As filed with the Securities and Exchange Commission on January 9, 2002
Registration No. 333-74534
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SeaChange International, Inc.
(Exact Name of Registrant as Specified in Its Charter)
---------------
Delaware 04-3197974
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
124 Acton Street, Maynard, MA 01754, (978) 897-0100
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
William C. Styslinger, III
Chairman, President and Chief Executive Officer
SeaChange International, Inc.
124 Acton Street
Maynard, MA 01754
(978) 897-0100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
William B. Simmons, Jr., Esq. Keith F. Higgins, Esq.
TESTA, HURWITZ & THIBEAULT, LLP ROPES & GRAY
125 High Street One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
(617) 248-7000 (617) 951-7000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 9, 2002
3,000,000 Shares
[SEACHANGE INTERNATIONAL LOGO]
COMMON STOCK
-----------
SeaChange International, Inc. is offering 2,790,000 shares and selling
stockholders are offering 210,000 shares.
-----------
Our common stock is listed on the Nasdaq National Market under the symbol
"SEAC." On January 7, 2002, the last reported sale price of our common stock on
the Nasdaq National Market was $32.55 per share.
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 6.
-----------
PRICE $ A SHARE
-----------
Underwriting Proceeds Proceeds to
Price to Discounts and to Selling
Public Commissions SeaChange Stockholders
-------- ------------- --------- ------------
Per Share...................... $ $ $ $
Total.......................... $ $ $ $
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
SeaChange International has granted the underwriters the right to purchase up
to an additional 450,000 shares of common stock to cover over-allotments.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2002.
-----------
MORGAN STANLEY
THOMAS WEISEL PARTNERS LLC
RBC CAPITAL MARKETS
, 2002
TABLE OF CONTENTS
Page Page
- ---- ----
Prospectus Summary................... 3
Risk Factors......................... 6
Special Note Regarding Forward-
Looking Statements.................. 13
Use of Proceeds...................... 14
Price Range of Common Stock.......... 14
Dividend Policy...................... 14
Capitalization....................... 15
Summary Consolidated Financial Data.. 16
Management Discussion and Analysis of
Financial Condition and Results of
Operations.......................... 17
Business............................. 29
Management........................... 40
Selling Stockholders................. 42
Underwriters......................... 43
Legal Matters........................ 45
Experts.............................. 45
Where You Can Find More
Information......................... 45
Incorporation of Certain Information
by Reference........................ 46
Index to Financial Statements........ F-1
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders are offering to
sell shares of common stock and seeking offers to buy shares of common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of the common stock. In this prospectus, "SeaChange International," "we,"
"our" and "us" refer to SeaChange International, Inc.
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and the
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
SEACHANGE INTERNATIONAL
We are a leading developer, manufacturer and marketer of systems, known as
video storage servers, that automate the management and distribution of long-
form video streams, such as movies or other feature presentations, and short-
form video streams, such as advertisements. We sell our products and services
to cable system operators, including Adelphia, AOL Time Warner, AT&T,
Cablevision, Charter Communications, Comcast and Cox Communications;
telecommunications companies, including Qwest; and broadcast television
companies, including The Ackerley Group, Echostar, Group W Broadcasting and
United Pan-Europe Corporation. We believe that our digital video systems enable
our customers to differentiate their service offerings to reduce subscriber
turnover and access new revenue generating opportunities from subscribers,
advertisers and electronic commerce initiatives. Using our systems, we believe
our customers can increase their revenues by offering additional services such
as video-on-demand movies and subscription video-on-demand programming, both of
which allow subscribers to watch content at any time with pause, rewind and
fast forward features. Our systems also allow our customers to insert targeted
advertising segments, known as spot advertising, into their local cable
programming. In addition, our systems enable cable system operators to offer
other interactive television services that allow subscribers to customize
and/or dynamically interact with their television viewing experience in a
manner similar to that experienced with the use of a personal computer.
Our digital video systems provide enhanced storage and retrieval
capabilities, multi-channel content delivery and highly automated information
and order processing. These technologies provide a foundation for products that
can be deployed in next generation systems capable of increased levels of
subscriber interactivity. Our technologies and systems mitigate the effects of
electronic signal dispersion and offer higher image quality and greater
reliability than analog tape based systems. We have received several awards for
technological excellence, including an Emmy Award in 2001 for our patented
MediaCluster technology.
Our broadband or high bandwidth network segment includes our ITV System
which digitally manages, stores and distributes digital video, allowing cable
system operators and telecommunications companies to offer video-on-demand and
other interactive television services, including interactive electronic
advertising and retrieval of Internet content through the television. Our ITV
System can be deployed in either a residential environment or a hotel
environment to deliver a wide variety of video services. The ITV System
delivers video-on-demand and other guest services, Internet access and personal
computer games in the hotel environment, and our movie system provides long-
form video storage and delivery for the pay-per-view movie markets. Since 2000,
we have been selected to supply our ITV System in 22 domestic and international
commercial deployments of video-on-demand systems, including deployments by
five of the top seven cable system operators in the United States. We test and
integrate our ITV System with the digital set top boxes, or hardware devices
used to receive and unscramble television signals, of such manufacturers as
Scientific Atlanta, Motorola, Pace, Pioneer and Sony Corporation.
In addition to our ITV System, our broadband business segment includes our
SPOT System, which is a system for the transmission of video content, known as
a video insertion system, for digital advertisements and other short-form
video. Based on currently available industry sources and our internal data, we
believe our SPOT System is the leading video insertion system in the United
States in the multi-channel television market for digital advertisements and
other short-form video. Our system converts analog video forms such as
advertisements and news updates to digital video forms, stores the digital
video forms in remote or local storage devices known as digital libraries, and
inserts them automatically into television network streams. The SPOT System
provides high accuracy relative to the volume of video being played and high
video image quality, and permits geographic and demographic specificity of
advertisements. We believe our SPOT System reduces operating costs by
automating
3
the management and distribution process. Our Advertising Management Software
product operates with our SPOT System to automate and simplify complex sales,
scheduling and billing processes for the multi-channel television market. A
majority of our customers for these products consist of major cable system
operators and telecommunications companies in the United States. To date we
have sold SPOT Systems to support over 25,000 channels throughout the world. We
believe that the capabilities of our SPOT System will position us well as the
opportunities to distribute advertisements into a wide variety of digital media
platforms and the market for interactive advertising continues to increase.
Our broadcast network business segment includes our Broadcast MediaCluster
System, which allows broadcast television companies to directly transmit
content, such as commercials and other programming for broadcast television
companies, to their viewers through either single, multi-channel or satellite
based delivery systems. We believe that our Broadcast MediaCluster System will
eliminate the need for analog tape libraries and provide broadcasters with the
automated storage and playback features that they require. Since 1998, we have
installed our Broadcast MediaCluster System at customer locations including
network affiliates and multi-channel operations in the United States, Europe
and the Far East.
We face significant challenges in our business, as the market in which we
operate is intensely competitive and still emerging, meaning that the success
of our business is contingent upon the widespread marketplace acceptance of our
products and the technology on which they are based. Our customer base is
highly concentrated among a limited number of customers and our five largest
customers have accounted for approximately half of our revenues in each of the
last five years. We also have single suppliers for some of our raw materials.
Each of these factors, along with the challenges inherent in managing our
growth, could limit our ability to grow and succeed in accordance with our
business plan.
We were incorporated in Delaware in July 1993. Our principal executive
offices are located at 124 Acton Street, Maynard, Massachusetts 01754, and our
telephone number is (978) 897-0100. Our web site is located at www.schange.com.
The information contained on our web site is not incorporated by reference into
this document and should not be considered a part of this prospectus. Our web
site address is included in this document as an inactive textual reference
only.
THE OFFERING
Common stock offered by SeaChange................... 2,790,000
Common stock offered by the selling stockholders.... 210,000
Common stock to be outstanding after this offering.. 25,752,415
Use of proceeds..................................... General corporate
purposes, including
potential acquisitions.
See "Use of Proceeds."
Nasdaq National Market Symbol....................... "SEAC"
We calculated the number of shares of common stock to be outstanding after
this offering based on the number of shares outstanding on October 31, 2001.
This number excludes shares of common stock issuable upon exercise of warrants
and an aggregate of 8,086,977 shares of common stock that we have reserved for
issuance under our stock option plans, of which 3,503,315 were subject to
outstanding options as of October 31, 2001 at a weighted average price of
$18.88 per share. Unless otherwise specified, the information in this
prospectus assumes no exercise of the underwriters' over-allotment option.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year ended Nine months ended
December 31, One month ended October 31,
------------------ January 31, Year ended -----------------
1998 1999 2000 January 31, 2001 2000 2001
-------- -------- --------------- ---------------- -------- --------
Consolidated Statement of
Operations Data:
Revenues................ $ 72,924 $ 85,221 $ 1,710 $ 98,468 $ 72,686 $ 82,401
Gross profit (loss)..... 23,541 31,370 (368) 39,742 29,372 31,549
Income (loss) from
operations............. (7,596) 454 (3,623) (385) 1,655 (2,189)
Net income (loss) before
cumulative effect of
change in accounting
principle.............. (4,572) 497 (2,458) 93 1,105 (1,714)
Net income (loss)....... (4,572) 497 (2,458) (1,007) 5 (1,714)
Earnings (loss) per
share before cumulative
effect of change in
accounting principle:
Basic................. $ (0.24) $ 0.02 $ (0.12) $ 0.00 $ 0.05 $ (0.08)
Diluted............... $ (0.24) $ 0.02 $ (0.12) $ 0.00 $ 0.05 $ (0.08)
Earnings (loss) per
share:
Basic................. $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ 0.00 $ (0.08)
Diluted............... $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ 0.00 $ (0.08)
In April 2000, our board of directors voted to change our fiscal accounting
year from December 31 to January 31. The as adjusted consolidated balance sheet
data below reflects our sale of 2,790,000 shares of common stock in this
offering at an assumed public offering price of $32.55 per share.
As of October 31,
2001
-------------------
Actual As Adjusted
------- -----------
Consolidated Balance Sheet Data:
Working capital............................................. $37,593 $123,241
Total assets................................................ 91,406 177,054
Long-term liabilities....................................... 6,442 6,442
Deferred revenue............................................ 9,362 9,362
Total liabilities........................................... 35,556 35,556
Total stockholders' equity.................................. 55,850 141,498
5
RISK FACTORS
You should carefully consider the following risks before investing in our
common stock. If any of the following risks come to fruition, our business,
results of operations or financial condition could be materially adversely
affected. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the accompanying notes.
Our future success is dependent on the development of the emerging video-
on-demand market and if video-on-demand does not gain broad market acceptance,
our business may not grow as we have planned.
While our revenue growth to date has been primarily from sales of our
digital advertisement insertion products and related services, we believe our
future revenue growth will come predominately from sales and services related
to our video-on-demand products. The video-on-demand market is in the emerging
stages of development and involves a limited number of cable system operators.
The success of this market requires that cable system operators, particularly
the seven largest domestic cable system operators, continue to upgrade their
cable networks to support digital two-way transmission service and
successfully market video-on-demand and similar services to their cable
television subscribers. Cable system operators have only begun commercial
deployment of video-on-demand service to residential cable subscribers within
the past year and, accordingly, to date our digital video systems have been
commercially available only to a limited number of subscribers. As a result,
the ability of our digital video systems to support a substantial number of
subscribers is commercially unproven. If cable system operators fail to make
the capital expenditures necessary to upgrade their networks or determine that
broad deployment of video-on-demand services is not viable as a business
proposition or if our digital video systems cannot support a substantial
number of subscribers while maintaining a high level of performance, our
revenues will not grow as we have planned.
Because our customer base is highly concentrated among a limited number of
large customers, the loss of or reduced demand of these customers could have a
material adverse effect on our business, financial condition and results of
operations.
Our customer base is highly concentrated among a limited number of large
customers, and, therefore, a limited number of customers account for a
significant percentage of our revenues in any year. Our five largest customers
have accounted for approximately half of our revenues in each of the past five
years. We generally do not have written continuing purchase agreements with
our customers and do not generally have written agreements that require
customers to purchase fixed minimum quantities of our products. Our sales to
specific customers tend to vary significantly from year to year depending upon
these customers' budgets for capital expenditures and new product
introductions. We believe that a significant amount of our revenues will
continue to be derived from a limited number of large customers. The loss of,
or reduced demand for products or related services from, any of our major
customers could have a material adverse effect on our business, financial
condition and results of operations.
