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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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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
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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 11,
1999 was 13,834,463.
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1
SEACHANGE INTERNATIONAL, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at March 31, 1999 and December 31, 1998........................... 3
Consolidated Statement of Operations
Three months ended March 31, 1999 and 1998........................ 4
Consolidated Statement of Cash Flows
Three months ended March 31, 1999 and 1998........................ 5
Notes to Consolidated Financial Statements........................ 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................. 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................... 15
PART II. OTHER INFORMATION
Item 5. Other Information......................................... 15
Item 6. Exhibits.................................................. 15
SIGNATURES................................................................. 16
EXHIBIT INDEX.............................................................. 17
2
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share-related data)
March 31, December 31,
1999 1998
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,521 $ 5,115
Accounts receivable, net of allowance
for doubtful accounts of $1,021 at
March 31, 1999 and $870 at December 31,
1998 18,014 18,975
Inventories 14,002 16,157
Income taxes receivable 2,117 2,117
Prepaid expenses 1,725 1,701
Deferred income taxes 1,967 1,967
-------- ---------
Total current assets 44,346 46,032
Property and equipment, net 8,061 7,981
Goodwill and intangibles, net 1,094 1,197
Other assets 194 176
-------- ---------
$ 53,695 $ 55,386
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ - $ 2,000
Current portion of equipment line of credit
and obligations under capital lease 557 555
Accounts payable 10,223 10,103
Accrued expenses 3,449 3,374
Customer deposits 1,611 1,704
Deferred revenue 5,544 5,495
Income taxes payable 490 475
-------- ---------
Total current liabilities 21,874 23,706
-------- ---------
Long term equipment line of credit and
obligations under capital lease 887 1,027
-------- ---------
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 13,775,852 shares and 13,736,892
shares issued at March 31, 1999 and December 31,
1998, respectively 138 138
Additional paid-in capital 32,388 32,177
Accumulated deficit (1,550) (1,603)
Cumulative translation adjustment (42) (59)
-------- ---------
Total stockholders' equity 30,934 30,653
-------- ---------
$ 53,695 $ 55,386
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands, except share and per share data)
Three months ended
March 31,
--------------------------------
1999 1998
----------- -----------
Revenues:
Systems $ 16,924 $ 14,807
Services 3,719 3,362
----------- -----------
20,643 18,169
----------- -----------
Costs of revenues:
Systems 9,873 8,967
Services 3,373 3,043
----------- -----------
13,246 12,010
----------- -----------
Gross profit 7,397 6,159
----------- -----------
Operating expenses:
Research and development 4,120 4,003
Selling and marketing 1,910 1,845
General and administrative 1,289 1,562
Restructuring of operations - 676
----------- -----------
7,319 8,086
----------- -----------
Income (loss) from operations 78 (1,927)
Interest income, net 8 103
----------- -----------
Income (loss) before income taxes 86 (1,824)
Provision (benefit) for income taxes 33 (709)
----------- -----------
Net income (loss) $ 53 $ (1,115)
=========== ===========
Basic earnings (loss) per share $ 0.00 $ (0.10)
=========== ===========
Diluted earnings (loss) per share $ 0.00 $ (0.10)
=========== ===========
Shares used in calculating:
Basic earnings (loss) per share 13,543,809 11,579,919
=========== ===========
Diluted earnings (loss) per share 14,025,433 11,579,919
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
4
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited, in thousands)
Three months ended
March 31,
---------------------------
1999 1998
----- ----
Cash flows from operating activities
Net income (loss) $ 53 $ (1,115)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,037 1,164
Inventory valuation allowance 288 580
Changes in assets and liabilities:
Accounts receivable 961 (807)
Inventories 1,186 (619)
Prepaid expenses and other assets (42) (689)
Accounts payable 137 (819)
Accrued expenses 75 910
Customer deposits (93) (607)
Deferred revenue 49 (201)
Income taxes payable 15 -
-------- --------
Net provided by (used in)
operating activities 3,666 (2,203)
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Cash flows from investing activities
Purchases of property and equipment (333) (605)
Proceeds from sale and maturity of
marketable securities - 2,767
Purchases of marketable securities - (552)
-------- --------
Net cash provided by (used in)
investing activities (333) 1,610
-------- --------
Cash flows from financing activities
Repayment of line of credit (2,000) -
Repayment of borrowings under equipment line
of credit (122) -
Repayment of obligations under capital lease (16) -
Proceeds from issuance of common stock 211 1
-------- --------
Net cash provided by (used in)
financing activities (1,927) 1
-------- --------
Net increase (decrease) in cash and cash equivalents 1,406 (592)
Cash and cash equivalents, beginning of period 5,115 2,973
-------- --------
Cash and cash equivalents, end of period $ 6,521 $ 2,381
======== ========
Supplemental disclosure of noncash activities
Transfer of items originally classified as fixed
assets to inventories $ 56 $ 513
Transfer of items originally classified as
inventories to fixed assets $ 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, 1999 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,
1998, included in the Company's Annual Report on Form 10-K for such fiscal
year.
