Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
IPC Interactive Pte. Ltd.
We have audited the accompanying consolidated balance sheet of IPC Interactive
Pte. Ltd. as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from February 1,
1996 (inception) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 28, 1997,
which report contained as explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in Note 12, has been
acquired by SeaChange International, Inc., whose intent is to continue to fund
the operations of the Company for at least the next year. Therefore, the
conditions that raised substantial doubt about whether the Company will continue
as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IPC Interactive
Pte. Ltd. at December 31, 1996, and the consolidated results of its operations
and its cash flows for the period from February 1, 1996 (inception) through
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Walnut Creek, California
February 28, 1997,
except for note 12, at to which the date is
February 23, 1998
1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
IPC Interactive Pte. Ltd.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of IPC
Interactive Pte. Ltd. and its subsidiaries at November 30, 1997, and the results
of their operations and their cash flows for the eleven months ended November
30, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
January 22, 1998
2
IPC INTERACTIVE PTE. LTD.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, November 30,
1996 1997
-------------- --------------
Assets
Current assets:
Cash $ 2,044,000 $ 312,000
Restricted cash - 1,000,000
Accounts receivable, net of allowance for doubtful
accounts of $150,000 at December 31, 1996 and
$75,000 at November 30, 1997 2,480,000 543,000
Inventories 968,000 895,000
Prepaid expenses and other current assets 251,000 445,000
Receivable from IPC Corporation 242,000 -
-------------- --------------
Total current assets 5,985,000 3,195,000
Property and equipment, net 2,589,000 2,149,000
Other assets 97,000 79,000
-------------- --------------
$ 8,671,000 $ 5,423,000
-------------- --------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 2,005,000 $ 2,243,000
Line of credit - 700,000
Payable to IPC Corporation 796,000 513,000
Accrued expenses 416,000 1,067,000
Current portion of capital lease obligations 98,000 169,000
Customer deposits 821,000 1,958,000
Deferred revenue 59,000 217,000
Notes payable to related entities 380,000 470,000
-------------- --------------
Total current liabilities 4,575,000 7,337,000
-------------- --------------
Capital lease obligations 35,000 67,000
-------------- --------------
Commitments (Note 10)
Stockholders' equity (deficit):
Convertible preferred stock, $.04 par value;
2,500,000 shares authorized, issued and outstanding 6,700,000 6,700,000
Common stock, $.04 par value; 8,600,000 shares
authorized; 2,500,000 shares of Series A issued
and outstanding; 5,000,000 shares of Series B
issued and outstanding 300,000 300,000
Accumulated deficit (2,939,000) (8,872,000)
Cumulative translation adjustment - (109,000)
-------------- --------------
Total stockholders' equity (deficit) 4,061,000 (1,981,000)
-------------- --------------
$ 8,671,000 $ 5,423,000
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
IPC INTERACTIVE PTE. LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Period from Period from
February 1, February 1,
1996 1996 Eleven months
(inception) through (inception) through ended
December 31, November 30, November 30,
1996 1996 1997
---------------------- ---------------------- ---------------
(unaudited)
Revenues:
Systems $ 6,366,000 $ 4,226,000 $ 3,491,000
Services 4,740,000 4,282,000 4,405,000
---------------------- ---------------------- ---------------
11,106,000 8,508,000 7,896,000
---------------------- ---------------------- ---------------
Cost of revenues:
Systems 5,478,000 3,772,000 3,393,000
Services 1,745,000 1,581,000 3,630,000
---------------------- ---------------------- ---------------
7,223,000 5,353,000 7,023,000
---------------------- ---------------------- ---------------
Gross profit 3,883,000 3,155,000 873,000
---------------------- ---------------------- ---------------
Operating expenses:
Research and development 2,141,000 1,783,000 2,193,000
Sales and marketing 2,379,000 1,993,000 2,574,000
General and administrative 2,450,000 1,943,000 2,136,000
---------------------- ---------------------- ---------------
Total operating costs and expenses 6,970,000 5,719,000 6,903,000
---------------------- ---------------------- ---------------
Loss from operations (3,087,000) (2,564,000) (6,030,000)
Other income, net 148,000 148,000 97,000
---------------------- ---------------------- ---------------
Net loss $ (2,939,000) $ (2,416,000) $ (5,933,000)
---------------------- ---------------------- ---------------
Net loss per share $ (0.39) $ (0.32) $ (0.79)
---------------------- ---------------------- ---------------