Cancellation or deferral of purchases of our products could cause our
operating results to be below the expectations of the public market stock
analysts who cover our stock, resulting in a decrease in the market price of
our common stock.
We derive a substantial portion of our revenues from products that have a
selling price in excess of $200,000. Therefore, any significant cancellation
or deferral of purchases of our products could have a material adverse effect
on our business, financial condition and results of operations in any
particular quarter due to the resulting decrease in revenue and our relatively
fixed costs. In addition, to the extent significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected
because our expense levels are based, in part, on our expectations as to our
future revenues, and we may be unable to adjust spending in a timely manner to
compensate for any revenue shortfall. Because of these factors, in some future
quarter our operating results may be below the expectations of public market
analysts and investors which may adversely affect the market price of our
common stock.
6
Seasonal trends may cause our quarterly operating results to fluctuate,
making period-to-period comparisons of our operating results meaningless.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter and these variations are likely to
continue. We believe that fluctuations in the number of orders being placed
from quarter to quarter are principally attributable to the buying patterns
and budgeting cycles of cable system operators and broadcast companies, the
primary buyers of the digital advertising systems and broadcast systems,
respectively. We expect that there will continue to be fluctuations in the
number and value of orders received. As a result, our results of operations
have in the past and likely will, at least in the near future, fluctuate in
accordance with this purchasing activity making period-to-period comparisons
of our operating results meaningless. In addition, because these factors are
difficult for us to forecast, our business, financial condition and results of
operations for one quarter or a series of quarters may be adversely affected
and below the expectations of public market analysts and investors, resulting
in a decrease in the market price of our common stock.
Due to the lengthy sales cycle involved in the sale of our products, our
quarterly results may vary and should not be relied on as an indication of
future performance.
Digital video, movie and broadcast products are relatively complex and
their purchase generally involves a significant commitment of capital, with
attendant delays frequently associated with large capital expenditures and
implementation procedures within an organization. Moreover, the purchase of
these products typically requires coordination and agreement among a potential
customer's corporate headquarters and its regional and local operations. For
these and other reasons, the sales cycle associated with the purchase of our
digital video, movie and broadcast products is typically lengthy and subject
to a number of significant risks, including customers' budgetary constraints
and internal acceptance reviews, over which we have little or no control.
Based upon all of the foregoing, we believe that our quarterly revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of our results of operations are not
necessarily meaningful and that, in any event, these comparisons should not be
relied upon as indications of future performance.
If there were a decline in demand or average selling prices for our
broadband products, including our ITV System and SPOT System, our revenues
would be materially affected.
We expect our broadband products to continue to account for a significant
portion of our revenues. Accordingly, a decline in demand or average selling
prices for our broadband products, whether as a result of new product
introductions by others, price competition, technological change, inability to
enhance the products in a timely fashion, or otherwise, would have a material
adverse effect on our business, financial condition and results of operations.
If we are unable to manage our growth and the related expansion in our
operations effectively, our business may be harmed through a decreased ability
to monitor and control effectively our operations, and a decrease in the
quality of work and innovation of our employees.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires effective planning and
management. Not only are we growing in size, but we are also continuing to
transition towards greater reliance on our video-on-demand products for an
increased portion of our revenue. Our growth has placed, and our anticipated
future operations will continue to place, a significant strain on our
management, administrative, operational and other resources. To manage future
growth effectively, we must continue to improve our management and operational
controls, enhance our reporting systems and procedures, integrate new
personnel and manage expanded operations. A failure to manage our growth may
harm our business through a decreased ability to monitor and control
effectively our operations, and a decrease in the quality of work and
innovation of our employees upon which our business is dependent.
7
If content providers, such as movie studios, limit the scope of content
licensed for use in the digital video-on-demand market, our business,
financial condition and results of operations could be negatively affected
because the market for our products would be more limited than we currently
believe and have communicated to the financial markets.
The success of the video-on-demand market is contingent on content
providers, such as movie studios, permitting their content to be licensed for
use in this market. Content providers may, due to concerns regarding either or
both marketing and illegal duplication of the content, limit the extent to
which they provide content to the video-on-demand market. A limitation of
content for the video-on-demand market would indirectly limit the market for
our ITV System which is used in connection with that market.
If we are unable to successfully introduce to our marketplace new products
or enhancements to existing products, our financial condition and operating
results may be adversely affected by a decrease in purchases of our products.
Because our business plan is based on technological development in the form
of both development of new products and enhancements to our existing products,
our future success is dependent on our successful introduction to the
marketplace of these products and enhancements. In the future we may
experience difficulties that could delay or prevent the successful
development, introduction and marketing of these and other new products and
enhancements, or find that our new products and enhancements do not adequately
meet the requirements of the marketplace or achieve market acceptance.
Announcements of currently planned or other new product offerings may cause
customers to defer purchasing our existing products. Moreover, despite testing
by us and by current and potential customers, errors or failures may be found
in our products, and, even if discovered, may not be successfully corrected in
a timely manner. These errors or failures could cause delays in product
introductions and shipments, or require design modifications that could
adversely affect our competitive position. Our inability to develop new
products or enhancements on a timely basis or the failure of these new
products or enhancements to achieve market acceptance could have a material
adverse effect on our business, financial condition and results of operations.
Because we purchase certain of the components used in manufacturing our
products from sole suppliers and we use a limited number of third party
manufacturers to manufacture our products, our business, financial condition
and results of operation could be materially adversely affected by a failure
of these suppliers or manufacturers.
Certain key components of our products are currently purchased from a sole
supplier, including a computer chassis manufactured by Trimm Technologic Inc.,
a different computer chassis manufactured by JMR Electronics, Inc., an
interface controller video transmission board manufactured by Cyclone
Microsystems, Inc., a switch chassis manufactured by Ego Systems, a decoder
card manufactured by Vela Research, Inc. and an encoder card manufactured by
Optibase, Inc. We have in the past experienced quality control problems, where
products did not meet specifications or were damaged in shipping, and delays
in the receipt of these components. These problems were generally of short
duration and did not have a material adverse effect on us. However, we may in
the future experience similar types of problems which could be more severe or
more prolonged. While we believe that there are alternative suppliers
available for these components, we believe that the procurement of these
components from alternative suppliers could take up to four months. In
addition, these alternative components may not be functionally equivalent or
may be unavailable on a timely basis or on similar terms. The inability to
obtain sufficient key components as required, or to develop alternative
sources if and as required in the future, could result in delays or reductions
in product shipments which, in turn, could have a material adverse effect on
our business, financial condition and results of operations.
In addition, we rely on a limited number of third parties who manufacture
certain components used in our products. While to date there has been suitable
third party manufacturing capacity readily available at acceptable quality
levels, in the future there may not be manufacturers that are able to meet our
future volume or quality requirements at a price that is favorable to us. Any
financial, operational, production or quality assurance difficulties
experienced by these third party manufacturers that result in a reduction or
interruption in supply to us could have a material adverse effect on our
business, financial condition and results of operations.
8
If we are unable to successfully compete in our marketplace, our financial
condition and operating results may be adversely affected.
We currently compete against both computer companies offering video server
platforms and more traditional analog video playback systems. In the digital
advertisement insertion market, we compete against suppliers of both analog
tape-based and digital systems.
Due to the rapidly evolving markets in which we compete, additional
competitors with significant market presence and financial resources,
including computer hardware and software companies and television equipment
manufacturers, may enter those markets, thereby further intensifying
competition. Increased competition could result in price reductions and loss
of market share which would adversely affect our business, financial condition
and results of operations. Many of our current and potential competitors have
greater financial, selling and marketing, technical and other resources than
we do. Moreover, our competitors may also foresee the course of market
developments more accurately than we. Although we believe that we have certain
technological and other advantages over our competitors, realizing and
maintaining these advantages will require a continued high level of investment
by us in research and product development, marketing and customer service and
support. In the future we may not have sufficient resources to continue to
make these investments or to make the technological advances necessary to
compete successfully with our existing competitors or with new competitors.
If we are unable to compete effectively, our business, prospects, financial
condition and operating results would be materially adversely affected because
of the difference in our operating results from the assumptions on which our
business model is based.
If we fail to respond to rapidly changing technologies related to digital
video, our business, financial condition and results of operations would be
materially adversely affected because the competitive advantage of our
products relative to those of our competitors would decrease.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions
and enhancements. Future technological advances in the television and video
industries may result in the availability of new products or services that
could compete with the solutions provided by us or reduce the cost of existing
products or services, any of which could enable our existing or potential
customers to fulfill their video needs better and more cost efficiently than
with our products. Our future success will depend on our ability to enhance
our existing digital video products, including the development of new
applications for our technology, and to develop and introduce new products to
meet and adapt to changing customer requirements and emerging technologies. In
the future, we may not be successful in enhancing our digital video products
or developing, manufacturing and marketing new products which satisfy customer
needs or achieve market acceptance. In addition, there may be services,
products or technologies developed by others that render our products or
technologies uncompetitive, unmarketable or obsolete, or announcements of
currently planned or other new product offerings either by us or our
competitors that cause customers to defer or fail to purchase our existing
solutions.
Our ability to compete could be jeopardized if we are unable to protect our
intellectual property rights from third-party challenges.
Our success and ability to compete depends upon our ability to protect our
proprietary technology that is incorporated into our broadband and broadcast
products. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual
property rights. Although we have one issued patent, we cannot assure you that
any additional patents will be issued or that the issued patent will not be
invalidated. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise misappropriate and use our products or technology without
authorization, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. We may need
to resort to litigation in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. If competitors are able to use our
technology, our ability to compete effectively could be harmed.
9
We have been and in the future could become subject to litigation regarding
intellectual property rights, which could seriously harm our business and
require us to incur significant costs.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We have been and
currently are involved in significant intellectual property litigation, and we
may be a party to litigation in the future to enforce our intellectual
property rights or as a result of an allegation that we infringe others'
intellectual property. Any parties asserting that our products infringe upon
their proprietary rights would force us to defend ourselves and possibly our
customers or manufacturers against the alleged infringement. These claims and
any resulting lawsuit, if successful, could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention away from
our operations.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. In addition, any potential intellectual
property litigation also could force us to stop selling, incorporating or
using the products that use the infringed intellectual property or obtain from
the owner of the infringed intellectual property right a license to sell or
use the relevant technology, although this license may not be available on
reasonable terms, or at all, or redesign those products that use the infringed
intellectual property. If we are forced to take any of the foregoing actions,
our business may be seriously harmed. You should refer to "Business--Legal
Proceedings" for a more detailed description of intellectual property
litigation relating to our MediaCluster technology.
Because our business is susceptible to risks associated with international
operations, we may not be able to maintain or increase international sales of
our products.
International sales have accounted for approximately 15% to 20% of our
revenues in each of the past five years. We expect that international sales
will account for a significant portion of our business in the future. However,
in the future we may be unable to maintain or increase international sales of
our products. International sales are subject to a variety of risks,
including:
. difficulties in establishing and managing international distribution
channels;
. difficulties in selling, servicing and supporting overseas products and
in translating products into foreign languages;
. the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property;
. multiple and possibly overlapping tax structures;
. currency and exchange rate fluctuations; and
. economic or political changes in international markets.
Future acquisitions may be difficult to integrate, disrupt our business,
dilute stockholder value or divert management attention.
As part of our business strategy, we may seek to acquire or invest in
businesses, products or technologies that we believe could complement or
expand our business, augment our market coverage, enhance our technical
capabilities or otherwise offer growth opportunities. Acquisitions could
create risks for us, including:
. difficulties in assimilation of acquired personnel, operations,
technologies or products which may affect our ability to develop new
products and services and compete in our rapidly changing marketplace
due to a resulting decrease in the quality of work and innovation of our
employees upon which our business is dependent; and
10
. adverse effects on our existing business relationships with suppliers
and customers, which may be of particular importance to our business
because our customer base is highly concentrated among a limited number
of large customers and we purchase certain of the components used in
manufacturing our product from a sole supplier and we use a limited
number of third party manufacturers to manufacture our product.