2. Earnings Per Share
For the three months ended March 31, 1998, 214,640 common shares issuable
upon the exercise of stock options and 1,932,300 of unvested restricted
common stock 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,
-------------------------
1999 1998
-------------------------
Weighted average number of shares outstanding 13,543,809 11,579,919
Unvested restricted common shares 204,000 -
Dilutive stock options 277,624 -
-------------------------
Shares used in calculating diluted earnings per
share 14,025,433 11,579,919
========== ==========
3. Inventories
Inventories consist of the following:
March 31, December 31,
1999 1998
-------------------------------------
Components and assemblies $13,248 $14,592
Finished products 754 1,565
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$14,002 $16,157
======= ========
6
4. Restructuring of Operations
In March 1998, the Company recorded a charge of $676,000 as part of a
planned consolidation of the operations of SeaChange Asia Pacific
Operations Pte. Ltd. (SC Asia). The charge for restructuring included
$569,000 related to the termination of 13 employees, a provision of $60,000
related to the planned vacating of premises at GSN and $47,000 of
compensation expense associated with stock options for certain terminated
employees. At March 31, 1998, all employees terminated in connection with
such restructuring had been notified by the Company. As of December 31,
1998, the Company had paid all expenses related to the restructuring
charge.
5. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). The Company adopted SFAS 130 on January 1, 1998. SFAS 130
establishes standards for reporting comprehensive income and its components
in the consolidated financial statements. For the three months ended March
31, 1999 and 1998, the Company's comprehensive income (loss) was as
follows:
For the Three Months Ended
---------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
Net income (loss) $ 53 $(1,115)
Other comprehensive income (expense),
net of tax:
Foreign currency translation
adjustment, net of tax of $6 and
$37, respectively 11 (60)
----- -------
Other comprehensive income (expense) 11 (60)
----- -------
Comprehensive income (expense) $ 64 $(1,175)
===== ========
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 will become
effective in January 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. 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.
7. Segment Information
The Company has four reportable segments: digital advertising insertion,
movies and broadcast systems 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 movie systems segment comprises products to provide long-
form video storage and delivery for the pay-per-view markets for the
hospitality and commercial property markets. The broadcast systems segment
provides products for the storage, archival, on-air playback of advertising
and other video programming for the broadcast television industry. The
service segment provides installation, training, product maintenance and
technical support for the above systems and content which is distributed by
the movie product segment. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies
in the consolidated financial statements and related footnotes for the year
ended December 31, 1998 included in the Company's Annual Report on
Form 10-K for such fiscal year. The Company does not measure the assets
allocated to the 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:
7
Three months ended March 31,
----------------------------
1999 1998
---- ----
Revenues
Digital advertising insertion $12,581 $12,691
Movies 1,212 2,116
Broadcast 3,131 -
Services 3,719 3,362
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$20,643 $18,169
======= =======
Costs of revenues
Digital advertising insertion $ 7,353 $ 7,348
Movies 685 1,619
Broadcast 1,835 -
Services 3,373 3,043
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$13,246 $12,010
======= =======
The following summarizes revenues by geographic locations:
Revenues
United States $17,330 $16,742
Canada and South America 856 12
Europe 1,623 437
Rest of world 834 978
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$20,643 $18,169
======= =======
For the three months ended March 31, 1999 and 1998, certain customers
accounted for more than 10% of the Company's revenues. Individual customers
accounted for 17%, 16% and 14% of revenues in the three months ended
March 31, 1999; and 25% and 14% in the three months ended March 31, 1998.