Weighted average common shares outstanding 7,500,000 7,500,000 7,500,000
---------------------- ---------------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
IPC INTERACTIVE PTE. LTD
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM FEBRUARY 1, 1996 (INCEPTION) THROUGH NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
Preferred stock Common stock Accumulated
Shares Amount Shares Amount deficit
------------ ------------- ------------ ----------- --------------
Issuance of common stock - $ - 7,500,000 $ 300,000 $ -
Issuance of preferred stock 2,500,000 6,700,000 - - -
Net loss - - - - (2,939,000)
------------ ------------- ------------ ----------- --------------
Balance at December 31, 1996 2,500,000 6,700,000 7,500,000 300,000 (2,939,000)
Translation adjustment - - - - -
Net loss - - - - (5,933,000)
------------ ------------- ------------ ----------- --------------
Balance at November 30, 1997 2,500,000 $ 6,700,000 7,500,000 $ 300,000 $ (8,872,000)
------------ ------------- ------------ ----------- --------------
Cumulative Total
translation stockholders'
adjustment equity (deficit)
------------- -------------------
Issuance of common stock $ - $ 300,000
Issuance of preferred stock - 6,700,000
Net loss - (2,939,000)
------------- -------------------
Balance at December 31, 1996 - 4,061,000
Translation adjustment (109,000) (109,000)
Net loss - (5,933,000)
------------- -------------------
Balance at November 30, 1997 $ (109,000) $ (1,981,000)
------------- -------------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
IPC INTERACTIVE PTE. LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Period from Period from
February 1, February 1,
1996 1996 Eleven months
(inception) through (inception) through ended
December 31, November 30, November 30,
1996 1996 1997
---------------------- ---------------------- ----------------
(unaudited)
Cash flows from operating activities
Net loss $ (2,939,000) $ (2,416,000) $ (5,933,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 856,000 780,000 1,303,000
Loss on disposal of property and equipment - - 97,000
Changes in operating assets and liabilities:
Accounts receivable (2,480,000) (2,595,000) 1,937,000
Inventories (968,000) (1,380,000) 635,000
Prepaid expenses and other assets (348,000) (455,000) (176,000)
Receivable from IPC Corporation (242,000) (242,000) 242,000
Accounts payable 2,005,000 2,314,000 238,000
Payable to IPC Corporation 796,000 142,000 (283,000)
Accrued expenses 416,000 26,000 651,000
Customer deposits 821,000 1,638,000 532,000
Deferred revenue 59,000 60,000 158,000
---------------------- ---------------------- ----------------
Net cash used in operating activities (2,024,000) (2,128,000) (599,000)
---------------------- ---------------------- ----------------
Cash flows from investing activities
Purchases of property and equipment (3,223,000) (2,676,000) (695,000)
Increase in restricted cash - - (1,000,000)
Proceeds from sale of equipment - - 36,000
---------------------- ---------------------- ----------------
Net cash used in investing activities (3,223,000) (2,676,000) (1,659,000)
---------------------- ---------------------- ----------------
Cash flows from financing activities
Proceeds from issuance of common stock 300,000 300,000 -
Proceeds from issuance of preferred stock 6,700,000 6,700,000 -
Payments on capital lease obligations (89,000) (72,000) (243,000)
Increase in notes payable to related entities 380,000 380,000 90,000
Increase in line of credit - - 700,000
---------------------- ---------------------- ----------------
Net cash provided by financing activities 7,291,000 7,308,000 547,000
---------------------- ---------------------- ----------------
Effect of foreign exchange rate on cash - - (21,000)
---------------------- ---------------------- ----------------
Net increase (decrease) in cash 2,044,000 2,504,000 (1,732,000)
Cash at beginning of period - - 2,044,000
---------------------- ---------------------- ----------------
Cash at end of period $ 2,044,000 $ 2,504,000 $ 312,000
---------------------- ---------------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
IPC INTERACTIVE PTE. LTD,
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
Period from Period from
February 1, February 1,
1996 1996 Eleven months
(inception) through (inception) through ended
December 31, November 30, November 30,
1996 1996 1997
------------ ------------ ------------
(unaudited)
Supplemental disclosure of cash flow information:
Interest paid during the period $ 8,000 $ 8,000 $ 103,000
------------ ------------ ------------
Supplemental disclosure of noncash activity:
Transfer of items originally classified as fixed assets
to inventory - - $ 562,000
Equipment acquired through capital leases $ 221,000 $ 191,000 $ 346,000
Receipt of equipment in lieu of cash payment for
customer deposit - - $ 605,000
The accompanying notes are an integral part of these consolidated financial
statements.