In addition, if we consummate acquisitions through an exchange of our
securities, our existing stockholders could suffer significant dilution. Any
future acquisitions, even if successfully completed, may not generate any
additional revenue or provide any benefit to our business.
The success of our business model could be influenced by changes in the
regulatory environment, such as changes that either would limit capital
expenditures by television operations or reverse the trend towards
deregulation in the industries in which we compete.
The telecommunications and television industries are subject to extensive
regulation which may limit the growth of our business, both in the United
States and other countries. The growth of our business internationally is
dependent in part on deregulation of the telecommunications industry abroad
similar to that which has occurred in the United States and the timing and
magnitude of which is uncertain. Cable system operators are subject to
extensive government regulation by the Federal Communications Commission and
other federal and state regulatory agencies. These regulations could have the
effect of limiting capital expenditures by cable system operators and thus
could have a material adverse effect on our business, financial condition and
results of operations. The enactment by federal, state or international
governments of new laws or regulations, changes in the interpretation of
existing regulations or a reversal of the trend toward deregulation in these
industries could adversely affect our customers, and thereby materially
adversely affect our business, financial condition and results of operations.
We may not be able to hire and retain highly skilled employees,
particularly managerial, engineering, selling and marketing, finance and
manufacturing personnel, which could affect our ability to compete effectively
because our business is technology-based and there is a shortage of these
employees within the New England area.
Our success depends to a significant degree upon the continued
contributions of our key management, engineering, selling and marketing and
manufacturing personnel, many of whom would be difficult to replace given the
shortage within the New England area of qualified persons for these positions.
We do not have employment contracts with our key personnel. We believe that
our future success will also depend in large part upon our ability to attract
and retain highly skilled managerial, engineering, selling and marketing,
finance and manufacturing personnel, as our business is technology-based.
Because competition for these personnel is intense, we may not be able to
attract and retain qualified personnel in the future. The loss of the services
of any of the key personnel, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel, particularly
software engineers and sales personnel, could have a material adverse effect
on our business, financial condition and results of operations because our
business is technology-based.
Increasing political and social turmoil, such as terrorist and military
actions, increase the difficulty for us, our vendors and our customers to
accurately forecast and plan future business activities and could have a
material adverse effect on our business, financial condition and results of
operation.
Recent political and social turmoil, including the terrorist attacks of
September 11, 2001, can be expected to put further pressure on economic
conditions in the United States and worldwide. The political, social and
economic conditions make it difficult for us, our vendors and our customers to
accurately forecast and plan future business activities. Our business,
financial condition and results of operations may be materially adversely
affected by a fluctuation in revenue relative to our forecasted value, as we
may not be able to vary our incurred expenses in response to revenue actually
realized.
11
Our management may apply the proceeds of this offering to uses that do not
enhance our financial results or market value.
Our management will have considerable discretion in the application of the
net proceeds from this offering, and you will not have the opportunity, as
part of your investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for corporate purposes that
do not enhance our financial results or our market value. Pending any
application of the net proceeds, they may be placed in investments that do not
produce income or that lose value.
The market price of our common stock may be materially adversely affected
by market volatility.
The market price of our common stock has been and is likely to continue to
be highly volatile and may fluctuate substantially. The price of the common
stock that will prevail in the market after this offering may be higher or
lower than the price you pay, depending on many factors, some of which are
beyond our control. In particular, the announcement of any significant
customer developments, or our failure to achieve expected financial results
could have a material adverse effect on our stock price.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may," "might," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "intends,"
"predicts," "future," "potential" or "continue," the negative of these terms
and other comparable terminology. These forward-looking statements, which are
subject to risks, uncertainties, and assumptions about us, may include, among
other things, statements regarding the development of the video-on-demand and
interactive advertising markets, product enhancements, projections of our
future financial performance, our anticipated growth strategies and
anticipated trends in our business. These statements are only predictions
based on our current expectations and projections about future events. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results, level of activity,
performance or achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by the forward-
looking statements, including those factors discussed under the caption
entitled "Risk Factors." You should specifically consider the numerous risks
outlined under "Risk Factors."
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as otherwise required by law, we
are under no duty to update any of these forward-looking statements after the
date of this prospectus to conform our prior statements to actual results or
revised expectations.
13
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 2,790,000 shares of
common stock offered by us at an assumed public offering price of $32.55 per
share will be approximately $85.6 million after deducting estimated offering
expenses of $400,000 and the underwriting discounts and commissions payable by
us. See "Underwriters." We will not receive any of the proceeds from the sale
of the shares being sold by the selling stockholders. See "Selling
Stockholders."
The principal purposes of this offering are to obtain additional working
capital and create a larger public float for our common stock.
We expect to use the net proceeds from the sale of shares of common stock
offered by us for general corporate purposes, including for working capital and
capital expenditures. We may use a portion of the net proceeds to acquire or
make investments in businesses, products or technologies that we believe will
complement our current or future business. While we continuously evaluate
potential transactions and transaction prospects, we do not currently have
agreements or commitments with respect to any acquisition or investment. We
will retain broad discretion in the allocation of the net proceeds of this
offering. Pending such uses, we plan to invest the net proceeds in investment
grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"SEAC." The following table sets forth the high and low closing sale prices for
the Common Stock for the periods indicated, as reported on the Nasdaq National
Market.
High Low
----- -----
Three Month Period Ended:
April 30, 1999............................................... $7.83 $5.08
July 31, 1999................................................ 14.21 6.00
October 31, 1999............................................. 13.33 8.75
January 31, 2000............................................. 46.75 12.33
Fiscal 2001:
Fiscal quarter ended April 30, 2000.......................... 73.50 30.00
Fiscal quarter ended July 31, 2000........................... 41.19 21.08
Fiscal quarter ended October 31, 2000........................ 40.75 19.06
Fiscal quarter ended January 31, 2001........................ 34.75 16.38
Fiscal 2002:
Fiscal quarter ended April 30, 2001.......................... 26.25 10.38
Fiscal quarter ended July 31, 2001........................... 27.18 14.63
Fiscal quarter ended October 31, 2001........................ 29.30 15.29
Fiscal quarter ended January 31, 2002 (through January 7,
2002)....................................................... 37.78 25.75
On January 7, 2002, the last reported sale price of our common stock on the
Nasdaq National Market was $32.55.
DIVIDEND POLICY
We have not paid any cash dividends on our capital stock since our
inception, and do not expect to pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain all of our future earnings
for use in the operation and expansion of the business.
14
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 2001.
The as adjusted information reflects both the issuance and sale of the
2,790,000 shares of common stock offered by us in this offering at an assumed
public offering price of $32.55 per share and the application of the net
proceeds we expect to receive from this offering. The outstanding share
information excludes shares of common stock issuable upon exercise of warrants
and an aggregate of 3,503,315 shares of common stock issuable on exercise of
outstanding options as of October 31, 2001 with a weighted average price of
$18.88 per share. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this prospectus.
As of October 31,
2001
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share data)
Long-term liabilities..................................... $ 6,442 $ 6,442
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 22,962,415 shares issued and outstanding,
actual; 25,752,415 shares issued and outstanding, as
adjusted 230 258
Additional paid-in capital............................... 63,630 149,250
Deferred equity discount................................. (1,187) (1,187)
Accumulated deficit...................................... (6,619) (6,619)
Accumulated other comprehensive loss..................... (204) (204)
------- --------
Total stockholders' equity.............................. 55,850 141,498
------- --------
Total capitalization.................................. $62,292 $147,940
======= ========
15
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes
included elsewhere in this prospectus. The consolidated statement of
operations data for the twelve months ended December 31, 1998 and 1999, the
one month ended January 31, 2000 and the twelve months ended January 31, 2001
and the balance sheet data as of December 31, 1999, January 31, 2000 and
January 31, 2001 have been derived from our financial statements that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and that
are included elsewhere in this prospectus. The financial data for the nine-
month periods ended October 31, 2000 and 2001 and as of October 31, 2001 have
been derived from our unaudited financial statements, which are included
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair statement
of our financial position and our results of operations for those periods. The
historical results are not necessarily indicative of results to be expected
for any future period. On January 31, 2001, we implemented the SAB 101
guidelines promulgated by the Securities and Exchange Commission, retroactive
to the beginning of the year. The pro forma results for prior periods
presented below were calculated assuming the accounting change was made
retroactively to all prior periods presented.
Year ended One month Nine months ended
December 31, ended Year ended October 31,
-------------------- January 31, January 31, --------------------
1998 1999 2000 2001 2000 2001
--------- --------- ----------- ----------- ----------- --------
(in thousands, except per share data)
Consolidated Statement
of Operations Data:
Revenues:
Systems................ $ 58,033 $ 68,457 $ 226 $ 74,986 $ 55,794 $ 60,829
Services............... 14,891 16,764 1,484 23,482 16,892 21,572
--------- -------- -------- -------- -------- --------
72,924 85,221 1,710 98,468 72,686 82,401
Costs of revenues:
Systems................ 35,772 38,889 633 39,928 30,043 35,208
Services............... 13,611 14,962 1,445 18,798 13,271 15,644
--------- -------- -------- -------- -------- --------
49,383 53,851 2,078 58,726 43,314 50,852
Gross profit (loss)..... 23,541 31,370 (368) 39,742 29,372 31,549
Operating expenses:
Research and
development........... 15,763 16,302 1,764 20,283 14,456 17,560
Selling and
marketing............. 8,566 8,595 1,034 12,472 8,284 10,599
General and
administrative........ 6,132 5,335 457 7,372 4,977 5,579
Restructuring of
operations............ 676 -- -- -- -- --
Acquisition costs...... -- 684 -- -- -- --
--------- -------- -------- -------- -------- --------
31,137 30,916 3,255 40,127 27,717 33,738
Income (loss) from
operations............. (7,596) 454 (3,623) (385) 1,655 (2,189)
Interest income
(expense), net......... 235 28 9 (212) (30) (332)
--------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle.............. (7,361) 482 (3,614) (597) 1,625 (2,521)
Provision (benefit) for
income taxes........... (2,789) (15) (1,156) (690) 520 (807)
--------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle.............. (4,572) 497 (2,458) 93 1,105 (1,714)
Cumulative effect of
change in accounting
principle, net of tax
of $732................ -- -- -- (1,100) (1,100) --
--------- -------- -------- -------- -------- --------
Net income (loss).... $ (4,572) $ 497 $ (2,458) $ (1,007) $ 5 $(1,714)
========= ======== ======== ======== ======== ========
Earnings (loss) per
share before cumulative
effect of change in
accounting principle:
Basic................ $ (0.24) $ 0.02 $ (0.12) $ 0.00 $ 0.05 $ (0.08)
Diluted.............. $ (0.24) $ 0.02 $ (0.12) $ 0.00 $ 0.05 $ (0.08)
Earnings (loss) per
share:
Basic................ $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ 0.00 $ (0.08)
Diluted.............. $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ 0.00 $ (0.08)
Weighted-average common
shares:
Basic................ 18,982 20,883 21,269 21,745 21,668 22,796
Diluted.............. 18,982 21,774 21,269 23,234 23,170 22,796
Pro forma amounts
assuming the change in
accounting principle is
applied retroactively:
Revenue................ $ 71,790 $ 85,052 $ 2,144 $ 98,468
Net income (loss)...... (5,276) 323 (2,163) 93
Basic earnings (loss)
per share............. (0.28) 0.02 (0.10) 0.00
Diluted earnings
(loss) per share...... (0.28) 0.01 (0.10) 0.00
As of December 31, As of January 31, As of
-------------------- ----------------------- October 31,
1998 1999 2000 2001 2001
--------- --------- ----------- ----------- -----------
Consolidated Balance
Sheet Data:
Working capital........ $ 22,871 $ 23,365 $ 20,983 $ 28,819 $ 37,593
Total assets........... 54,527 62,304 56,712 88,253 91,406
Long-term
liabilities........... 1,027 1,231 1,144 3,934 6,442
Deferred revenue....... 3,939 4,380 6,292 8,435 9,362
Total liabilities...... 23,207 27,963 24,761 42,951 35,556
Total stockholders'
equity................ 31,320 34,341 31,951 45,302 55,850
16
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements, related notes and other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-
looking information that involves risks and uncertainties. Our actual results
could differ materially from those anticipated by such forward-looking
information due to competitive factors and other factors discussed under "Risk
Factors" and elsewhere in this prospectus.
