<PAGE>
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 June 30, 1999
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 August 10,
1999 was 13,900,109.
================================================================================
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SEACHANGE INTERNATIONAL, INC.
Table of Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at June 30, 1999 and December 31, 1998.......................... 3
Consolidated Statement of Operations
Three and Six months ended June 30, 1999 and 1998............... 4
Consolidated Statement of Cash Flows
Six months ended June 30, 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................ 9-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..... 16
Item 6. Exhibits................................................ 16
SIGNATURES................................................................ 17
EXHIBIT INDEX............................................................. 18
</TABLE>
2
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SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share-related data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,942 $ 5,115
Accounts receivable, net of allowance for doubtful accounts
of $1,001 at June 30, 1999 and $870 at December 31, 1998 16,828 18,975
Inventories 12,748 16,157
Income taxes receivable 2,087 2,117
Prepaid expenses 2,002 1,701
Deferred income taxes 1,967 1,967
----------------- ----------------
Total current assets 46,574 46,032
Property and equipment, net 9,303 7,981
Goodwill and intangibles, net 991 1,197
Other assets 222 176
================= ================
$ 57,090 $ 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 1,028 555
Accounts payable 10,513 10,103
Accrued expenses 3,129 3,374
Customer deposits 2,812 1,704
Deferred revenue 5,635 5,495
Income taxes payable 576 475
----------------- ----------------
Total current liabilities 23,693 23,706
----------------- ----------------
Long term equipment line of credit and
obligations under capital lease 1,720 1,027
----------------- ----------------
Stockholders' Equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 13,893,
992 shares and 13,736,892 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 139 138
Additional paid-in capital 32,985 32,177
Accumulated deficit (1,393) (1,603)
Accumulated other comprehensive income (54) (59)
----------------- ----------------
Total stockholders' equity 31,677 30,653
----------------- ----------------
$ 57,090 $ 55,386
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Systems $ 17,443 $ 13,207 $ 34,367 $ 28,014
Services 3,890 3,373 7,609 6,735
----------------- ----------------- --------------- ----------------
21,333 16,580 41,976 34,749
----------------- ----------------- --------------- ----------------
Costs of revenues:
Systems 10,080 8,223 19,953 17,190
Services 3,514 3,108 6,887 6,151
----------------- ----------------- --------------- ----------------
13,594 11,331 26,840 23,341
----------------- ----------------- --------------- ----------------
Gross profit 7,739 5,249 15,136 11,408
----------------- ----------------- --------------- ----------------
Operating expenses:
Research and development 4,274 3,900 8,394 7,903
Selling and marketing 1,947 2,081 3,857 3,926
General and administrative 1,265 1,721 2,554 3,283
Restructuring of operations - - - 676
----------------- ----------------- --------------- ----------------
7,486 7,702 14,805 15,788
----------------- ----------------- --------------- ----------------
Income (loss) from operations 253 (2,453) 331 (4,380)
Interest income, net (1) 76 7 179
----------------- ----------------- --------------- ----------------
Income (loss) before income taxes 252 (2,377) 338 (4,201)
Provision (benefit) for income taxes 95 (769) 128 (1,478)
================= ================= =============== ================
Net income (loss) $ 157 $ (1,608) $ 210 $ (2,723)
================= ================= =============== ================
Basic earnings (loss) per share $ 0.01 $ (0.13) $ 0.02 $ (0.23)
================= ================= =============== ================
Diluted earnings (loss) per share $ 0.01 $ (0.13) $ 0.01 $ (0.23)
================= ================= =============== ================
Shares used in calculating:
Basic earnings (loss) per share 13,674,204 12,115,901 13,609,006 11,847,910
================= ================= =============== ================
Diluted earnings (loss) per share 14,294,286 12,115,901 14,159,860 11,847,910
================= ================= =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 210 $ (2,723)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,034 2,467
Inventory valuation allowance 288 937
Changes in assets and liabilities:
Accounts receivable 2,147 (1,861)
Inventories 1,076 (2,472)
Prepaid expenses and other assets (312) (2,926)
Accounts payable 410 922
Accrued expenses (245) (153)
Customer deposits 1,108 (1,368)
Deferred revenue 140 45
Income taxes payable 101 150
----------------- ------------------
Net cash provided by (used in) operating activities 6,957 (6,982)
----------------- ------------------
Cash flows from investing activities
Purchases of property and equipment (769) (1,154)
Proceeds from sale and maturity of marketable securities - 8,750