7
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
IPC Interactive Pte. Ltd. (the "Company") was formed in Singapore in
February 1996 as a corporate joint venture between IPC Corporation (owning
50%), and certain investors (collectively owning 50%) pursuant to the terms
of a joint venture agreement. Also in February 1996, the Company purchased
all the assets of GuestServe Systems International, Inc. ("GSI") for
$2,300,000, which principally consisted of hardware deployed at hotels and
in commercial operation. These assets were recorded at fair value.
The Company develops software and designs hardware for network control
systems ("Systems") used in the delivery of interactive media content for
commercial applications, primarily by hotel operators. The Systems are
generally either sold to distributors or end users or are deployed and
operated by the Company. The Company maintains ownership of the Systems
which it operates ("deployed assets") and charges fees for service and for
providing content such as movies.
The Company also sells its Systems and other peripheral hardware to a
property development concern in Singapore and installs such hardware in new
property developments of multiple dwelling units ("MDUs") such as apartment
complexes. The Systems are utilized to provide the MDUs with video on
demand or internet access.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, IPC Interactive Inc. All intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
REVENUE RECOGNITION
Revenue from the sale of Systems is recognized upon shipment provided that
there are no uncertainties regarding customer acceptance and collection of
the related receivable is probable. If uncertainties exist, such as
performance criteria beyond the Company's standard terms and conditions,
revenue is recognized upon customer acceptance. Customer deposits represent
advance payments from customers for Systems.
Content fees, primarily movies, are recognized in the period earned based
on noncancelable agreements. Installation, maintenance and training revenue
is deferred and recognized as the services are performed.
8
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Revenue from the sale and installation of systems and peripheral hardware
for deployment in MDUs is recognized using the percentage-of-completion
method of accounting. The revenue value is determined by the ratio of
actual costs provided for each contract to the total estimated cost to be
provided for each contract. Costs are expensed as incurred. If the total
estimated cost of a contract is expected to exceed the contract price, the
total estimated loss is charged to expense in the period when the
information becomes known. The Company's contracts for hardware deployment
in MDU's are subject to retainage of up to 5% of the total contract amount.
Total retainage attributable to contracts in progress at December 31, 1996
and November 30, 1997 was $96,000. Amounts representing retainage were not
billed or billable as of November 30, 1997. Retention balances are expected
to be billed and collected in 1999.
Deferred revenue includes amounts received or billed in advance of
satisfying the Company's revenue recognition criteria.
CASH AND CASH EQUIVALENTS
The Company classifies investments that are highly liquid, readily
convertible to cash and that mature within three months from the date of
purchase as cash equivalents.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires the Company
to classify its investments among three categories: held-to-maturity, which
are reported at amortized cost; trading securities, which are reported at
fair value, with unrealized gains and losses included in earnings; and
available-for-sale securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
The Company did not have any cash equivalents at December 31, 1996 or
November 30, 1997.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily
of components and subassemblies. Rapid technological change and new product
introductions and enhancements could result in excess or obsolete
inventory. To minimize this risk, the Company evaluates inventory levels
and expected usage on a periodic basis and records valuation allowances as
required.