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, 1998. Any forward-looking statements should be considered in
light of those factors.
Overview
The Company develops, markets, licenses and sells digital advertising
insertion, movie and broadcast 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 that there are no
uncertainties regarding customer acceptance and collection of the related
receivables is probable. If such uncertainties exist, such as performance
criteria beyond the Company's standard terms and conditions, revenue is
recognized upon customer acceptance. 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.
9
Results of Operations
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1998
Systems. The Company's systems revenues consist of sales of its digital
video insertion, movie and broadcast system products. Systems revenues
increased 14% from $14.8 million in the three months ended March 31, 1998 to
$16.9 million in the three months ended March 31, 1999. The increased systems
revenues in the three months ended March 31, 1999 compared to the three months
ended March 31, 1998 resulted from the sale of $3.1 million of broadcast
systems, a product introduced during the quarter ended June 30, 1998, offset in
part, by a decrease in movie system revenues.
For the three months ended March 31, 1999 and 1998, certain customers
accounted for more than 10% of the Company's total revenues. Individual
customers accounted for 17%, 16% and 14% of revenues in the three months ended
March 31, 1999; and 25% and 14% in the three months ended March 31, 1998. The
Company believes that revenues from current and future large customers will
continue to represent a significant portion of total revenues.
International sales accounted for approximately 16% and 8% of total
revenues for the three months ended March 31, 1999 and 1998, respectively.
The Company expects that international sales will continue to increase as a
percentage of the Company's business in the future. As of March 31, 1999, all
sales of the Company's products were made in United States dollars. The Company
does not expect any material change to 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 11% from
approximately $3.4 million in the three months ended March 31, 1998 to $3.7
million in the three months ended March 31, 1999. These increases in services
revenues primarily resulted from renewals of maintenance and support 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 increased 10% from $9.0 million in the three months ended March 31,
1998 to $9.9 million in the three months ended March 31, 1999. For the three
months ended March 31, 1999, the increase in cost of systems revenues primarily
reflects increased material and manufacturing labor and overhead costs incurred
to support increases in systems revenue and changes in the product mix,
including the introduction of the broadcast products.
Systems gross profit as a percentage of systems revenues was 41.7% and
39.4% in the three months ended March 31, 1999 and 1998, respectively. The
increase in systems gross profit in 1999 was primarily due to a product mix of
higher ad insertion and broadcast system sales and lower material and
manufacturing costs. The gross profits in the three months ended March 31, 1999
and 1998 were impacted by increases of approximately $183,000 and $430,000,
respectively, 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 11% from
approximately $3.0 million in the three months ended March 31, 1998 to $3.4
million in the three months ended March 31, 1999, 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
ad insertion, movie and broadcast systems and costs associated with providing
movie content. Services gross profit as a percentage of services revenue
remained
10
relatively flat at 9.3% in the three months ended March 31, 1999 compared to a
gross profit margin of 9.5% in the three months ended March 31, 1998.
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.