Purchases of marketable securities - (902)
----------------- ------------------
Net cash provided by (used in) investing activities (769) 6,694
----------------- ------------------
Cash flows from financing activities
Repayment of line of credit (2,000) -
Borrowings under equipment line of credit 1,106 -
Repayment of borrowings under equipment line of credit (245) -
Repayment of obligations under capital lease (31) -
Proceeds from issuance of common stock 809 333
----------------- ------------------
Net cash provided by (used in ) financing activities (361) 333
----------------- ------------------
Net increase in cash and cash equivalents 5,827 45
Cash and cash equivalents, beginning of period 5,115 2,973
----------------- ------------------
Cash and cash equivalents, end of period $ 10,942 $ 3,018
================= ==================
Supplemental disclosure of noncash activities
Transfer of items originally classified as fixed assets to
inventories $ 109 $ 513
Transfer of items originally classified as inventories to
fixed assets $ 2,154 $ -
Equipment acquired under capital leases $ 336 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 and six month periods ended June 30,
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 and six months ended June 30, 1998, common shares of 331,995
and 273,318, respectively, issuable upon the exercise of stock options and
unvested restricted common stock of 1,424,550 and 1,678,425, respectively,
are antidilutive because the Company recorded a net loss for the periods,
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:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ---------------------------
1999 1998 1999 1998
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding 13,674,204 12,115,901 13,609,006 11,847,910
Unvested restricted common shares 163,200 - 183,600 -
Dilutive stock options 456,882 - 367,254 -
------------------------- -------------------------
Shares used in calculating diluted earnings per
share 14,294,286 12,115,901 14,159,860 11,847,910
========== ========== ========== ==========
</TABLE>
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Components and assemblies $ 11,897 $ 14,592
Finished products 851 1,565
---------- ----------
$ 12,748 $ 16,157
========== ==========
</TABLE>
6
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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
For the three and six months ended June 30, 1999 and 1998, the
Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- ----------------------------
1999 1998 1999 1998
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 157 $ (1,608) $ 210 $ (2,723)
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment, net
of tax of $5,$19, $2 and $16, respectively (7) 35 3 (27)
-------------------------- ----------------------------
Other comprehensive income (expense) (7) 35 3 (27)
-------------------------- ----------------------------
Comprehensive income (loss) $ 150 $ (1,573) $ 213 $ (2,750)
====== ====== ====== ======
</TABLE>
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). 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. The
Company will adopt SFAS 133 as required by SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133", in January 2001. To date
the Company has not utilized derivative instruments or hedging
activities and, therefore, the adoption of SFAS 133 is not expected to
have a material impact on the Company's financial position or results
of operations.
7. Segment Information
The Company has four reportable segments: digital advertising
insertion, movies systems, 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
7
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- ------------------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Digital advertising insertion $ 10,863 $ 9,773 $ 23,444 $ 22,464
Movies 2,385 1,700 3,597 3,816
Broadcast 4,195 1,734 7,326 1,734
Services 3,890 3,373 7,609 6,735
------------------- ------------- -------------- ---------------
$ 21,333 $ 16,580 $ 41,976 $ 34,749
------------------- ------------- -------------- ---------------
Costs of revenues
Digital advertising insertion $ 6,411 $ 6,170 $ 13,764 $ 13,518
Movies 1,531 1,099 2,216 2,718
Broadcast 2,138 954 3,973 954
Services 3,514 3,108 6,887 6,151
------------------- ------------- -------------- ---------------
$ 13,594 $ 11,331 $ 26,840 $ 23,341
------------------- ------------- -------------- ---------------
</TABLE>
The following summarizes revenues by geographic locations:
<TABLE>
<S> <C> <C> <C> <C>
Revenues
United States $ 15,436 $ 12,843 $ 32,766 $ 29,585
Canada and South America 1,493 35 2,349 47
Europe 3,367 1,652 4,990 2,089
Rest of world 1,037 2,050 1,871 3,028
------------------- ------------- -------------- ---------------
$ 21,333 $ 16,580 $ 41,976 $ 34,749
------------------- ------------- -------------- ---------------
</TABLE>
For the three and six months ended June 30, 1999 and 1998, certain
customers accounted for more than 10% of the Company's revenues. Individual
customers accounted for 27% and 10% of revenues in the three months ended
June 30, 1999, 18% and 13% in the three months ended June 30, 1998, 22% and
13% in the six months ended June 30, 1999 and 22% and 13% in the six months
ended June 30, 1998.