Overview
We are a leading developer, manufacturer and marketer of systems, known as
video storage servers, that automate the management and distribution of long-
form video streams, such as movies or other feature presentations, and short-
form video streams, such as advertisements.
We have three reportable segments: broadband systems, broadcast systems and
services. The broadband systems segment includes products, such as our digital
advertising and video-on-demand products, that digitally manage, store and
distribute digital video for cable system operators and telecommunications
companies. The broadcast systems segment includes products for the storage,
archival, on-air playback of advertising and other video programming for the
broadcast television industry. Our system revenues are comprised of sales of
our broadband and broadcast systems. The service segment is comprised of
revenue related to product development contracts, installation, training,
product maintenance and technical support for all of the above systems, and
content which is distributed by the broadband product segment.
Revenues from sales of systems are recognized upon shipment provided title
and risk of loss have passed to the customer, there is evidence of an
arrangement, fees are fixed or determinable and collection of the related
receivable is probable. Installation, project management and training revenue
is deferred and recognized as these services are performed. Revenue from
technical support and maintenance is deferred and recognized ratably over the
period of the related agreements, generally twelve months. Customers are
billed for installation, project management, training and maintenance at the
time of the product sale. Revenue from content fees, primarily movies, is
recognized based on the volume of monthly purchases that are made by hotel
guests. Revenue from product development contract services is recognized based
on the time and materials incurred to complete the work.
Our transactions frequently involve the sales of systems and services under
multiple element arrangements. Systems sales always include at least one year
of free technical support and maintenance services. Revenue under multiple
element arrangements is allocated to all elements except systems based upon
the fair value of those elements. The amounts allocated to training, project
management, technical support and maintenance and content fees is based upon
the price charged when these elements are sold separately and unaccompanied by
the other elements. The amount allocated to installation revenue is based upon
hourly rates and the estimated time required to complete the service. The
amount allocated to systems is done on a residual method basis. Under this
method, the total arrangement value is allocated first to undelivered
elements, based on their fair values, with the remainder being allocated to
systems revenue. Installation, training and project management services are
not essential to the functionality of systems as these services do not alter
the equipment's capabilities, are available from other vendors and the systems
are standard products.
We have experienced fluctuations in our systems revenues from quarter to
quarter due to the timing of receipt of customer orders and the shipment of
those orders. The factors that impact the timing of receipt of customer orders
include among other factors: (1) the customer's obtaining authorized
signatures on their purchase orders; (2) budgetary approvals within the
customer's company for capital purchases; and (3) the ability to process the
purchase order within the customer's organization in a timely manner. Factors
that may impact the shipment of customer orders include: (1) the availability
of material to produce the product; and (2) the time required to produce and
test the system before delivery. Because the average sales price of our system
is high, the delay in the timing of receipt and shipment of any one customer
order can result in quarterly fluctuations in our revenue.
17
Our results are significantly influenced by a number of factors, including
our pricing, the costs of materials used in our products and the expansion of
our operations. We price our products and services based upon our costs as
well as in consideration of the prices of competitive products and services in
the marketplace. The costs of our products primarily consist of the costs of
components and subassemblies that have generally declined over time. As a
result of the growth of our business, our operating expenses have increased in
the areas of research and development, selling and marketing, customer service
and support and administration.
On December 30, 1999, we acquired all of the outstanding capital stock of
Digital Video Arts, Ltd. in exchange for 330,000 shares of our common stock
using an exchange ratio of 0.033 of one share of our common stock for each
share of Digital Video Arts. The acquisition was accounted for as a pooling of
interests. Digital Video Arts is a developer of custom software products
specializing in digital video and interactive television. As a result of the
acquisition, Digital Video Arts became our wholly-owned subsidiary. The
accompanying consolidated financial statements for all the periods presented
have been restated to include the results of operations, financial position
and cash flows of Digital Video Arts.
Results of Operations
Nine Months Ended October 31, 2001 Compared to the Nine Months Ended October
31, 2000
Systems Revenues. Our systems revenues consist of sales of our broadband
and broadcast products. Systems revenues increased 9% to $60.8 million in the
nine months ended October 31, 2001 from $55.8 million in the nine months ended
October 31, 2000. Revenues from the broadband segment, which accounted for 58%
and 54% of total revenues in the nine months ended October 31, 2001 and 2000,
respectively, increased to $48.2 million for the comparable period in 2001 as
compared to $39.3 million for the comparable period in 2000. Interactive
television system revenues were $32.8 million for the nine months ended
October 31, 2001 as compared to $10.0 million in the comparable period in the
prior year primarily due to the initial deployment of residential video-on-
demand systems in the United States for cable operators. As of October 31,
2001, the balance of the deferred equity discount was $1.2 million. Included
in the interactive television systems revenue for the nine months ended
October 31, 2001 was the amortization of $1.1 million related to the deferred
equity discount associated with the Comcast equity investment. Digital
advertising system revenues were $15.4 million for the nine months ended
October 31, 2001 as compared to $29.3 million in the prior year. The decrease
resulted primarily from the decline in the number of expansion systems
purchased by U.S. cable operators. Broadcast system segment revenues were
$12.7 million in the nine months ended October 31, 2001 as compared to $16.5
million in the nine months ended October 31, 2000. The decrease in broadcast
revenues is primarily attributable to a decrease in capital expenditures by
broadcast companies that we believe is tied to declining advertising revenues
earned by those companies. We expect future revenue growth, if any, to come
principally from our interactive television and broadcast system products as
cable and telecommunications companies continue to offer new video-on-demand
applications for their customers and the market for digital video servers
within the broadcast industry continues to expand. As revenues from broadcast
and interactive television products increase, the digital advertising products
will become a smaller portion of total system revenues. However, we believe
that there will be a continuing demand for expansions to existing digital
advertising insertion systems within the United States.
Services Revenues. Our services revenues consist of fees for installation,
training, product maintenance, technical support services and movie content
fees. Our services revenues increased 28% to $21.6 million in the nine months
ended October 31, 2001 from $16.9 million in the nine months ended October 31,
2000. This increase in services revenues primarily resulted from the renewals
of technical support and maintenance services, price increases on certain
technical support and maintenance services, the impact of a growing installed
base of systems and a higher level of product development services.
For the nine month periods ended October 31, 2001 and October 31, 2000, a
limited number of our customers each accounted for more than 10% of our total
revenues. Single customers accounted for 20% and 17% of total revenues in nine
months ended October 31, 2001 and 11%, 11%, 10% and 10% of total revenues in
the nine months ended October 31, 2000. Revenue from these customers was
primarily in the broadband segment. We believe that a significant amount of
our revenues will continue to be derived from a limited number of large
customers.
International sales accounted for approximately 14% and 20% of total
revenues in the nine-month periods ended October 31, 2001 and October 31,
2000, respectively. We expect that international sales will remain a
significant portion of our business in the future. As of October 31, 2001,
substantially all sales of our products were made in United States dollars.
Therefore, we have not experienced, nor do we expect to experience in the
18
near term, any material impact from fluctuations in foreign currency exchange
rates on our results of operations or liquidity. If this practice changes in
the future, we will reevaluate our foreign currency exchange rate risk.
Systems Gross Profit. 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 17% to $35.2 million in the nine months ended
October 31, 2001 as compared to $30.0 million in the nine months ended October
31, 2000. In the nine months ended October 31, 2001, the increase in costs of
systems revenues reflects higher systems revenue and higher material costs
within the interactive television products. We expect cost of systems revenues
for the interactive television products within the broadband segment to be
higher as a percentage of revenues as the products are first deployed and to
decrease as a percentage of revenues as the revenue level increases and we
improve our manufacturing and material purchasing efficiencies.
Systems gross profit as a percentage of systems revenues was 42% and 46% in
the nine months ended October 31, 2001 and October 31, 2000, respectively. The
decrease in systems gross profit in the nine months ended October 31, 2001 was
primarily due to the shift within the broadband segment from product sales of
higher gross profit ad insertion systems to lower gross profit interactive
television systems. Gross profit for the broadband segment decreased to 42%
for the nine months ended October 31, 2001 as compared to 47% for the nine
months ended October 31, 2000 primarily due to lower ad insertion systems
revenues. Gross profit for the broadcast segment decreased to 43% for the nine
months ended October 31, 2001 as compared to 45% for the nine months ended
October 31, 2000.
Services Gross Profit. Costs of services revenues consist primarily of
labor, materials and overhead relating to the installation, training, product
maintenance and technical support services provided by us and costs associated
with providing movie content. Costs of services revenues increased 18% to
$15.6 million in the nine months ended October 31, 2001 from $13.3 million in
the nine months ended October 31, 2000 primarily as a result of increased
revenues and the costs associated with us hiring and training additional
service personnel to provide worldwide support for the growing installed base
of broadband and broadcast systems and costs associated with providing movie
content. Services gross profit as a percentage of services revenue was 27% in
the nine months ended October 31, 2001 and 21% in the nine months ended
October 31, 2000. The increase in gross profit was primarily due to the
increase in services revenues. We expect that we will continue to experience
fluctuations in services gross profit as a percentage of services revenue as a
result of the timing of revenues from technical support and other services to
support the growing installed base of systems and the timing of costs
associated with our 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 the compensation of development personnel, depreciation of
development and test equipment and an allocation of related facilities
expenses. Research and development expenses increased 21% to $17.6 million in
the nine months ended October 31, 2001 as compared to $14.5 million in the
nine months ended October 31, 2000. The increase in the nine months ended
October 31, 2001 was primarily attributable to the hiring and contracting of
additional development personnel which reflects our continuing investment in
new products. The second quarter also included additional prototype expenses
associated with new board development efforts. We expect that research and
development expenses will continue to increase in dollar amount as we continue
our 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 28% to
$10.6 million in the nine months ended October 31, 2001 from $8.3 million in
the nine months ended October 31, 2000. The increase was primarily due to the
hiring of additional sales personnel for our interactive television and
broadcast products and related commission costs.
19
General and Administrative. General and administrative expenses consist
primarily of the compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facilities expenses. General and administrative expenses increased 12%
to $5.6 million in the nine-month period ended October 31, 2001, as compared
to $5.0 million in the nine-month period ended October 31, 2000. This increase
is primarily due to the amortization of capitalized patent costs and fees
related to the registration statement covering the shares of our common stock
in the Comcast transaction.
Interest expense, net. Interest expense, net was $332,000 for the nine
months ended October 31, 2001 and $30,000 for the nine months ended October
31, 2000. The increase in interest expense, net in the nine months ended
October 31, 2001 primarily resulted from interest expense on borrowings under
our lines of credit and construction loan.
Provision (benefit) for Income Taxes. Our effective tax benefit rate was
32% in the nine months ended October 31, 2001. The effective tax rate for the
nine months ended October 31, 2001 was favorably impacted by the utilization
of research and development tax credits.
We had net deferred tax assets of $8.5 million at October 31, 2001 and $7.7
million at January 31, 2001. Although realizability is not assured, based on
the weight of available evidence, we believe it is more likely than not that
all remaining deferred tax assets will be realized. The amount of the deferred
tax assets considered realizable is subject to change based on future events,
including generating taxable income in future periods. We will continue to
assess the need for the valuation allowance at each balance sheet date based
on all available evidence. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if we do not generate
sufficient taxable income in future periods. Any reduction of the amount of
the deferred tax assets would reduce net income in the period in which the
reduction occurs.
Cumulative effect change in accounting principle. During the fourth quarter
of the twelve months ended January 31, 2001, we implemented the SEC's SAB 101
guidelines, retroactive to the beginning of the year. This was reported as a
cumulative effect of a change in accounting principle as of February 1, 2000.
Historically, for some of our sales transactions, a portion of the sales
price, typically 25%, was not due until installation occurred. We now defer
the portion of the sales price not due until installation is complete. The
cumulative effect of the change in accounting principle on prior years
resulted in a charge to income of $1.1 million (net of income taxes of
$732,000) or $0.05 per diluted share which has been included in income for the
nine months ended October 31, 2000.