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 3% from approximately $4.0 million, or 22% of total revenues
in the three months ended March 31, 1998 to $4.1 million, or 20% of total
revenues in the three months ended March 31, 1999. The increase in the dollar
amount was primarily attributable to the hiring and contracting of additional
development personnel which reflects the Company's continuing investment in new
products. 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 4% from
approximately $1.8 million, or 10% of total revenues in the three months ended
March 31, 1998 to $1.9 million, or 9% of total revenues in the three months
ended March 31, 1999. The increase in the dollar amount was attributable to the
hiring of additional selling and marketing personnel, increased international
selling efforts and expanded promotional activities to support the broadcast
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 decreased 17%
from $1.6 million, or 9% of total revenues in the three months ended March 31,
1998 to $1.3 million, or 6% of total revenues in the three months ended March
31, 1999. The decrease in the dollar amount was primarily attributable to lower
payroll and related costs related to the centralization of accounting and
administrative functions.
Restructuring of Operations. In March 1998, the Company recorded a charge
of $676,000 for the restructuring of operations as part of a planned
consolidation of the operations of SC Asia. The charge for restructuring
included $569,000 related to the termination of 13 employees, a provision of
$60,000 related to the planned vacating of premises and $47,000 of compensation
expense associated with stock options for certain terminated employees. At March
31, 1998, the Company had notified all terminated employees. All restructuring
charges were paid as of December 31, 1998.
Interest Income, net. Interest income, net, was approximately $8,000 and
$103,000 in the three months ended March 31, 1999 and March 31, 1998,
respectively. The decrease in 1999 in interest income, net, primarily resulted
from a decrease in interest earned on lower invested cash balances and interest
paid on borrowings.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
38.0% and 38.9% for the three months ended March 31, 1999 and March 31, 1998,
respectively .
The Company had net deferred tax assets of $1,967,000 at March 31, 1999
and December 31, 1998. The Company has made the determination it is more likely
than not that it will realize the benefits of the net deferred tax assets. As a
result of the acquisition of IPC, the Company acquired deferred tax assets of
$3.4 million, consisting primarily of net operating loss carryforwards.
11
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities increased $1.4 million
from $5.1 million at December 31, 1998 to $6.5 million at March 31, 1999.
Working capital increased from approximately $22.3 million at December 31, 1998
to approximately $22.5 million at March 31, 1999.
Net cash provided by operating activities was approximately $3.7 million
for the three months ended March 31,1999. Net cash used for operating activities
was approximately $2.2 million for the three months ended March 31, 1998.
The net cash provided by operating activities during 1999 was the result of net
income plus non-cash expenses including depreciation and amortization, the
inventory valuation allowance and the changes in certain assets and liabilities.
The significant net changes in assets and liabilities that provided cash from
operations includes decreases in accounts receivable and inventories. The net
decrease in accounts receivable in the three months ended March 31, 1999 of
approximately $1.0 million is attributable to the collection of $22.8 million of
customer balances, offset in part, by the increase in revenues for the quarter.
The net decrease in inventories in the three months ended March 31, 1999 of
approximately $1.2 million is principally attributable to the on-going efforts
of the Company to reduce inventory levels and the use of previously purchased
materials to meet current customer demand.
Net cash used in investing activities was approximately $300,000 for the
three months ended March 31, 1999. Net cash provided by investing activities was
approximately $1.6 million in the three months ended March 31, 1998. 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 during the three months ended
March 31, 1999.
Net cash used in financing activities was approximately $1.9 million for
the three months ended March 31, 1999. Net cash provided by financing activities
was approximately $1,000 in the three months ended March 31, 1998. In the three
months ended March 31, 1999, the cash used for financing activities included
$2.0 million repayment of borrowings under the line of credit, offset in part,
by $211,000 received in connection with the issuance of common stock pursuant to
the exercise of stock options.
The Company has a $6.0 million revolving line of credit and a $3.0 million
equipment line of credit with a bank. The revolving line of credit expires in
October 1999 and the equipment line of credit expires in June 1999. Borrowings
under the lines of credit are secured by substantially all of the Company's
assets. Loans made under the revolving line of credit generally bear interest at
a rate per annum equal to the bank's base rate plus .5% (8.25 % at March 31,
1999). Loans made under the equipment loan bear interest at a rate per annum
equal to the bank's base rate plus 1.0% (8.75 % at March 31, 1999). 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, 1999, the Company was
in compliance with all covenants. As of March 31, 1999, the Company had
borrowings outstanding of $1.2 million against the equipment line of credit.