8
<PAGE>
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
<PAGE>
Results of Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Systems. The Company's systems revenues consist of sales of its digital ad
insertion, movie and broadcast system products. Systems revenues increased 32%
from $13.2 million in the three months ended June 30, 1998 to $17.4 million in
the three months ended June 30, 1999. The increased systems revenues in the
three months ended June 30, 1999 resulted primarily from higher sales of
broadcast systems, $4.2 million for the three months ended June 30, 1999
compared to $1.7 million for the three months ended June 30, 1998. These
broadcast systems were introduced during the quarter ended June 30, 1998. In
addition, digital ad insertion and movie system revenues increased $1.1 million
and $700,000, respectively, in the three months ended June 30, 1999 as compared
to the three months ended June 30, 1998.
For the three months ended June 30, 1999 and 1998, certain customers
accounted for more than 10% of the Company's total revenues. Individual
customers accounted for 27% and 10% of revenues in the three months ended June
30, 1999 and 18% and 13% in the three months ended June 30, 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 28% and 23% of total
revenues for the three months ended June 30, 1999 and 1998, respectively. The
Company expects that international sales will remain a significant portion of
revenues of the Company in the future. As of June 30, 1999, all sales of the
Company's products were made in United States dollars. 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 15% from
approximately $3.4 million in the three months ended June 30, 1998 to $3.9
million in the three months ended June 30, 1999. The increase 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 23% from $8.2 million in the three months ended June 30, 1998
to $10.1 million in the three months ended June 30, 1999. For the three months
ended June 30, 1999, the increase in cost of systems revenues primarily is the
result of higher systems revenues and changes in the product mix.
Systems gross profit as a percentage of systems revenues was 42.2% and
37.7% in the three months ended June 30, 1999 and 1998, respectively. The
increase in systems gross profit in 1999 was primarily due to higher systems
revenue and lower material and manufacturing costs. The gross profits in the
three months ended June 30, 1999 and 1998 were impacted by increases of
approximately $ - and $310,000, 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 13% from
approximately $3.1 million in the three months ended June 30, 1998 to $3.5
million in the three months ended June 30, 1999, primarily as a result of higher
service revenues and 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. Services
gross profit as a percentage of services revenue increased to 9.7% in the three
months ended June 30, 1999 compared to a gross profit margin of 7.9% in the
three months ended
10
<PAGE>
June 30, 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 maintenance and technical 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 10% from approximately $3.9 million, or 24% of total revenues
in the three months ended June 30, 1998 to $4.3 million, or 20% of total
revenues in the three months ended June 30, 1999. The increase in the dollar
amount was primarily attributable to the continuing investment in development
personnel which reflects the Company's commitment to the development of new
technology. 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 decreased 6% from
approximately $2.1 million, or 13% of total revenues in the three months ended
June 30, 1998 to $1.9 million, or 9% of total revenues in the three months ended
June 30, 1999. The decrease in the dollar amount was attributable to the
initial promotional activities incurred in the quarter ended June 30, 1998 to
support the introduction of the Company's new 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 27%
from $1.7 million, or 10% of total revenues in the three months ended June 30,
1998 to $1.3 million, or 6% of total revenues in the three months ended June 30,
1999. The decrease in the dollar amount was primarily attributable to lower
payroll and related costs related to planned cost reduction measures.
Interest Income, net. Interest income, net, was approximately ($1,000) and
$76,000 in the three months ended June 30, 1999 and June 30, 1998, respectively.
