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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registration as specified in its charter)
Delaware 04-3197974
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
124 Acton Street, Maynard, MA 01754
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (508) 897-0100
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months (or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
----- -----
The number of shares outstanding of the registrant's Common Stock on May 6, 1997
was 12,890,195.
- --------------------------------------------------------------------------------
1
Exhibit Index at Page 12
SEACHANGE INTERNATIONAL, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at December 31, 1996 and March 31, 1997 ........................ 3
Consolidated Statement of Income
Three months ended March 31, 1996 and 1997 ..................... 4
Consolidated Statement of Cash Flows
Three months ended March 31, 1996 and 1997 ..................... 5
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............... 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ....................... 10
SIGNATURES ............................................................... 11
EXHIBIT INDEX ............................................................ 12
EXHIBIT .................................................................. 13
2
Item 1: Consolidated Financial Statements
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share-related data)
December 31, March 31,
1996 1997
-------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 23,394 $ 20,139
Accounts receivable, net of allowance for doubtful accounts
of $173 at December 31, 1996 and $230 at March 31, 1997 7,426 12,376
Inventories 9,153 8,649
Other current assets 825 1,080
-------------- ------------
Total current assets 40,798 42,244
Property and equipment, net 4,705 4,851
Other assets 532 462
-------------- ------------
$ 46,035 $ 47,557
============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,305 $ 5,947
Accrued expenses 1,809 2,683
Customer deposits 2,899 2,834
Deferred revenue 2,192 2,380
Income taxes payable - 71
-------------- ------------
Total current liabilities 14,205 13,915
-------------- ------------
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 12,859,234
shares and 12,878,407 shares issued at December 31, 1996
and March 31, 1997, respectively 129 129
Additional paid-in capital 26,167 26,247
Retained earnings 5,534 7,266
-------------- ------------
Total stockholders' equity 31,830 33,642
-------------- ------------
$ 46,035 $ 47,557
============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except share-related data)
(unaudited)
Three months ended
March 31,
--------------------------------
1996 1997
-------------- -------------
Revenues:
Systems $ 9,684 $ 16,796
Services 545 1,256
-------------- -------------
10,229 18,052
-------------- -------------
Cost of revenues:
Systems 6,342 9,457
Services 729 1,386
-------------- -------------
7,071 10,843
-------------- -------------
Gross profit 3,158 7,209
-------------- -------------
Operating expenses:
Research and development 992 2,416
Selling and marketing 755 1,268
General and administrative 294 930
-------------- -------------
2,041 4,614
-------------- -------------
Income from operations 1,117 2,595
Interest income, net 48 200
-------------- -------------
Income before income taxes 1,165 2,795
Provision for income taxes 446 1,062
-------------- -------------
Net income $ 719 $ 1,733
============== =============
Net income per share $ 0.06 $ 0.13
============== =============
Weighted average common shares and
equivalent common shares outstanding 11,583,835 13,413,555
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH FLOWS
(in thousands)
(unaudited)
Three months ended
March 31,
--------------------------------------
1996 1997
--------------- --------------
Cash flows from operating activities
Net income $ 719 $ 1,733
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 178 473
Inventory valuation allowance 255 600
Compensation expense associated with stock options - 45
Deferred income taxes - (138)
Changes in assets and liabilities:
Accounts receivable (6,143) (4,950)
Inventories (4,114) (96)
Prepaid expenses and other assets (7) (129)
Accounts payable 1,670 (1,358)
Accrued expenses 574 874
Customer deposits 4,996 (65)
Deferred revenue 319 187
Income taxes payable (642) 71
--------------- --------------
Net cash used in operating activities (2,195) (2,753)
--------------- --------------
Cash flows from investing activities
Purchases of property and equipment (446) (537)
--------------- --------------
Net cash used in investing activities (446) (537)
--------------- --------------
Cash flows from financing activities
Proceeds from issuance of common stock 23 35
Purchase of treasury stock (2,023) -
Repayments of note receivable from stockholders 200 -
--------------- --------------
Net cash (used in) provided by financing
activities (1,800) 35
--------------- --------------
Net decrease in cash and cash equivalents (4,441) (3,255)
Cash and cash equivalents, beginning of period 6,184 23,394
--------------- --------------
Cash and cash equivalents, end of period $ 1,743 $ 20,139
=============== ==============
Supplemental disclosure of noncash activity
Transfer of items originally classified as inventories to
fixed assets 700 -
Purchase of treasury stock in lieu of cash payment of
notes receivable from stockholders 505 -
The accompanying notes are an integral part of these consolidated financial
statements.
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share-related data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of the Company 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 period ended March 31, 1997 are
not necessarily indicative of results expected for the full fiscal year or
any other future periods. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements
and related notes for the year ended December 31, 1996, included in the
Company's Annual Report on Form 10-K.