The Company believes that existing funds together with available borrowings
under the line of credit and equipment line facility are adequate to satisfy its
working capital and capital expenditure requirements for the foreseeable future.
The Company had no material capital expenditure commitments as of March 31,
1999.
Year 2000 Issue/Year 2000 Readiness Disclosure
Overview. The Company is completing its process of analyzing and
addressing what is known as the Year 2000 Issue. The Year 2000 Issue has arisen
because many existing computer programs use only two digits to identify a year
in the data field. These programs were designed and developed without
considering the impact of the upcoming change in the century and, accordingly,
could misconstrue dates such as "00" as the year 1900 rather than 2000. The
failure of computer programs and systems to properly recognize dates beginning
in the year 2000 could adversely affect the Company's business activities.
12
The Company's Year 2000 Compliance Program. The Company is executing its
Year 2000 Compliance Program, the purpose of which is: to identify important
systems that are not yet Year 2000 compliant; to initiate replacement or
remedial action to assure that key systems will continue to operate in the Year
2000 and to test the replaced or remediated systems; to identify and contact key
suppliers, vendors, customers and business partners to evaluate their ability to
maintain normal operations in the Year 2000; and to develop appropriate
contingency plans for dealing with foreseeable Year 2000 complications. The
Company's Year 2000 Committee has made significant progress toward the
completion of these goals. The Committee continues to execute the Company's Year
2000 Compliance Program and reports the results and status of the Company's Year
2000 efforts to the Board of Directors. The Company expects to substantially
complete its Year 2000 Compliance Program activities by the end of 1999.
Information Technology Systems. The Company's critical internal
information technology ("IT") systems consist of its Electronic Mail system,
Corporate Communications system, Manufacturing database, desktop and file
management systems, Software Development tools and I/S Management tools.
The Company also uses a Call Center Management software tool for use in the
Company's customer service department. The Company has contacted the vendors of
these systems and obtained assurances that these IT systems are currently in
material Year 2000 compliance. The Company continues to upgrade older versions
of these systems that may not be compliant and intends to finish these upgrades
to achieve material Year 2000 compliance. The Company is in the process of
obtaining written statements confirming such compliance from these vendors.
The Company is still in the process of evaluating other areas of its existing
internal IT systems at this time and will seek further assurances from its
vendors as necessary. The Company plans to test its critical IT systems during
1999. The Company intends to evaluate the need for contingency plans for these
internal IT systems given the assurances of compliance the Company has received
for these systems. While the Company will work diligently with all of its IT
system providers, there is no guarantee that these IT systems providers will
meet Year 2000 compliance. The failure of any such IT system to be Year 2000
compliant could have a negative effect on the business activities of the
Company.
Non-Information Technology Systems. The Company is conducting an
assessment of its non-information technology systems (such as building security,
voice mail, telephone and other systems containing embedded microprocessors) and
is in the process of determining the nature and extent of any work that may be
required to make any non-IT systems Year 2000 compliant. The Company has made
Year 2000 compliance inquiries to the vendors of these systems, and intends to
track the responses to its inquiries and have the inquiry process completed by
the end of the first half of 1999.
Third Party Suppliers, Vendors and Customers. The Company's Year 2000
Compliance Program also includes an investigation of the Year 2000 compliance of
its major suppliers, vendors, customers and business partners. All of the
Company's products and services incorporate third party software and hardware.