The Company is dependent upon certain vendors for the manufacture of
significant components of its network control systems. If these vendors
were to become unwilling or unable to continue to manufacture these
products in required volumes, the Company would have to identify and
qualify acceptable alternative vendors. The inability to develop alternate
sources, if required in the future, could result in delays or reductions in
product shipments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from one to five years, except for leasehold improvements which
are depreciated over the shorter of their estimated useful lives or related
lease term. Maintenance and repair costs are expensed as incurred.
Deployed assets included in property and equipment consist primarily of
hardware owned and operated by the Company and installed at customer
locations. The assets are depreciated over the life of the related service
agreements ranging from 2 to 5 years.
9
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK COMPENSATION
The Company's employee stock option plan is accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123 ("FAS 123"),
"Accounting for Stock-Based Compensation."
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 1997, the FASB issued Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") and Statement of Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS"). These statements are effective for fiscal years
beginning after December 15, 1997. The Company will implement these
statements as required. The future adoption of SFAS 130 and SFAS 131 is not
expected to have a material effect on the Company's consolidated financial
position or results of operations.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of the Company's products
are expensed as incurred, except for certain software development costs.
Costs associated with the development of computer software are expensed
prior to establishing technological feasibility and capitalized thereafter
until the product is released for sale. Software development costs eligible
for capitalization to date have not been material to the Company's
financial statements and have not been capitalized.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of its foreign
operation is the local foreign currency. Accordingly, assets and
liabilities are translated to U.S. dollars at current exchange rates.
Income and expense items are translated using average rates during the
year. Translation adjustments are included in a separate component of
stockholders' equity. Foreign exchange transaction gains and losses, not
material in amount for the period ended December 31, 1996 and the eleven
months ended November 30, 1997, are included in other income.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. To minimize this risk, the Company evaluates customers'
financial condition and may require advance payments from certain
customers. At December 31, 1996 and November 30, 1997, the Company had
allowances for doubtful accounts of $150,000 and $75,000, respectively, to
provide for potential credit losses. Such losses to date have not exceeded
management's expectations.
For the period ended December 31, 1996 and for the eleven months ended
November 30, 1997, certain customers accounted for more than 10% of the
Company's revenues. Individual customers accounted for 18% of revenues in
1996 and 20% and 13% in the eleven months ended November 30, 1997.
Additionally, revenue recognized in conjunction with systems provided for
use at MDUs accounted for 13% of revenues for the period ended December 31,
1996 and 12% of revenues in the eleven months ended November 30, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, restricted cash,
receivables, accounts payable, line of credit and notes payable. The fair
values of these instruments approximate their carrying value.
10
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NET LOSS PER SHARE
Net loss per share was determined by dividing net loss by the weighted
average number of common shares outstanding during the period. Common
share equivalents are comprised of convertible preferred stock and have
been excluded from the calculation as they are antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share." ("SFAS
128"). SFAS 128 replaces the presentation of primary and fully diluted
earnings per share with basic and diluted earnings per share and modifies
the calculation of earnings per share from the method currently used by the
Company as prescribed by APB Opinion Number 15. SFAS 128 will be effective
for periods ending after December 15, 1997. Because the Company has had
only net losses to date, basic and diluted loss per share amounts are
equal to net loss per share amounts for all periods presented.
INTERIM FINANCIAL DATA
The interim financial data for the period ended November 30, 1996 is
unaudited. In the opinion of management, this interim financial data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for this
interim period.
3. CONSOLIDATED BALANCE SHEET DETAIL
Property and equipment consisted of the following:
December 31, November 30,
Useful Life 1996 1997
Deployed assets 2-5 $ 2,069,000 $ 1,694,000
Equipment 5 1,102,000 1,641,000
Computer equipment 3 99,000 284,000
Furniture and leasehold improvements 5 (or life of lease) 175,000 177,000
-------------- --------------
3,445,000 3,796,000
Less accumulated depreciation (856,000) (1,647,000)
-------------- --------------
Property and equipment, net $ 2,589,000 $ 2,149,000
-------------- --------------
Total depreciation expense was $856,000 and $1,303,000 for the period ended
December 31, 1996 and the eleven months ended November 30, 1997,
respectively.
The cost of assets acquired under capital leases and related accumulated
depreciation was $221,000 and $97,000, respectively, at December 31, 1996
and $567,000 and $187,000, respectively, at November 30, 1997.