Year Ended December 31, 1999 Compared to the Year Ended January 31, 2001
Systems Revenues. Systems revenues increased 10% from $68.5 million in the
twelve months ended December 31, 1999 to $75.0 million in the twelve months
ended January 31, 2001. Revenues from the broadband segment, which accounted
for 55% of total revenues in the twelve months ended January 31, 2001 and 61%
of total revenues in the twelve months ended December 31, 1999, increased from
$51.7 million in 1999 to$54.4 million in 2001. Digital advertising system
revenues were $40.0 million for the twelve months ended January 31, 2001 as
compared to $44.6 million for the twelve months ended December 31, 1999.
Interactive television systems revenues increased to $14.4 million for the
twelve months ended January 31, 2001 as compared to $7.1 million for the
twelve months ended December 31, 1999. The increase in broadband revenues is
primarily attributable to the sale of interactive television systems to U.S.
cable system operators who began to deploy residential video-on-demand
services to their subscriber base during the twelve months ended January 31,
2001, offset in part by a decline in the number of expansion systems purchased
by United States cable system operators for digital advertising. Broadcast
system segment revenues were $20.6 million in the twelve months ended January
31, 2001 compared to $16.8 million in the twelve months ended December 31,
1999. The 23% increase in broadcast revenues for the twelve months ended
January 31, 2001 was primarily due to shipments for new broadcast customers in
the United States, Europe and the Far East.
Services Revenues. Our services revenues increased 40% to $23.5 million in
twelve months endedJanuary 31, 2001 from $16.8 million in the twelve months
ended December 31, 1999. This increase in services revenues primarily resulted
from the renewals of existing technical support and maintenance, price
increases on certain technical support and maintenance services, the impact of
a growing installed base of systems and a higher volume of product development
services.
20
For the twelve-month periods ended January 31, 2001 and December 31, 1999,
certain customers each accounted for more than 10% of our total revenues.
Single customers each accounted for 12% and 10% of total revenues in the
twelve months ended January 31, 2001 and 15% and 10% of total revenues in the
twelve months ended December 31, 1999. Revenue from these customers was
primarily in the broadband segment. We believe that a significant amount of
our revenues will continue to be derived from a limited number of large
customers.
International sales accounted for approximately 21% and 23% of total
revenues in the twelve-month periods ended January 31, 2001 and December 31,
1999, respectively.
Systems Gross Profit. Costs of systems revenues increased to $39.9 million
in the twelve months ended January 31, 2001 as compared to $38.9 million in
the twelve months ended December 31, 1999. In the twelve months ended January
31, 2001, the cost of systems revenues increased from the prior year primarily
as a result of higher systems revenues.
Systems gross profit as a percentage of systems revenues was 47% and 43% in
the twelve months ended January 31, 2001 and December 31, 1999, respectively.
The increase in systems gross profit in the twelve months ended January 31,
2001 was primarily due to lower material and other manufacturing costs as a
percentage of systems revenue within the broadband segment and specifically
for system revenues for the digital advertising insertion products. We were
able to reduce manufacturing material costs principally through improved
purchasing methods despite the continued trend towards the purchase of smaller
scale digital advertising insertion systems and expansions to existing systems
that have higher material content. Gross profit for the broadband segment
improved from 43% for the twelve months ended December 31, 1999 to 48% for the
twelve months ended January 31, 2001 while gross profit for the broadcast
segment was 44% and 45% for the twelve months ended January 31, 2001 and the
twelve months ended December 31, 1999, respectively.
Services Gross Profit. Costs of services revenues increased 26% from $15.0
million in the twelve months ended December 31, 1999 to $18.8 million in the
twelve months ended January 31, 2001, primarily as a result of increased
revenues and the costs associated with our hiring and training additional
service personnel to provide worldwide support for the growing installed base
of broadband and broadcast systems and costs associated with providing movie
content. Services gross profit as a percentage of services revenue was 20% in
the twelve months ended January 31, 2001 and 11% in the twelve months ended
December 31, 1999. Improvements in the services gross profit in the twelve
months ended January 31, 2001 reflect the increase in the installed base of
systems under maintenance, price increases on certain annual technical support
and maintenance services and higher product development revenues.
Research and Development. Research and development expenses increased 24%
from approximately $16.3 million in the twelve months ended December 31, 1999
to $20.3 million in the twelve months ended January 31, 2001. The increase in
the dollar amount was primarily attributable to the hiring and contracting of
additional development personnel which reflects our continuing investment in
new products.
Selling and Marketing. Selling and marketing expenses increased 45% from
$8.6 million in the twelve months ended December 31, 1999 to $12.5 million in
the twelve months ended January 31, 2001. This increase is primarily due to
the hiring of additional sales personnel for our broadcast and interactive
television products, increased sales commissions on higher revenues and higher
marketing expenses specifically for tradeshow and other promotional
activities.
General and Administrative. General and administrative expenses increased
38% from $5.3 million in the twelve months ended December 31, 1999 to $7.4
million in the twelve months ended January 31, 2001. This increase is
primarily due to increased legal expenses associated with various litigation
matters and accounting expenses associated primarily with tax matters.
Interest Expense (Income), Net. Interest expense, net, was approximately
$212,000 in the twelve months ended January 31, 2001 and interest income, net,
was approximately $28,000 in the twelve months ended
21
December 31, 1999. The increase in 2001 in interest expense, net, primarily
resulted from interest expense on increased borrowings under our lines of
credit and new borrowings under our construction loan.
Provision (Benefit) for Income Taxes. Our effective tax rate for the twelve
months ended January 31, 2001 differed from the U.S. federal statutory tax
rate due to the utilization of research and development tax credits. Our
effective tax benefit rate was 116% for the twelve months ended January 31,
2001 as compared to 3% for the twelve months ended December 31, 1999. We had
net deferred tax assets of $2.9 million, $4.1 million and $7.7 million at
December 31, 1999, January 31, 2000 and January 31, 2001, respectively.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1999
Systems Revenues. Systems revenues increased 18% from $58.0 million in 1998
to $68.5 million in 1999. Revenues from the digital advertising insertion
segment or SPOT Systems, which accounted for 60.5% and 52.3% of total revenues
in 1998 and 1999, respectively, increased slightly from $44.1 million in 1998
to $44.6 million in 1999. The most significant increase in systems revenues in
1999 compared to 1998 resulted primarily from the sale of broadcast systems, a
product that was first introduced and sold by us in the second quarter of
1998. Broadcast segment revenues increased from $4.2 million, or 5.8% of total
revenues, in 1998 to $16.8 million, or 19.7% of total revenues, in 1999. In
addition, during the third quarter of 1999, we sold our first interactive
television systems which are used by cable system operators and
telecommunications companies to provide movie and other interactive services
directly to the home of the cable subscriber. Revenues from the interactive
television segment were $500,000 in 1999. These increases in systems revenues
were offset in part by a $3.1 million decrease in systems revenues from the
movies segment which was due to the timing of receiving a relatively small
number of orders with a high average value per order.
For the years ended December 31, 1998 and 1999, certain customers accounted
for more than 10% of our total revenues. Individual customers accounted for
24% and 15% of total revenues in 1998 and 15% and 10% of total revenues in
1999. Revenues from these customers were predominantly in the digital
advertising insertion segment. International sales accounted for approximately
13% and 23% of total revenues in the years ended December 31, 1998 and 1999,
respectively.
Services Revenues. Our services revenues increased 13% to $16.8 million in
1999 from $14.9 million in 1998. This increase in services revenues primarily
resulted from the renewals of maintenance and support contracts and the impact
of a growing installed base of systems.
Systems Gross Profit. Costs of systems revenues increased 9% from $35.8
million in 1998 to $38.9 million in 1999. In 1999, the increase in costs of
systems revenues reflects the higher revenue level and increased manufacturing
labor and overhead costs incurred to support changes in the product mix,
including the introduction of the new broadcast and video-on-demand products.
Systems gross profit as a percentage of systems revenues were 38% and 43%
in 1998 and 1999, respectively. Gross profit for the digital advertising
insertion and the movies segments increased from 40% and 30% in 1998 to 43%
and 38% in 1999, respectively, primarily as a result of continued reductions
in manufacturing material and labor costs as a percentage of segment revenues.
We were able to reduce manufacturing material costs principally through
improved purchasing methods despite the continued trend towards the purchase
of smaller scale digital advertising insertion systems and expansions to
existing systems that have higher material content. Gross profit for the
broadcast segment also improved from 43% in 1998 to 45% in 1999 as a result of
higher revenues and lower material and labor manufacturing costs as a
percentage of revenues. The gross profits in 1998 and 1999 were impacted by
increases of approximately $2.0 million and $500,000, respectively, in our
inventory valuation allowance. These increases were within the digital
advertising insertion segment and were the result of new product introductions
within this segment and the identification and anticipation of inventory
write-downs of slower turning excess and obsolete materials.
Services Gross Profit. Costs of services revenues increased 10% from $13.6
million in 1998 to $15.0 million in 1999, primarily as a result of the costs
associated with our hiring and training additional service
22
personnel to provide worldwide support for the growing installed base of
digital ad insertion, movie, broadcast and video-on-demand systems and costs
associated with providing movie content. Services gross profit margin as a
percentage of services revenue was 9.0% in 1998 and 11% in 1999. The higher
services gross profit in 1999 is primarily due to higher level of services
revenue.
Research and Development. Research and development expenses increased 3%
from $15.8 million in 1998 to $16.3 million in 1999. The increase in the dollar
amount in 1999 was primarily attributable to the hiring and contracting of
additional development personnel which reflects our continuing investment in
new products. All internal software development costs to date have been
expensed by us.
Selling and Marketing. Selling and marketing expenses remained flat at $8.6
million in 1998 and 1999.
General and Administrative. General and administrative expenses decreased
13% from $6.1 million in 1998 to $5.3 million in 1999. The decrease in the
dollar amounts was primarily attributable to lower payroll and related costs
related to the centralization of accounting and administrative functions and
lower legal costs.
Restructuring of Operations. In March 1998, we 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, we had
notified all terminated employees. All restructuring charges were paid as of
December 31, 1998.
Acquisition Costs. On December 30, 1999, we acquired all of the outstanding
common stock of Digital Video Arts, Ltd. in exchange for 330,000 shares of our
common stock using an exchange ratio of 0.033 of one share of our common stock
for each share of Digital Video Arts. The acquisition was accounted for as a
pooling of interests. Digital Video Arts is a developer of custom software
products specializing in digital video and interactive television. As a result
of the acquisition, Digital Video Arts became our wholly-owned subsidiary.
Total revenues of $85.2 million for the year ended December 31, 1999 consisted
of $84.2 million of our revenues and $1.0 million of Digital Video Arts'
revenues. Net income of $497,000 for the same period consisted of our net
income of $1.1 million and a Digital Video Arts net loss of $592,000. Included
in net income were acquisition costs of $684,000 consisting primarily of
professional service fees. Due to the acquisition, Digital Video Arts'
previously unrecognized tax benefits of operating loss carryforwards were
recognized in our consolidated results in the applicable period.
Interest Income, Net. Interest income, net was approximately $235,000 and
$28,000 in 1998 and 1999, respectively. The decrease in interest income, net in
1999 primarily resulted from lower average invested balances in 1999 and
interest expense on borrowings.
Provision (Benefit) for Income Taxes. Our effective tax benefit rate was
37.9% and 3% in 1998 and 1999, respectively, due to the taxable loss in 1998
and the utilization of operating tax loss carryforwards associated with the
acquisition of Digital Video Arts in 1999.
One Month Ended January 31, 2000 Compared to the One Month Ended January 31,
1999
Systems Revenues. Systems revenues decreased 68% from $697,000 in the one
month ended January 31, 1999 to $226,000 in the one month ended January 31,
2000. This decreased systems revenues resulted primarily from the timing of
receipt of customer orders and related shipment within both the broadband and
broadcast segments.
Services Revenues. Our services revenues increased 23% from approximately
$1.2 million in the one month ended January 31, 1999 to $1.5 million in the one
month ended January 31, 2000. This increase in services revenues resulted
primarily from renewals of technical support and maintenance contracts, higher
product development revenues and the impact of a growing installed base of
systems.
