenue is deferred and recognized as these services are
performed. Revenue from technical support and maintenance is deferred and
recognized ratably over the period of the related agreements, generally twelve
months. Customers are billed for installation, project management, training and
maintenance at the time of the product sale. Revenue from content fees,
primarily movies, is recognized based on the volume of monthly purchases that
are made by hotel guests. Revenue from product development contract services is
recognized based on the time and materials incurred to complete the work.
SeaChange's transactions frequently involve the sales of systems and services
under multiple element arrangements. Systems sales always include one year of
free technical support and maintenance services. Revenue under multiple element
arrangements is allocated to all elements except systems based upon the fair
value of those elements. The amounts allocated to training, project management,
technical support and maintenance content fees is based upon the price charged
when these elements are sold separately and unaccompanied by the other elements.
The amount allocated to installation revenue is based upon hourly rates and the
estimated time required to complete the service. The amount allocated to systems
is done on a residual method basis. Under this method, the total arrangement
value is allocated first to undelivered elements, based on their fair values,
with the remainder being allocated to systems revenue. Installation, training
and project management services are not essential to the functionality of
systems as these services do not alter the equipment's capabilities, are
available from other vendors and the systems are standard products.
SeaChange has experienced fluctuations in the number of orders being placed from
quarter to quarter. SeaChange 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. SeaChange expects that there will continue to
be fluctuations in the number and value of orders received and that at least in
the near future, SeaChange's revenue and results of operations will reflect
these fluctuations.
SeaChange's results are significantly influenced by a number of factors,
including SeaChange's pricing, the costs of materials used in SeaChange's
products and the expansion of SeaChange's operations. SeaChange 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
SeaChange's products primarily consist of the costs of components and
subassemblies that have generally declined over time. As a result of the growth
of SeaChange's business, operating expenses of SeaChange have increased in the
areas of research and development, selling and marketing, customer service and
support and administration.
In April 2000, SeaChange's Board of Directors voted to change SeaChange's fiscal
accounting year from December 31 to January 31, such that the current fiscal
year began on February 1, 2000 and will end on January 31, 2001.
Revenues
Systems. SeaChange's systems revenues consist of sales within its digital
advertising insertion, broadcast and interactive television segments. 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. Revenues from
the digital advertising insertion segment, which accounted for 49% and 60% of
total revenues in the three months ended March 31, 2000 and 1999, respectively,
decreased from $12.5 million in 1999 to $10.8 million in 2000. Broadcast system
segment revenues were $3.3 million in the three months ended March 31, 2000
compared to $4.1 million in the three months ended March 31, 1999. This decrease
in both the digital advertising insertion and broadcast segment revenues is
primarily attributable to a shift in the timing of orders by U.S. customers
between quarters this year versus the previous year. Interactive television
segment revenues increased from $326,000 in the three months ended March 31,
1999 to $2.5 million in the three months ended March 31, 2000. The higher
revenue reflects the introduction of the residential video on demand products in
the third quarter of 1999. SeaChange expects future revenue growth, if any, to
come principally from the broadcast and the interactive television segments.
Services. SeaChange's services revenues consist of fees for installation,
training, project management, technical support and maintenance services,
product development services and movie content fees. SeaChange'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 for technical support and
maintenance, price increases on certain annual maintenance and the impact of a
growing installed base of systems.
10
For the three month periods ended March 31, 2000 and 1999, certain customers
accounted for more than 10% of SeaChange'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.
Revenue from these customers was primarily within the digital advertising
insertion segment. SeaChange 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. SeaChange expects that
international sales will remain a significant portion of SeaChange's business in
the future. As of March 31, 2000, substantially all sales of SeaChange's
products were made in United States dollars. SeaChange does not expect to change
this practice in the foreseeable future. Therefore, SeaChange 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, SeaChange will
reevaluate its foreign currency exchange rate risk.
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. SeaChange expects cost of systems
revenues for the broadcast and interactive television to be higher as a
percentage of revenues as the products are first deployed and to decrease as a
percentage of revenues as the revenue level increases and SeaChange improves its
manufacturing and material purchasing efficiencies.