The decrease in 1999 in interest income, net, primarily resulted from interest
paid on borrowings, offset in part, by interest earned on invested balances.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
38% and 32% for the three months ended June 30, 1999 and June 30, 1998,
respectively. The provision for income taxes in the three months ended June 30,
1999 was the result of an increase in taxable income offset by the Company's
expected utilization in 1999 of previously generated net operating loss carry
forwards.
The Company had net deferred tax assets of $1,967,000 at June 30, 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 in December 1997, the Company acquired deferred
tax assets of $3.4 million, consisting primarily of net operating loss carry
forwards.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Systems. Systems revenues increased 23% from $28.0 million in the six
months ended June 30, 1998 to $34.4 million in the six months ended June 30,
1999. The increased systems revenues in the six months ended June 30, 1999
resulted primarily from higher sales of broadcast systems, $7.3 million for the
six months ended June 30, 1999 compared to $1.7 million for the six months ended
June 30, 1998. These broadcast systems were introduced during the quarter ended
June 30, 1998. In addition, digital ad insertion system revenues increased $1.0
million and movie system revenues decreased $200,000 in the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998.
For the six months ended June 30, 1999 and 1998, certain customers
accounted for more than 10% of the Company's total revenues. Individual
customers accounted for 22% and 13% of revenues in the six months ended
11
<PAGE>
June 30, 1999 and 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 22% and 15% of total
revenues for the six months ended June 30, 1999 and 1998, respectively. The
Company expects that international sales will remain a significant portion of
revenues of the Company in the future. As of June 30, 1999, all sales of the
Company's products were made in United States dollars. 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 increased 13% from approximately
$6.7 million in the six months ended June 30, 1998 to $7.6 million in the six
months ended June 30, 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 increased 16% from $17.2 million in the
six months ended June 30, 1998 to $20.0 million in the six months ended June 30,
1999. For the six months ended June 30, 1999, the increase in cost of systems
revenues primarily is the result of higher systems revenues and changes in the
product mix.
Systems gross profit as a percentage of systems revenues was 41.9% and
38.6% in the six months ended June 30, 1999 and 1998, respectively. The
increase in systems gross profit in 1999 was primarily due to higher systems
revenue and lower material and manufacturing costs. The gross profits in the
six months ended June 30, 1999 and 1998 were impacted by increases of
approximately $288,000 and $937,000, 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 increased 12% from approximately $6.2
million in the six months ended June 30, 1998 to $6.9 million in the six months
ended June 30, 1999, primarily as a result of higher service revenues and 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. Services gross profit as a percentage
of services revenue increased to 9.5% in the six months ended June 30, 1999
compared to a gross profit margin of 8.7% in the six months ended June 30, 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 increased 6%
from approximately $7.9 million, or 23% of total revenues in the six months
ended June 30, 1998 to $8.4 million, or 20% of total revenues in the six months
ended June 30, 1999. The increase in the dollar amount was primarily
attributable to the continuing investment in development personnel which
reflects the Company's commitment to the development of new technology. 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 remained flat at
$3.9 million, or 11% and 9% of total revenues in the six months ended June 30,
1998 and 1999, respectively.
General and Administrative. General and administrative expenses decreased
22% from $3.3 million, or 9% of total revenues in the six months ended June 30,
1998 to $2.6 million, or 6% of total revenues in the six months ended June 30,
1999. The decrease in the dollar amount was primarily attributable to lower
payroll and related costs related to planned cost reduction measures.
12
<PAGE>
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 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 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 $7,000 and
$179,000 in the six months ended June 30, 1999 and June 30, 1998, respectively.
The decrease in 1999 in interest income, net, primarily resulted from interest
paid on borrowings, offset in part, by interest earned on lower invested
balances.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
38% and 35% for the six months ended June 30, 1999 and June 30, 1998,
respectively. The provision for income taxes in the six months ended June 30,
1999 was the result of an increase in taxable income offset by the Company's
expected utilization in 1999 of previously generated net operating loss carry
forwards.