For the one month period ended January 31, 2000 and January 31, 1999,
certain customers accounted for more than 10% of our total revenues. Single
customers accounted for 16% and 11% of total revenues in one
23
month ended January 31, 2000 and 17%, 12% and 10% of total revenues in the one
month ended January 31, 1999. Revenues from these customers were primarily in
the broadband segment.
International sales accounted for approximately 18% and 38% of total
revenues for the one month ended January 31, 2000 and January 31, 1999,
respectively.
Systems Gross Profit. Costs of systems revenues decreased 6% from $670,000
in the one month ended January 31, 1999 to $633,000 in the one month ended
January 31, 2000. For the one month ended January 31, 2000, the decrease in
cost of systems revenues primarily reflects lower systems revenue offset in
part by fixed manufacturing labor and overhead costs.
Systems gross profit as a percentage of systems revenues was a negative
180% in the one month ended January 31, 2000. In the one month ended January
31, 1999, gross profit as a percentage of systems revenues was 4%. The
decrease in systems gross profit in 2000 was primarily due to lower systems
revenue and higher material and fixed manufacturing costs as a percentage of
systems revenues.
Services Gross Profit. Costs of services revenues increased 38% from
approximately $1.0 million in the one month ended January 31, 1999 to $1.4
million in the one month ended January 31, 2000, primarily as a result of the
costs associated with our hiring and training additional service personnel to
provide worldwide support for the growing installed base of broadband and
broadcast systems and costs associated with providing movie content. Services
gross profit as a percentage of services revenue decreased to 3% in the one
month ended January 31, 2000 compared to a gross profit margin of 13% in the
one month ended January 31, 1999.
Research and Development. Research and development expenses increased 33%
from approximately $1.3 million, in the one month ended January 31, 1999 to
$1.8 million in the one month ended January 31, 2000. The increase in the
dollar amount was primarily attributable to the hiring and contracting of
additional development personnel which reflects our continuing investment in
new products.
Selling and Marketing. Selling and marketing expenses increased 98% from
$522,000 in the one month ended January 31, 1999 to $1.0 million in the one
month ended January 31, 2000. This increase is primarily due to the hiring of
additional sales personnel for our broadcast and interactive television
products and higher tradeshow expenses.
General and Administrative. General and administrative expenses increased
2% from $447,000 in the one month ended January 31, 1999 to $457,000 in the
one month ended January 31, 2000.
Interest Income, Net. Interest income, net, was approximately $9,000 in the
one month endedJanuary 31, 2000 and January 31, 1999, respectively.
Benefit for Income Taxes. Our effective tax benefit rate was 32% and 33% in
the one month ended January 31, 2000 and January 31, 1999, respectively.
24
Quarterly Results of Operations
The following tables present certain unaudited quarterly information for
the quarterly periods in the year ended January 31, 2001 and for the quarterly
periods ended April 30, 2001, July 31, 2001 and October 31, 2001. Previously
reported amounts for the first, second and third quarters of fiscal 2001 have
been restated to give effect to the cumulative change in accounting principle
and the adoption of EITF 00-10, "Accounting for Shipping and Handling Revenues
and Costs." The results for any quarter are not necessarily indicative of
future quarterly results, and we believe that period-to-period comparisons
should not be relied upon as an indication of future performance.
Three Months Ended
---------------------------------------------------------------------
April July April July
30, 31, October 31, January 31, 30, 31, October 31,
2000 2000 2000 2001 2001 2001 2001
------- ------- ----------- ----------- ------- ------- -----------
(in thousands, except per share amounts)
Revenue................. $22,304 $25,356 $25,026 $25,782 $30,156 $27,024 $25,221
Gross profit............ 8,706 9,906 10,760 10,370 11,460 10,751 9,338
Operating expenses...... 8,346 9,426 9,945 12,410 11,028 11,669 11,041
Income (loss) before
cumulative effect of
change in accounting
principle.............. 263 330 512 (1,012) 182 (684) (1,212)
Cumulative effect of
change in accounting
principle net of tax of
$732................... (1,100) -- -- -- -- -- --
Net income (loss)....... (837) 330 512 (1,012) 182 (684) (1,212)
Earnings (loss) per
share--Basic........... (0.04) 0.02 0.02 (0.05) 0.01 (0.03) (0.05)
Earnings (loss) per
share--Diluted......... (0.04) 0.01 0.02 (0.05) 0.01 (0.03) (0.05)
We have experienced significant variations in revenues, expenses and
operating results from quarter to quarter and such variations are likely to
continue. A significant portion of our revenues have been generated from a
limited number of customers and it is difficult to predict the timing of
future orders and shipments to these and other customers. Customers can cancel
or reschedule shipments, and development or production difficulties could
delay shipments. During the quarterly periods outlined above, we experienced
variations in our revenues from quarter to quarter primarily related to the
significant growth of our interactive television products in the broadband
segment and broadcast segment products.
We have also experienced significant variations in our quarterly systems
gross margins. Changes in pricing policies, the product mix, the timing and
significance of new product introductions and product enhancements, and
fluctuations in the number of systems affects manufacturing efficiencies and,
accordingly, gross profits. Quarterly services gross margins have historically
fluctuated significantly because installation and training service revenue
varies by quarter while the related costs are relatively consistent by
quarter.
Operating expenses also vary with the number, timing and significance of
new product and product enhancement introductions by us and our competitors,
increased competition, the gain or loss of significant customers, the hiring
of new personnel and general economic conditions. During the quarterly periods
outlined above, we experienced certain fluctuations in our operating expenses.
During the twelve months ended January 31, 2001, we increased headcount within
our research and development and sales and marketing areas to reflect our
continued investment in future product development and our desire to increase
our interactive television and broadcast revenues. As a result, our expenses
in both of these areas increased during the year. In addition, our selling and
marketing costs fluctuate from quarter to quarter as a result of large
tradeshows that take place in the first and third quarter of the year and
significant promotional costs that are incurred for new product introductions.
All of the above factors are difficult for us to forecast, and these or other
factors may materially adversely effect our business, financial condition and
results of operations for one quarter or a series of quarters. Only a small
portion of our expenses vary with revenues in the short-term and there would
likely be a material adverse effect on our operating results if future
revenues are lower than expectations.
Based upon all of the foregoing, we believe that quarterly revenues and
operating results are likely to vary significantly in the future and that
period-to-period comparisons of our results of operations are not necessarily
meaningful and, therefore, should not be relied upon as indications of future
performance.
25
Liquidity and Capital Resources
We have financed our operations and capital expenditures primarily with the
proceeds of our common stock, borrowings and cash flows generated from
operations. Cash and cash equivalents increased $1.1 million from $6.1 million
at January 31, 2001 to $7.3 million at October 31, 2001. Working capital
increased from approximately $28.8 million at January 31, 2001 to
approximately $37.6 million at October 31, 2001.
Net cash provided by operating activities for the nine months ended October
31, 2001 was approximately $2.0 million and net cash used in operating
activities for the nine months ended October 31, 2000 was $2.0 million. The
net cash provided by operating activities in the nine months ended October 31,
2001 was the result of the net loss adjusted for non-cash expenses including
depreciation and amortization of $6.4 million and the changes in certain
operating assets and liabilities. The significant net changes in assets and
liabilities that provided cash from operations included a decrease in accounts
receivable of $2.8 million and an increase in deferred revenues of
approximately $900,000. These items that generated cash from operations were
offset by a decrease in accounts payable of $1.2 million, a decrease in
customer deposits of $3.0 million and an increase in inventories of
approximately $500,000. We expect that the broadcast segment and the
interactive television products within the broadband segment will continue to
require a significant amount of cash to fund future product development, to
manufacture and deploy customer test and demonstration equipment and to meet
higher revenue levels in both product segments.
Net cash used in investing activities was approximately $8.3 million and
$9.6 million for the nine months ended October 31, 2001 and October 31, 2000,
respectively. Intangible assets increased by $2.7 million as a result of the
successful defense of our patents. Investment activity consisted primarily of
capital expenditures related to capital equipment required to support the
expansion and growth of the business. We had no material capital expenditure
commitments as of October 31, 2001.
Net cash provided by financing activities was approximately $7.4 million
and approximately $16.1 million for the nine months ended October 31, 2001 and
October 31, 2000, respectively. In the nine months ended October 31, 2001, the
cash provided by financing activities included $10.0 million in connection
with the issuance of common stock issued on February 28, 2001, from a private
placement sale of common stock and a warrant to Comcast SC Investment, Inc.
(See Note 10 to the Consolidated Financial Statements) and an additional $5.4
million in borrowings under the line of credit with a bank. During the same
period, cash used in financing activities included approximately $4.0 million
in repayments under our revolving line of credit and $5.0 million in principal
payments under our equipment line of credit and capital lease obligations.
Net cash used in operating activities was approximately $4.9 million for
the twelve months ended January 31, 2001. Net cash provided by operating
activities was approximately $8.6 million for the twelve months ended December
31, 1999. The net cash used in operating activities in the twelve months ended
January 31, 2001 was the result of the net loss adjusted for non-cash expenses
including depreciation and amortization of $4.9 million offset by changes in
certain operating assets and liabilities. The significant net changes in
assets and liabilities that used cash in operations included an increase in
accounts receivable of $10.4 million, an increase in inventories of $5.1
million and an increase in prepaid expenses and other assets of $2.1 million.
The increase in accounts receivable was the result of higher revenues and a
larger international customer base that typically has longer payment cycles.
Inventory levels increased during the period principally as a result of new
product introductions within the interactive television and broadcast product
areas. Increases of inventory levels occurred in each of these product areas
specifically for customer demonstration equipment and procurement commitments
in component inventories with an average order to delivery requirement of
twelve to fifteen weeks. We expect these inventory levels to decrease and then
stabilize as revenues from both these products increase. We expect that the
broadcast segment and the interactive television products within the broadband
segment will continue to require a significant amount of cash to fund future
product development, to manufacture and deploy customer test and demonstration
equipment and to meet higher revenue levels in both product segments. These
items that used cash in operations were partially offset by an increase in
accounts payable of $6.9 million and an increase in deferred revenue of $2.1
million.
26
Net cash used in investing activities was approximately $12.8 million and
$3.1 million for the twelve months ended January 31, 2001 and December 31,
1999, respectively. Investment activity consisted primarily of capital
expenditures related to construction to expand the current manufacturing
facility and the acquisition of computer equipment, office furniture, and
other capital equipment required to support the expansion and growth of the
business.
Net cash provided by financing activities was approximately $21.1 million
and $364,000 for the twelve months ended January 31, 2001 and December 31,
1999, respectively. In the twelve months ended January 31, 2001, the cash
provided by financing included $12.8 million received in connection with the
issuance of common stock, $10 million of which was issued to Microsoft
Corporation, and $10.0 million in borrowings under the lines of credit and our
construction loan. Microsoft entered into an agreement with us to collaborate
on extending Microsoft Windows Media Technologies from Broadband Internet
delivery to cable and broadcast television systems. Concurrent with this
agreement, Microsoft purchased 277,162 shares of our common stock for
$10 million at 8% below the average closing price of our common stock over the
ten trading days ending one trading day prior to the date of the relevant
commercial milestones. Microsoft has agreed to purchase additional shares of
our common stock based upon the achievement of mutually agreed upon
development milestones including the development of software that meets
specific streaming performance levels and the commercial release of an
enhanced version of the software that will be used with Microsoft's Next
Generation Media Server. During the same period, cash used in financing
activities included approximately $1.7 million in principal payments under our
equipment line of credit and capital lease obligations.
During the one month periods ended January 31, 2000 and January 31, 1999,
we used cash in operations of $8.3 million and $1.3 million, respectively.
In October 2001, we entered into a $10.0 million revolving line of credit
with a bank that expires in October 2003. Loans made under this revolving line
of credit will bear interest at a rate per annum equal to the bank's prime
rate, 5.50% at October 31, 2001. As of October 31, 2001, we have borrowings of
$5.4 million under this revolving line of credit. Borrowings under this line
of credit are collateralized by substantially all of our assets. The loan
agreement requires that we provide the bank with certain periodic financial
reports and comply with certain financial ratios including a minimum level of
earnings before interest, taxes and depreciation and amortization on a
trailing twelve month basis. As of October 31, 2001, we were in compliance
with these financial covenants. The line of credit replaces our prior
revolving line of credit and equipment line with a different bank. In
conjunction with entering into the new bank line, we repaid to our prior
lender all outstanding borrowings under the equipment line of financing in an
amount of $3.4 million.