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. Gross
profit for the digital advertising insertion segment improved from 42% for the
three months ended March 31, 1999 to 45% for the three months ended March 31,
2000 while gross profit for the broadcast segment decreased to 40% for the three
months ended March 31, 2000 compared to 43% for the three months ended March 31,
1999. The higher revenue level for the interactive television segment resulted
in the improvement in gross profit from 29% for the three months ended March 31,
1999 to 52% for the three months ended March 31, 2000. The gross profits in the
three months ended March 31, 1999 were impacted by an increase of approximately
$288,000 in SeaChange's inventory valuation allowance. SeaChange 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 SeaChange 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
SeaChange 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, the
impact of price increases on certain annual maintenance and the completion of
certain high margin product development contracts. SeaChange 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 SeaChange's ongoing investment
required to build a service organization to support the installed base of
systems and new products.
11
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
SeaChange's continuing investment in new products. All internal software
development costs to date have been expensed by SeaChange. SeaChange expects
that research and development expenses will continue to increase in dollar
amount as SeaChange 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 SeaChange'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. SeaChange's effective tax provision rate was 32% in
the three months ended March 31, 2000.
SeaChange had net deferred tax assets of $2.9 million at March 31, 2000.
SeaChange 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
SeaChange has financed its operations and capital expenditures primarily with
the proceeds of SeaChange'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 SeaChange's
equipment line of credit and capital lease obligations.
SeaChange 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 SeaChange to make purchases applied to the
equipment line of credit expired in March 2000. SeaChange is currently in the
process of renewing both lines of credit. Borrowings under the lines of credit
are secured by substantially all of SeaChange'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 SeaChange provide the bank with certain periodic financial reports and
comply with certain financial ratios including
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the maintenance of total liabilities, excluding deferred revenue, to net worth
of at least .80 to 1.0. At March 31, 2000 SeaChange 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.
SeaChange believes that existing funds together with proceeds to be received
from SeaChange'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.
SeaChange 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. SeaChange 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 SeaChange has not utilized
derivative instruments or hedging activities and, therefore, the adoption of
SFAS 133 is not expected to have a material impact on SeaChange's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 is required in SeaChange'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. SeaChange'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. SeaChange does not expect the
application of FIN 44 to have a material impact on SeaChange's financial
position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
SeaChange 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 SeaChange's financial results. SeaChange's primary
exposure has been related to local currency revenue and operating expenses in
Europe and Asia. Historically, SeaChange has not hedged specific currency
exposures as gains and losses on foreign currency transactions have not been
material to date. At March 31, 2000, SeaChange 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.
SeaChange maintains investment portfolio holdings of various issuers, types, and
maturities. SeaChange's cash and marketable securities include cash equivalents,
which SeaChange 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 SeaChange's
investment portfolio. As a result, SeaChange does not currently hedge these
interest rate exposures.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 17, 2000, Beam Laser Systems, Inc. and Frank L. Beam instituted a claim
(Civil Action No. 2:00-CV-195) in the federal courts in the Eastern District of
Virginia against one of SeaChange's customers, Cox Communications, Inc. Beam
Laser is seeking both an injunction and monetary damages from the defendants in
that case. The defendants have made a counterclaim against Beam Laser seeking a
declaration of non-infringement, invalidity and unenforceability of the two
patents held by Beam Laser that are at question. In addition, SeaChange has
agreed to indemnify its customer for claims brought against the customer that
are related to the customer's use of SeaChange's products.
On June 14, 1999, SeaChange filed a defamation complaint against Jeffery
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure the business and reputation of SeaChange in the
marketplace. The complaint further alleges that Mr. Putterman and Lathrop
Investment Management, Inc. defamed SeaChange through false postings on an
Internet message board. The complaint seeks unspecified amounts of compensatory
and punitive damages.
SeaChange cannot be certain of the outcome of the foregoing litigation, but does
plan to oppose allegations against it and assert its claims against other
parties vigorously. In addition, as these claims are in the early stages of
discovery and certain claims for damages are as yet unspecified, SeaChange is
unable to estimate the impact to its business, financial condition, and results
of operations or cash flows.
ITEM 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K On January 14, 2000, SeaChange filed a Form 8-K
with the SEC with disclosure therein under Items 2, 5 and 7 of Form 8-K
relating to SeaChange's acquisition on December 30, 1999 of all of the
outstanding capital stock of Digital Video Arts, Ltd. and SeaChange'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 amended report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 2001
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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