Liquidity and Capital Resources
Cash and cash equivalents increased $5.8 million from $5.1 million at
December 31, 1998 to $10.9 million at June 30, 1999. Working capital increased
from approximately $22.3 million at December 31, 1998 to approximately $22.9
million at June 30, 1999.
Net cash provided by operating activities was approximately $7.0 million for
the six months ended June 30, 1999, an increase of approximately $14.0 million
from the same period in 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 six
months ended June 30, 1999 of approximately $2.1 million is attributable to the
collection of $47.4 million of customer balances, offset by the increase in
revenues for the year. The net decrease in inventories in the six months ended
June 30, 1999 of approximately $1.1 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 $800,000 for the six
months ended June 30, 1999. Net cash provided by investing activities was
approximately $6.7 million in the six months ended June 30, 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 six months ended
June 30, 1999.
Net cash used in financing activities was approximately $400,000 for the six
months ended June 30, 1999. Net cash provided by financing activities was
approximately $333,000 in the six months ended June 30, 1998. In the six months
ended June 30, 1999, the cash used for financing activities included $2.0
million repayment of borrowings under the line of credit, offset in part, by a
$1.1 million draw-down under an equipment line of credit with a bank and
$800,000 received in connection with the issuance of common stock pursuant to
the exercise of stock options and the Company's stock purchase plan.
The Company has a $6.0 million revolving line of credit and had 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 expired 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% (8.50 % at
June 30, 1999). Loans made under the equipment loan bear interest at a rate per
annum equal to the bank's base rate plus 1.0% (9.00 % at June 30, 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 June 30, 1999, the
Company was in compliance with all covenants. As of June 30, 1999, the Company
had borrowings outstanding of $2.1 million against the equipment line of
credit.
13
<PAGE>
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 June 30,
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.
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 is testing 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 third quarter 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
14
<PAGE>
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, 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.
15
<PAGE>
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 June 30, 1999, the Company had approximately $2.1
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 $20,000 per year.
The carrying amounts reflected in the consolidated balance sheet of cash and
cash equivalents, trade receivables, and trade payables approximates fair value
at June 30, 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 June 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the security holders of the Company was held on June 17,
1999. The following persons were elected as directors of the Company:
Nominee Total Votes for Nominee Total Votes Withheld for Nominee
- ------- ----------------------- --------------------------------
Paul H. Saunders 11,074,908 379,112
Carmine Vona 11,366,638 87,382
In addition, after the annual meeting, the following persons continued to serve
as directors of the Company: William C. Styslinger, III, Martin R. Hoffmann,
and Edward J. McGrath.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 27: Financial Data Schedule (For SEC Edgar
Filing Only; Intentionally Omitted)
16
<PAGE>
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: August 13, 1999
SEACHANGE INTERNATIONAL, INC.
By: /s/ William C. Styslinger, III
- ----------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director
By: /s/ William L. Fiedler
- ----------------------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
<PAGE>
SEACHANGE INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
27 Financial Data Schedule (For SEC Edgar Filing Only;
Intentionally Omitted)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEACHANGE INTERNATIONAL, INC. FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-01-1999
<CASH> 10,942 10,942
<SECURITIES> 0 0
<RECEIVABLES> 17,849 17,849
<ALLOWANCES> (1,021) (1,021)
<INVENTORY> 12,748 12,748
<CURRENT-ASSETS> 46,574 46,574
<PP&E> 18,581 18,581
<DEPRECIATION> (9,278) (9,278)
<TOTAL-ASSETS> 57,090 57,090
<CURRENT-LIABILITIES> 23,693 23,693
<BONDS> 0 0
0 0
0 0
<COMMON> 139 139
<OTHER-SE> 31,538 31,538
<TOTAL-LIABILITY-AND-EQUITY> 57,090 57,090
<SALES> 21,333 41,976
<TOTAL-REVENUES> 21,333 41,976
<CGS> 13,594 26,840
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,486 14,805
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1 (7)
<INCOME-PRETAX> 252 338
<INCOME-TAX> 95 128
<INCOME-CONTINUING> 157 210
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 157 210
<EPS-BASIC> .01 .02
<EPS-DILUTED> .01 .01
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