11
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accrued expenses consisted of the following:
DECEMBER 31, NOVEMBER 30,
1996 1997
Employee compensation $ 268,000 $ 531,000
Other accrued expenses 148,000 536,000
---------------- ----------------
$ 416,000 $ 1,067,000
---------------- ----------------
4. INCOME TAXES
The components of net loss are as follows:
PERIOD FROM
FEBRUARY 1,
1996 ELEVEN
(INCEPTION) THROUGH MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1996 1997
Domestic $ 2,840,000 $ 4,596,000
Foreign 99,000 1,337,000
----------------- -----------------
$ 2,939,000 $ 5,933,000
----------------- -----------------
The components of the income tax benefit are as follows:
PERIOD FROM
FEBRUARY 1,
1996 (INCEPTION) ELEVEN MONTHS
THROUGH ENDED
DECEMBER 31, NOVEMBER 30,
1996 1997
CURRENT:
Federal $ 819,000 $ 1,243,000
State 127,000 395,000
Foreign 27,000 348,000
------------------ ------------------
973,000 1,986,000
Valuation allowance (973,000) (1,986,000)
------------------ ------------------
$ - $ -
------------------ ------------------
12
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The significant components of the net deferred tax asset are as follows:
DECEMBER 31, NOVEMBER 30,
1996 1997
Deferred tax assets:
Net operating loss carryforwards $ 973,000 $ 2,765,000
Property and Equipment 103,000 440,000
Other 124,000 156,000
---------------- ------------
Deferred tax assets 1,200,000 3,361,000
Deferred tax asset valuation allowance (1,200,000) (3,361,000)
---------------- ------------
$ - $ -
---------------- ------------
The differences between the income tax benefit and income taxes computed
using the applicable U.S. statutory federal tax rate are as follows:
PERIOD FROM
FEBRUARY 1,
1996 ELEVEN
(INCEPTION) THROUGH MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1996 1997
Taxes computed at federal statutory rate 35.0% 35.0%
State income taxes, net of federal tax benefit 6.0 4.2
Foreign income taxed at different rates (0.3) (2.0)
Change in valuation allowance (40.8) (35.8)
Other 0.1 (1.4)
----------------- ------------
Effective income tax rate - % - %
----------------- ------------
At November 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $5,980,000 which expire at various dates
through 2012 and foreign net operating loss carryforwards of approximately
$1,436,000 which do not expire. Ownership changes, as defined by the
Internal Revenue Code, may limit the amount of net operating loss
carryforwards that can be utilized to offset future taxable income or tax
liability.
The Company has provided a full valuation allowance for its deferred tax
assets since realization of these future benefits is not sufficiently
assured. In the event the Company achieves profitability, these deferred
tax assets will be available to offset future income tax liabilities and
expense.
13
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. LINE OF CREDIT AND RESTRICTED CASH
During 1997, the Company entered into a line of credit agreement with a
bank under which it can borrow up to $1,100,000 for working capital
purposes. Borrowings under the credit line are contingent upon the
maintenance of a $1,000,000 certificate of deposit at the bank. This amount
has been classified as restricted cash on the balance sheet. Outstanding
borrowings bore interest at 8.25% during the period ended November 30,
1997. Borrowings under this facility were $700,000 at November 30, 1997.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
STOCK SPLITS
Effective December 8, 1996, the Company's board of directors approved a 5-
for-1 stock split of the Company's common stock. All shares of common
stock, preferred stock conversion ratios and per share amounts included in
the accompanying financial statements have been adjusted to give
retroactive effect to the stock split for all periods presented.
VOTING RIGHTS
Stockholders of both classes of common stock are entitled to votes equal to
the number of shares held. Stockholders of Series A Common Stock and of
Series B Common Stock are each entitled to elect three members of the six
member board of directors.
PREFERRED STOCK
Preferred stock dividends are payable no later than any dividends are paid
on common stock and must be at least equal to the per share value paid for
common stock. No dividends have been declared through November 30, 1997.