2. Net Income Per Share
Net income per share was determined by dividing net income by the weighted
average number of common shares and common share equivalents outstanding
during the period. Common share equivalents issued subsequent to September
1995 which are comprised of common stock options and Series B convertible
preferred stock have been included in the calculation for the quarter
ended March 31, 1996 pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share."
SFAS128 establishes new standards for computing and presenting earnings per
share and will be effective for the Company's interim and annual periods
ending after December 15, 1997. Early adoption of the Statement is not
permitted. SFAS 128 requires restatement of all previously reported
earnings per share data that are presented. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company has calculated both the basic earnings per share and the
diluted earnings per share to be $0.13 for the quarter ended March 31,
1997.
3. Inventories
Inventories consist of the following:
December 31, March 31,
1996 1997
-------------- -------------
Components and assemblies $ 6,525 $ 7,378
Finished products 2,628 1,271
----------- -----------
$ 9,153 $ 8,649
=========== ===========
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Factors That May Affect Future Results
Any statements contained in this Form 10-Q that do not describe historical
facts may constitute forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained herein are based on current expectations, but are subject
to a number of risks and uncertainties that may cause actual results to differ
materially from expectations. The factors that could cause actual future results
to differ materially from current expectations include the following:
fluctuations in demand for the Company's products and services; the Company's
ability to manage its growth; the Company's ability to develop, market and
introduce new and enhanced products and services on a timely basis; the rapid
technological change which characterizes the Company's markets; the Company's
significant concentration of customers; the Company's dependence on certain sole
source suppliers and third-party manufacturers; the risks associated with
international sales as the Company expands its markets; and the ability of the
Company to compete successfully in the future. Further information on factors
that could cause actual results to differ from those anticipated is detailed in
various 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 "Risk Factors" in the Company's Prospectus dated November 4, 1996 and
factors under the caption "Certain Risk Factors" in the Company's Annual Report
on Form 10-K dated March 28, 1997. Any forward-looking statements should be
considered in light of those factors.
Results of Operations
Revenues. The Company's systems revenues consist primarily of sales of its
digital video insertion products. Systems revenues increased by 73% to $16.8
million for the quarter ended March 31, 1997, from $9.7 million in the
comparable quarter in 1996. The increase in systems revenues resulted primarily
from the increase in the number of the Company's digital video insertion systems
sold to television operators primarily in the United States. The increase over
the 1996 quarter was also attributable to a price reduction in the Company's
first generation digital video insertion systems in effect during the quarter
ended March 31, 1996.
The Company's services revenues consist of fees for installation, training,
product maintenance and technical support services. The Company's services
revenues increased by 130% to $1.3 million for the quarter ended March 31, 1997,
from approximately $545,000 in the comparable quarter in 1996. The increase in
services revenues primarily resulted from the increase in product sales and
renewals of maintenance and support contracts related to the growing installed
base of systems.
For the quarter ended March 31, 1997 and 1996, certain customers accounted
for more than 10% of the Company's total revenues. Individual customers
accounted for 37%, 15%, 15% and 11% of total revenues in the quarter ended
March 31, 1997 and 24%, 24%, 17% and 10% of total revenues in the quarter ended
March 31, 1996.
International revenues accounted for approximately 12% and 17% of total
revenues in the quarters ended March 31, 1997 and 1996, respectively and the
Company expects that international sales will account for a significant portion
of the Company's business in the future. As of March 31, 1997, all sales of the
Company's products have been made in United States dollars and the Company
expects this practice to continue in the foreseeable future. Therefore, the
Company has not experienced, nor does it expect to experience in the near term,
any 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.
7
Gross profit. Systems gross profit as a percentage of systems revenues was
43.7% and 34.5% for the quarters ended March 31, 1997 and 1996, respectively.
The increase in systems gross profit resulted from design improvements in the
second generation video insertion product, lower costs of certain purchased
components and subassemblies and the Company achieving manufacturing
efficiencies as a result of increased volume. The increase was partially offset
by an increase of $600,000 in the Company's inventory valuation allowance in the
quarter ended March 31, 1997. The Company evaluates inventory levels and
expected usage on a periodic basis and provides a valuation allowance for
estimated inactive, obsolete and surplus inventory.
Costs of services revenues exceeded services revenues by 10.4% and 33.7%
for the quarters ended March 31, 1997 and 1996, respectively, primarily as a
result of the costs associated with the Company building a service organization
to support the installed base of systems. Improvements in the services negative
gross profit in the quarter ended March 31, 1997 resulted from the timing of
providing product and maintenance support and other services to the growing
installed base of systems.