In October 2000, we entered into an agreement with a bank to finance $1.2
million of the construction costs related to the purchase and renovation of a
manufacturing mill in New Hampshire that we previously purchased in February
2000. During the construction period, interest accrued and was paid at a per
annum rate of 8.875%. Upon occupancy of the building in November 2000, the
loan converted into two promissory notes whereby we will pay principal and
interest based upon a fixed interest rate per annum over a five and ten year
period, respectively, of 8.875% at October 31, 2001. Borrowings under the loan
are secured by the land and buildings of the renovated mill. The loan
agreement requires that we provide the bank with certain periodic financial
reports and comply with certain financial ratios. At October 31, 2001, we were
in compliance with all covenants. As of October 31, 2001, borrowings
outstanding under the loan were $1.1 million.
It is typical for us to experience fluctuations in our monthly operating
results primarily due to the timing of receiving customer orders and the
related shipment of these customer orders. As a result of these monthly
fluctuations, we may experience an increase in our inventories as a result of
procurement of both short and long lead components for anticipated orders for
both our product segments, a decrease in our accounts payable balance
primarily due to the timing of payments for materials purchased for prior
month shipments, a decrease in accounts receivable amounts as a result of
customer payments without corresponding customer shipments and a resulting
decrease in cash and cash equivalents.
We believe that existing funds together with available borrowings under the
revolving line of credit and the proceeds from this offering are adequate to
satisfy our working capital and capital expenditure requirements for the
foreseeable future.
27
Effects of Inflation
Our management believes that financial results have not been significantly
impacted by inflation and price changes.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interest method.
We believe the adoption of SFAS 141 will not have a material impact on our
current financial position and results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is effective for us on February 1, 2002. SFAS 142
requires, among other things, the discontinuance of goodwill amortization and
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, and reclassification of certain intangibles out of
previously reported goodwill. We believe the adoption of SFAS 142 will not
have a material impact on our current financial position and results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." SFAS 143
provides the accounting requirements for retirement obligations associated
with tangible long-lived assets. SFAS 143 is effective for financial
statements for fiscal years beginning after June 15, 2002. We believe the
adoption of SFAS 143 will not have a material impact on our current financial
position and results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 requires one method of
accounting for long-lived assets disposed of by sale. SFAS 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001. We believe the adoption of SFAS 144 will not have a material impact on
our current financial position and results of operations.
Quantitative and Qualitative Disclosures About Market Risk
We face 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 our financial results. Our primary exposure has been related
to local currency revenue and operating expenses in Europe and Asia.
Historically, we have not hedged specific currency exposures as gains and
losses on foreign currency transactions have not been material to date. At
January 31, 2001 and October 31, 2001, we had approximately $10.1 million and
$6.5 million outstanding related to variable rate U.S. dollar denominated
debt. The carrying value of these short-term borrowings approximates fair
value due to the short maturities of these instruments. Assuming a
hypothetical 10% adverse change in the interest rate, interest expense on
these short-term borrowings would increase by approximately $95,000 for the
twelve month period ended January 31, 2001 and $36,000 for the nine month
period ended October 31, 2001.
The carrying amounts reflected in the consolidated balance sheet of cash
and cash equivalents, trade receivables, and trade payables approximates fair
value at October 31, 2001 due to the short maturities of these instruments.
We maintain investment portfolio holdings of various issuers, types, and
maturities. Our cash and marketable securities include cash equivalents, which
we consider 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 October 31, 2001, a sharp rise in interest rates should
not have a material adverse impact on the fair value of our investment
portfolio. As a result, we do not currently hedge these interest rate
exposures.
28
BUSINESS
We are a leading developer, manufacturer and marketer of systems, known as
video storage servers, that automate the management and distribution of long-
form video streams, such as movies or other feature presentations, and short-
form video streams, such as advertisements. We sell our products and services
to cable system operators, including Adelphia, AOL Time Warner, AT&T,
Cablevision, Charter Communications, Comcast and Cox Communications;
telecommunications companies, including Qwest; and broadcast television
companies, including The Ackerley Group, Echostar, Group W Broadcasting and
United Pan-Europe Corporation. We believe that our digital video systems
enable our customers to differentiate their service offerings to reduce
subscriber turnover and access new revenue generating opportunities from
subscribers, advertisers and electronic commerce initiatives. Using our
systems, we believe our customers can increase their revenues by offering
additional services such as video-on-demand movies and subscription video-on-
demand programming, both of which allow subscribers to watch content at any
time with pause, rewind and fast forward features. Our systems also allow our
customers to insert targeted advertising segments, known as spot advertising,
into their local cable programming. In addition, our systems enable cable
system operators to offer other interactive television services that allow
subscribers to customize and/or dynamically interact with their television
viewing experience in a manner similar to that experienced with the use of a
personal computer.
Our digital video systems provide enhanced storage and retrieval
capabilities, multi-channel content delivery and highly automated information
and order processing. These technologies provide a foundation for products
that can be deployed in next generation systems capable of increased levels of
subscriber interactivity. Our technologies and systems mitigate the effects of
electronic signal dispersion and offer higher image quality and greater
reliability than analog tape based systems. We have received several awards
for technological excellence, including an Emmy Award in 2001 for our patented
MediaCluster technology.
Our broadband or high bandwidth network segment includes our ITV System
which digitally manages, stores and distributes digital video, allowing cable
system operators and telecommunications companies to offer video-on-demand and
other interactive television services, including interactive electronic
advertising and retrieval of Internet content through the television. Our ITV
System can be deployed in either a residential environment or a hotel
environment to deliver a wide variety of video services. The ITV System
delivers video-on-demand and other guest services, Internet access and
personal computer games in the hotel environment, and our movie system
provides long-form video storage and delivery for the pay-per-view movie
markets. Since 2000, we have been selected to supply our ITV System in 22
domestic and international commercial deployments of video-on-demand systems,
including deployments by five of the top seven cable system operators in the
United States. We test and integrate our ITV System with the digital set top
boxes, or hardware devices used to receive and unscramble television signals,
of such manufacturers as Scientific Atlanta, Motorola, Pace, Pioneer and Sony
Corporation.
In addition to our ITV System, our broadband business segment includes our
SPOT System, which is a system for the transmission of video content, known as
a video insertion system, for digital advertisements and other short-form
video. Based on currently available industry sources and our internal data, we
believe our SPOT System is the leading video insertion system in the United
States in the multi-channel television market for digital advertisements and
other short-form video. Our system converts analog video forms such as
advertisements and news updates to digital video forms, stores the digital
video forms in remote or local storage devices known as digital libraries, and
inserts them automatically into television network streams. The SPOT System
provides high accuracy relative to the volume of video being played and high
video image quality, and permits geographic and demographic specificity of
advertisements. We believe our SPOT System reduces operating costs by
automating the management and distribution process. Our Advertising Management
Software product operates with our SPOT System to automate and simplify
complex sales, scheduling and billing processes for the multi-channel
television market. A majority of our customers for these products consist of
major cable system operators and telecommunications companies in the United
States. To date we have sold SPOT Systems to support over 30,000 channels
throughout the world. We believe that the capabilities of our SPOT System will
position us well as the
29
opportunities to distribute advertisements into a wide variety of digital
media platforms and the market for interactive advertising continues to
increase.
Our broadcast network business segment includes our Broadcast MediaCluster
System, which allows broadcast television companies to directly transmit
content, such as commercials and other programming for broadcast television
companies, to their viewers through either single, multi-channel or satellite
based delivery systems. We believe that our Broadcast MediaCluster System will
eliminate the need for analog tape libraries and provide broadcasters with the
automated storage and playback features that they require. Since 1998, we have
installed our Broadcast MediaCluster System at customer locations including
network affiliates and multi-channel operations in the United States, Europe
and the Far East.
Industry Background
Cable System Operators and Telecommunications Companies
The number of cable subscribers has been estimated at 80 million in the
United States and 330 million worldwide. Over the last several years, cable
system operators have spent billions of dollars to upgrade their networks from
analog to digital, yielding a significant increase in available bandwidth,
channel capacity and two-way capability. We believe this investment by the
cable system operators reflects their commitment to video-on-demand,
advertising insertion, Internet access and other value added services, and
differentiates cable system operators from competing service providers such as
satellite delivery systems.
Video-on-demand represents a new opportunity for cable system operators.
The increased channel capacity through the installation of fiber optic cables
has provided many cable system operators with the capacity to offer video-on-
demand services to residential cable subscribers. In 2001, cable system
operators and telecommunications companies began the deployment of residential
video-on-demand, which allows subscribers to watch video programming at any
time with pause, rewind and fast forward capabilities. Six of the seven
largest cable system operators have begun deploying video-on-demand services
in one or more residential markets. The first application offered by cable
system operators has been movies on demand. Other applications in development
include subscription video-on-demand, news, sports and weather on demand,
personal video recording, targeted advertising for video-on-demand and music
video and audio on demand.
In addition, because cable television programming is sent over broadband,
or high bandwidth, networks, cable system operators have the opportunity to
segment and target their programming to viewers in selected geographies. We
believe that the ability of cable system operators to target viewers will
extend to personal targeting of advertisements to specific individuals. In
addition, continuing growth in cable television's multiple specialized
programming networks, such as CNN, MTV and ESPN and other networks such as
Black Entertainment Television, the Discovery Channel and Nickelodeon, allows
advertisers to target viewers demographically. Despite this advantage over
television broadcasters, cable system operators historically have not realized
advertising revenues in proportion to their share of television viewers.
According to industry sources, in 2001, 35% of all television viewers were
watching ad-supported cable networks, yet cable television advertising revenue
accounted for only 23% of the total television advertising revenue. As cable
system operators gain the ability to target individual customers with
advertisements, we believe the amount of revenue derived by cable system
operators from advertising will increase.
Increased demand for video and audio content over the Internet will also
require a substantial increase in storage capacity and bandwidth over time. We
believe that cable system operators and telecommunications companies will play
an integral role in providing these broadband Internet applications. We also
believe that in order to offer high quality video applications over the
Internet, cable system operators and telecommunications companies will need
storage and distribution products capable of complex management and scheduling
of video data streams.
30
Television Broadcasters
Both domestically and internationally, broadcast stations face many of the
same technological issues as cable system operators. Additionally, television
broadcasters rely on advertising for nearly all of their revenue and require
high accuracy and image quality relative to the volume of video being played.
The majority of television broadcasters utilize tape-based systems with
robotic libraries, which are cumbersome and require high levels of maintenance
and manual intervention to ensure that the needed performance requirements are
met. Also, the videotapes in these systems need to be replaced frequently due
to repeated use.
Many television broadcasters are using digital bandwidth to originate
multiple program streams. As this application further develops, television
broadcasters will require more video storage and delivery systems that can
effectively manage and deliver these multiple television signals. In addition,
we believe that television broadcasters will continue to automate their entire
programming to reduce overall operating costs and improve reliability.
The SeaChange Solution
We are a leading developer, manufacturer and marketer of systems, known as
video storage servers, that automate the management and distribution of long-
form video streams, such as movies or other feature presentations, and short-
form video streams, such as advertisements. We market our products and
services to cable system operators, telecommunications companies and broadcast
television companies. Our solutions are based on the following four core areas
of functionality:
. storage and retrieval of video content to and from digital libraries;
. automated distribution of video streams between digital libraries by
means of local and wide area data networks;
. delivery of video streams over single and multiple channels; and
. management of video sales, scheduling, billing and execution of related
business transactions.
We use these core areas of functionality to provide solutions to a number
of commercial markets and are focused on providing solutions to meet the
opportunities demanded by next generation systems with increased levels of
subscriber interactivity. Our systems are designed to provide a consistent set
of features and benefits, including:
. Viewer Targeting. Our digital video products enable cable system
operators to efficiently target viewers in specific demographic or
geographic groups. We believe this allows operators to capitalize on new
revenue generating opportunities from subscribers and advertisers. Using
our ITV System, cable system operators are able to offer interactive
television services to individual residences or hotel rooms and, with
our SPOT System, operators can better target digital advertisement
campaigns.