The Company is in the process of evaluating its product components. The Company
has identified and contacted most of its third party suppliers of hardware and
software components regarding Year 2000 compliance and has collected compliance
statements from most of these suppliers. The Company has learned that some
features or functions of such third party components are not Year 2000
compliant. However, in certain cases the Company does not use such features or
functions in its products and, to that extent, the Company believes the non-
compliance of such features and functions will not have a negative impact on its
products. In those cases where the non-compliance of third party components
does affect features or functions used by the Company in its products, the
Company intends to install upgrades (most of which are currently available) to
achieve material compliance. In addition, the Company is completing the process
of testing its application software. To date, the Company has found only a few
minor problems with its application software, and has already created patches to
this software. Given the number of components and the complexity of the
software incorporated in the Company's products and services, the Company
believes that in the course of conducting its Year 2000 Compliance Program it
could reasonably discover that the Year 2000 problem may affect its software or
components. However, the Company regularly develops software updates to its
product offerings as a natural course of business and the Company does not
expect that these Year 2000 updates will be excessively complex or expensive to
implement. Still, there can be no assurances that there will be no service
interruption on the part of any of the Company's third party suppliers due to
the Year 2000 problem and this could have a material adverse effect on the
Company.
Year 2000 Costs and Expenses. To date, the costs associated with the Year
2000 Issue and the Company's Year 2000 Compliance Program have not been
material. The Company will incur costs that include internal resources, software
and equipment upgrades and replacement. Based on currently available
information,
13
the Company believes that the expense associated with its ongoing efforts will
not be material and will be funded through operations, but the Company has not
completed its evaluation of its non-IT systems and its third party
relationships. If unforeseen compliance efforts are required or if present
compliance efforts are not completed on time, or if the cost of any required
updating, modification or replacement of the Company's systems or equipment
exceeds the Company's estimates, the Year 2000 Issue could result in material
costs and have a material adverse effect on the Company.
Contingency Plans. At the present time, the Company has not felt it
necessary to formulate any contingency plans for addressing problems due to the
Year 2000 Issue. The Company has been assured that its critical internal IT
systems are compliant by the vendors of those systems and the Company will
evaluate the need for contingency plans for internal IT systems given those
assurances. The Company is currently in the process of evaluating the Year 2000
Issue with respect to its non-IT systems and with respect to its major
suppliers, vendors, customers and business partners. As this evaluation process
proceeds, the Company will formulate appropriate contingency plans. The Company
expects that any required contingency planning will be completed no later than
the end of 1999.
Risks Associated with Year 2000 Issue. Various statements in this
discussion of Year 2000 are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed above under
"Factors That May Affect Future Results." These statements include statements
of the Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance. These
forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified, the failure of software vendors to deliver
the upgrades and repairs to which they have committed, the wide variety of
information technology systems and components, both hardware and software, that
must be evaluated and the large number of vendors and customers with which the
Company interacts. The Company's assessments of the effects of Year 2000 on the
Company are based, in part, upon information received from third parties and the
Company's reasonable reliance on that information. Therefore, the risk that
inaccurate information is supplied by third parties upon which the Company
reasonably relied must be considered as a risk factor that might affect the
Company's Year 2000 efforts. The Company is attempting to reduce the risks by
utilizing an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
Effects of Inflation
Management believes that financial results have not been significantly
impacted by inflation and price changes.
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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, 1999, the Company had approximately $1.2
million outstanding related to variable rate U.S. dollar denominated short-term
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 approximately $10,000.
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, 1999 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, 1999, 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 5. OTHER INFORMATION
Proposals of stockholders intended for inclusion in the proxy statement to be
furnished to all stockholders entitled to vote at the next annual meeting of
stockholders of the Company must be received at the Company's principal
executive office not later than the close of business on January 7, 2000. The
deadline for providing timely notice to the Company of matters that stockholders
otherwise desire to introduce at the next annual meeting of stockholders of the
Company is May 22, 2000. In order to curtail any controversy as to the date on
which a proposal was received by the Company, it is suggested that the
proponents submit their proposals by Certified Mail, Return Receipt Requested.
All notices of proposals by stockholders should be sent to the attention of
William L. Fiedler.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 27: Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
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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 14, 1999
SEACHANGE INTERNATIONAL, INC.
by:
/s/ William C. Styslinger, III
-------------------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director
/s/ William L. Fiedler
-------------------------------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Number Description Page
-------------- ----------- ----
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
17