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 $2.4 million, or 13% of total revenues in the quarter
ended March 31, 1997, from approximately $992,000, or 10% of total revenues in
the comparable quarter in 1996. These increases were primarily attributable to
the hiring of additional development personnel. All internal software research
and development costs have been expensed by the Company. The Company anticipates
that it will continue to devote substantial resources to its research and
development efforts.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation of selling and marketing personnel, including sales commissions and
travel expenses and certain promotional expenses. Selling and marketing expenses
increased to $1.3 million, or 7% of total revenues in the quarter ended March
31, 1997, from approximately $755,000, or 7% of total revenues in the comparable
quarter in 1996. The increases in the dollar amounts were attributable to the
hiring of additional selling and marketing personnel, expanded promotional
activities, increased international selling efforts and an increase in
commissions resulting from increased revenues. The Company expects that selling
and marketing expenses will continue to increase in dollar amount as the Company
hires additional personnel and expands selling and marketing activities for the
remainder of 1997.
General and Administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facility expenses. General and administrative expenses increased to
approximately $930,000, or 5% of total revenues in the quarter ended March 31,
1997, from approximately $294,000, or 3% of total revenues in the comparable
quarter in 1996. The increases were attributable to increased staffing to
support the Company's growth and an increase in the allowance for doubtful
accounts. The Company evaluates the credit risk of accounts receivable on a
periodic basis and provides an allowance for doubtful accounts to provide for
potential credit losses. Such losses to date have not exceeded management's
expectations. The Company believes that its general and administrative expenses
will continue to increase in dollar amount as a result of an expansion of the
Company's administrative staff to support its growing operations and as a result
of expenses associated with being a public company.
Interest Income. Interest income was approximately $200,000 and $48,000 in
the quarters ended March 31, 1997 and 1996, respectively. The increase in
interest income primarily resulted from tax-exempt interest earned on a higher
invested balance primarily due to the net proceeds of $24.1 million from the
initial public offering of the Company's Common Stock in November 1996.
Provision for Income Taxes. The Company's effective tax rate was 38.0% and
38.3% for the quarters ended March 31, 1997 and 1996, respectively.
8
Liquidity and Capital Resources
From inception through November 1996, the Company funded its operations
primarily through cash provided by operations and the private sale of equity
securities. In November 1996, in connection with the initial public offering of
the Company's Common Stock, the Company received proceeds of $24.1 million.
Cash and cash equivalents at March 31, 1997 was $20.1 million, a $3.3
million decrease from the December 31, 1996 balance of $23.4 million. Working
capital increased to $28.3 million at March 31, 1997 from $26.6 million at
December 31, 1996.
Net cash used in operating activities was $2.8 million and $2.2 million for
the quarters ended March 31, 1997 and 1996, respectively. Net cash used in
operating activities during the quarter ended March 31, 1997 was primarily due
to increased accounts receivable and a decrease in accounts payable partially
offset by net income adjusted for non-cash expenses including depreciation and
amortization and an increase in the inventory valuation allowance. Accounts
receivable increased from $7.4 million at December 31, 1996 to $12.4 million at
March 31, 1997, an increase of $5.0 million, or 67%. The increase in accounts
receivable is primarily attributable to the increased revenues in the quarter
ended March 31, 1997 of $18.1 million, compared to revenues of $12.0 million in
the quarter ended December 31, 1996, a 51% increase.
Net cash used in investing activities was approximately $537,000 and
$446,000 for the quarters ended March 31, 1997 and 1996, respectively.
Investment activity consisted primarily of purchases of property and equipment
to support the Company's growth.
Net cash provided by financing activities was approximately $35,000 for the
quarter ended March 31, 1997 compared with net cash used in financing activities
of $1.8 million during the comparable period in 1996. For the quarter ended
March 31, 1997, the cash provided by financing activities consisted of proceeds
from the issuance of common stock, upon the exercise of employee stock options.
For the quarter ended March 31, 1996, cash used in financing activities
consisted primarily of the repurchase of shares of the Company's common stock
from certain employees and directors of the Company, net of the repayment of
notes receivable from stockholders.
The Company has a $6.0 million revolving line of credit with a bank which
expires in September 1997. Borrowings under the line of credit are secured by
substantially all of the Company's assets. The loan agreement relating to the
line of credit requires that the Company provide the bank with certain periodic
financial reports and comply with certain financial ratios. As of March 31,
1997, the Company had not borrowed against the line.
The Company believes that its existing cash, together with available
borrowings under the line of credit, are sufficient to meet the Company's
requirements for the next twelve months.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Computation of Net Income Per Share.
Exhibit 27: Financial Data Schedule (For SEC Edgar
Filing Only; Intentionally Omitted)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, SeaChange
International, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: May 13, 1997
SEACHANGE INTERNATIONAL, INC.
by:
/s/ William C. Styslinger, III
- ------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director
/s/ Joseph S. Tibbetts, Jr.
- ---------------------------
Joseph S. Tibbetts, Jr.
Vice President, Finance and Administration,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
11
SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
11 Computation of Net Income Per Share 13
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
12