Each share of preferred stock is convertible at any time into common stock
on a one-for-one basis at the option of the holder. Each preferred
shareholder is entitled to vote the number of common shares into which the
preferred shares would be converted. The Company's outstanding preferred
shares are subject to adjustment in the event of certain fundamental
changes affecting the common shares, including stock splits, subdivisions,
and certain other forms of recapitalization.
7. STOCK OPTION PLAN
The IPC Interactive Pte. Ltd. 1997 Stock Option Plan (the "Plan") provides
for the issuance of incentive stock options and non-qualified stock options
to purchase common stock to employees, non-employee directors or
consultants at prices not less than the fair value at the date of grant. A
total of 1,100,000 shares of the Company's common stock has been authorized
for issuance under the Plan. Under the Plan, options would vest ratably
over periods up to three years from the date of grant. As of November 30,
1997, no options had been issued under the Plan.
14
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. 401(K) PLAN
The Company has an employee savings and retirement plan (the "401(k) Plan")
for its eligible employees. The 401(k) Plan is available to all domestic
employees who meet minimum age and service requirements. Employees may
contribute up to 15% of their salary, subject to certain limitations. The
401(k) Plan allows for contributions by the Company at the discretion of
the Company's board of directors. The Company has not contributed to the
401(k) Plan since its inception.
9. GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the development, sale
and operation of systems used in the delivery of interactive media.
Financial information summarized by geographic location is presented below:
United States Singapore Eliminations Total
Period ended December 31, 1996
Total revenue 9,660,000 1,446,000 - 11,106,000
Loss from operations (2,840,000) (247,000) - (3,087,000)
Identifiable assets 6,262,000 3,647,000 (1,238,000) 8,671,000
Eleven months ended November 30, 1997
Total revenue $ 6,921,000 $ 975,000 $ - $ 7,896,000
Loss from operations (4,493,000) (1,537,000) - (6,030,000)
Identifiable assets 4,091,000 2,143,000 (811,000) 5,423,000
15
IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS
The Company leases its facilities and certain computer equipment under
various operating leases. Additionally, the Company has acquired various
computer and other equipment through capital leases. Future minimum
payments for both operating and capital leases as of November 30, 1997 are
as follows:
OPERATING CAPITAL
LEASES LEASES
1998 $ 405,000 $ 196,000
1999 403,000 77,000
2000 402,000 20,000
2001 and thereafter 205,000 -
------------- -----------
Total $ 1,415,000 293,000
-------------
Less amount representing interest 57,000
-----------
236,000
Less amounts due within one year 169,000
-----------
$ 67,000
-----------
Total rent expense under operating leases was $314,000 for the period ended
December 31, 1996 and $390,000 for the eleven months ended November 30,
1997.
The Company had non-cancelable purchase commitments of approximately
$1,000,000 at November 30, 1997 with IPC Corporation for hardware
components used in the Company's systems.
11. RELATED PARTY TRANSACTIONS
At December 31, 1996 and November 30, 1997, the Company had payable
balances to IPC Corporation for purchases of inventories of $796,000 and
$513,000, respectively. The Company had inventory purchases from IPC
Corporation of $1,033,000 and $1,050,000 during the period ended December
31, 1996 and the eleven months ended November 30, 1997, respectively.
At December 31, 1996, the Company had a receivable balance from IPC
Corporation of $242,000 for reimbursable legal expenses in connection with
the formation of the joint venture and for other services provided. This
amount was paid in full during the eleven months ended November 30, 1997.
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IPC INTERACTIVE PTE. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1996 and November 30, 1997, the Company had notes payable
to related entities, including accrued interest, in the amount of $380,000
and $470,000, respectively. The notes payable pertain to cash advances made
to the Company by GSI and GuestServe Development Group ("GDG"). GSI and GDG
are 100% owned by certain investors of the Company. The loans accrue
interest at 5.25% and were paid in full subsequent to November 30, 1997.
12. SUBSEQUENT EVENT
On December 10, 1997, all shares of common and preferred stock of the
Company were acquired by SeaChange International, Inc. ("SeaChange") for
625,000 shares of SeaChange common stock. Subsequent to this date, the
Company is a wholly-owned subsidiary of SeaChange.
17