. Scalability. Our products are scalable in both video storage and video
output stream capacity. Our proprietary technology, including our
patented single-copy storage system, allows a single copy of content to
be streamed through all available outputs without the need for
duplication of content or re-routing between servers on the system. Our
storage technology and distributed architecture results in a highly
scalable system that reduces operational complexity and yields storage
and bandwidth efficiencies as the amount of available content and the
number of subscribers increase. Our products are scalable to the needs
of our customers whether operating in a single channel system
concentrated in one specific zone or a system with hundreds of channels
serving multiple markets and a large number of users within each market.
31
. Interoperability. Our products have been designed to be compatible with
a wide range of hardware systems and software applications used by cable
system operators to deliver their digital video offerings. These include
set top boxes from Motorola, Scientific Atlanta, Sony, Pioneer and Pace,
a variety of programming guides including TV Guide, Passport and
Worldgate, billing systems, service delivery systems and interactive
application control software.
. Automation. Our automated system allows cable system operators to
distribute and manage content without significant human intervention. We
believe this automation also allows our customers to minimize operating
personnel and equipment requirements resulting in cost savings and lower
ongoing operating costs.
. Reliability. Through the use of our proprietary storage technology and
application software and low-cost standard computer industry components,
our products are designed to be fault resilient, with no single point of
failure, providing the high reliability required for television and
video-on-demand operations.
Strategy
Our objective is to be the leader in the market for the storage, management
and distribution of professional quality digital video for the television
marketplace. The key elements of our strategy are to:
. Maintain and Extend Long-term Customer Relationships. We focus our
product development, marketing and direct sales efforts on maintaining
and extending long-term customer relationships with cable system
operators, telecommunications companies and television broadcasters in
the United States and internationally. We have formed important
relationships with customers by initially providing solutions such as
advertisement and other short-form video insertion, and we have extended
these relationships to include video-on-demand systems and other
interactive television services. We believe that the fundamental shift
from broadcast to on-demand video and the growing emphasis on
interactive technologies will continue to present opportunities for us
to develop, market and support our solutions to both our existing
customer base and to customers in additional markets.
. Offer Integrated Solutions. Our customers operate complex networks that
require the delivery and management of video programming across multiple
channels and target zones. We believe that cable system operators desire
solutions that can integrate all steps of digital video delivery, from
scheduling to post-air verification and billing, and that can
interoperate with existing and emerging third-party equipment and
software. To address these needs, we intend to continue to provide and
further develop, internally and with our partners, integrated
applications and support services for our customers. We believe that
providing complete integrated solutions has been a significant factor in
our success and will be an increasingly important competitive advantage.
. Establish and Maintain Technological Leadership. We believe our
competitive position is dependent in a large part on the features and
performance of our integrated systems. As a result, we focus our
research and development efforts on introducing systems with improved
hardware and software capabilities. We have been granted a patent for
our single-copy storage technology and have other patents pending. We
have received several awards for technological excellence, including an
Emmy Award in 2001 for our patented MediaCluster storage technology.
. Provide Superior Customer Service and Support. Our products operate in
customer environments where continuous operation is critical. As a
result, we believe that providing a high level of service and support
give us a competitive advantage and is a differentiating factor in
developing and maintaining key customer relationships. Our in-depth
industry and application knowledge allows us to better understand the
service needs of our customers. As of October 31, 2001, over 35% of our
employees were dedicated to customer service and support, including
project design and implementation, installation and training. In
addition, using remote diagnostic and communications
32
features embedded in our products, the service organization has the
ability to monitor the performance of customer installations and, in
most cases, rectify problems remotely. Customers have access to service
personnel via 24-hour, seven-day a week telephone support.
Products
Broadband Products
SeaChange ITV System
We have developed and are deploying a video-on-demand system for sale to
cable television companies and other telecommunications companies. Our ITV
System consists of:
. our video storage servers which reside at headends or nodes in a cable
system and are used to play out or stream videos as requested;
. our Command Center control software to manage and control the system;
. our advertising systems hardware and software; and
. interfaces to digital headend modulators, control systems and subscriber
management systems.
Our ITV System currently allows our customers to offer the following
interactive services:
. Video-on-Demand. This interactive service allows residential users and
hotel guests to review lists of available movies, order individual
movies and view them in real time. Using this service, subscribers gain
full control over the video stream, including pause, fast-forward and
rewind functions. Billing is typically done through the subscriber's
normal cable bill, and movie choices are refreshed on a regular basis.
. Subscription Video-on-Demand. This interactive service provides premium
channel offerings, such as those offered by HBO, Showtime or Cinemax, in
an on-demand manner, as well as on a scheduled basis. Similar to our
video-on-demand interactive service described above, our subscription
video-on-demand service allows subscribers to review lists of available
premium channel content, order individual programs and watch them at
home with full video cassette recorder-like control over the video
stream. As in video-on-demand, billing flows through the normal cable
bill.
In addition, our ITV System is designed to support the following
interactive services that are currently being developed by cable system
operators:
. Personal Time Television. This interactive service will provide users
with some level of control over live television, allowing users to gain
access to up to date program information, full video cassette recorder-
like control over the video stream, and the ability to watch one program
while recording another. This personal time television service, using
our servers and software located in cable company headends, will provide
functionality competitive with that provided by personal video
recorders, such as TiVo or Ultimate TV, to record television programs
for later viewing. The personal time television interactive service will
allow cable companies to offer time shifting and live television control
to their subscribers without the customers having to purchase a video
cassette recorder or personal video recorder.
. Targeted and Interactive Advertising. This interactive service will
support interactive advertising, or advertising where the subscriber
controls the path and delivery of an advertisement, in a personal time
television interactive service and in other forms of programming that
result in a dedicated communications link between that subscriber's set
top box and the video-on-demand system itself. This service will be
competitive with those provided by direct marketing and direct mail
firms and may allow purchases over the television, such as one might do
with a web browser over the Internet.
33
. Personalized News, Sports and Weather. This interactive service will
allow individual clips of video content to be aggregated into larger
segments, or even into programs. This service will allow cable system
operators to offer a service where information programs, such as news,
sports or weather, are customized to reflect a subscriber's personal
needs. We believe this business will allow cable system operators to
gain revenue from subscription fees and to provide a feature that cannot
be easily duplicated by satellite or broadcast television systems,
resulting in increased customer loyalty to the cable company.
The delivery of these current and anticipated interactive services utilizes
both our hardware and software through the following steps:
. Customer Selection. When a customer selects from their set top box a
video title to view, a message is transmitted from the set top box to
our video server system located at the headend of the cable system.
. Video Selection Execution. Our video server system receives the video
title request and retrieves the selection from the storage disk, which
is a compressed digital video file. Our software determines if the title
has space for advertising, and if so, retrieves the commercial content
files as well. The video files are loaded on the video server, which
then executes the files.
. Transmission to the Customer. A network management device assesses the
best route along the operator's network to deliver the video selection.
The video file is delivered to a modulator, which formats the video file
so that it can be delivered across the broadband network. The video file
is then delivered back to the customer's set top box.
. Customer Viewing. The set top box receives the video file and decrypts
the signal and delivers it to the television for viewing. The software
in the set top box provides the subscriber with the functionality of a
traditional video cassette recorder, allowing the customer to pause,
fast-forward and rewind the video file. Some set top boxes have storage
capabilities that enable the customer to store the video file for an
extended period of time.
. Billing. Content consumption records are kept by our software, and on a
regular basis, records of the movies, programs and commercials viewed
are exported to appropriate billing systems.
SeaChange SPOT System
Our SPOT System automates the complex process of advertisement and other
video insertion across multiple channels and geographic zones for cable system
operators and telecommunications companies. Through our embedded proprietary
software, our SPOT System allows cable system operators to insert local and
regional advertisements and other short-form video streams into the time
allocated for these video streams by cable television networks such as CNN,
MTV, ESPN, Black Entertainment Television, the Discovery Channel and
Nickelodeon. Our SPOT System is also capable of inserting advertising into
digital cable channels and delivering targeted advertising, as well as
advertising with interactive links to content on the ITV System, as well as
other interactive advertising systems.
Our SPOT System is an integrated solution composed of software
applications, hardware platforms, data networks and easy to use graphical
interfaces. Our SPOT System is designed to be installed at local cable
transmission sites, known as headends, and advertising sales business offices.
Our video insertion process consists of six steps:
. Encoding. The process begins with our encoding software which in real
time transforms and compresses analog to digital short-and long-form
video.
34
. Storage. Our SPOT System organizes, manages and stores these video
streams in a disk-based video library capable of storing thousands of
spots.
. Scheduling. Our advertising management software coordinates with the
traffic and billing application to determine the designated time slot,
channel and geographic zone for each video stream.
. Distribution. Our strategic digital video software then copies the video
files from the master video library and distributes them over the
operator's data network to appropriate headends, where they are stored
in video servers for future play.
. Insertion. Following a network cue, our video switch module
automatically inserts the video stream into the network feed (initiating
the analog conversion, if necessary), where they are then seen by
television viewers.
. Verification. After the video streams run, our proprietary software and
hardware verifies the content, accuracy, timing and placement of these
video streams to facilitate proper customer billing.
SeaChange Advertising Management Software
Our Advertising Management Software product, referred to in the past as our
Traffic and Billing Software product, is designed to permit cable system
operators to manage advertising sales, scheduling, packaging and billing
operations. This product provides management performance reports, inventory
management and optimization, interactive linkage construction, billing and
accounts receivable management. Our Advertising Management Software product
works with our SPOT System, our ITV System and with many other broadcast
automation systems.
Broadcast Products
SeaChange Broadcast MediaCluster System
Our Broadcast MediaCluster System is currently composed of three to seven
individual video servers arranged in a cluster acting as one system. This
system is designed to provide high quality, digital based video storage and
playback for use with automation systems in broadcast television stations.
This product is intended to replace on-air tape decks used to store and play
back advertising, movies and other programming from video tape cart systems
and, in some cases, to replace the cart systems themselves. Our Broadcast
MediaCluster System is designed for customers both in larger broadcast
television markets, which use station automation systems, and in smaller
markets, which use control software included in the system.
As with the ITV System in the broadband segment, our Broadcast MediaCluster
System is designed to simultaneously record, encode, store to a disk and play
video content using compression and decompression hardware. This product is
designed to seamlessly integrate into television broadcasters' current tape-
based operations and meet the high performance requirements of television
broadcasters. Our Broadcast MediaCluster System has features that enable the
broadcaster to have end to end functionality and reliability, including one
feature that enables broadcasters to schedule its programming for a week of
television content.
Customer Service and Support
We install, maintain and support our products in North America, Asia, South
America and Europe. We offer basic and advanced formal on-site training for
customer employees. We currently provide installation, maintenance and support
to international customers and also provide movie content in conjunction with
sales of our ITV System to hotels. We offer technical support to customers,
agents and distributors on a 24-hour, seven-day a week basis. Our systems
sales always include at least one year of free maintenance.
Customers
We currently sell our products primarily to cable system operators,
broadcast and telecommunications companies.
35
Our customer base is highly concentrated among a limited number of large
customers, primarily due to the fact that the cable, movie, broadcast, and
telecommunications industries in the United States are dominated by a limited
number of large companies. A significant portion of our revenues in any given
fiscal period have been derived from substantial orders placed by these large
organizations. In the year ended December 31, 1999, the year ended January 31,
2001, and the nine months ended October 31, 2001 revenues from our five
largest customers represented approximately 47%, 44% and 48%, respectively, of
our total revenues. Customers accounting for more than 10% of total revenues
consisted of AT&T Media Services (15%) and Time Warner (10%) in 1999; AT&T
Media Services (16%) and Time Warner (11%) in the one month ended January 31,
2000; Time Warner (12%) and Cox Communications (10%) in the twelve months
ended January 31, 2001; and Comcast (20%) and Time Warner (17%) in the nine
months ended October 31, 2001. We expect that we will continue to be dependent
upon a limited number of customers for a significant portion of our revenues
in future periods. As a result of this customer concentration, our business,
financial condition and results of operations could be materially adversely
affected by the failure of anticipated orders to materialize and by deferrals
or cancellations of orders as a result of changes in customer requirements or
new product announcements or introductions. In addition, the concentration of
customers may make variations in revenue, expenses and operating results due
to seasonality of orders more pronounced.
We believe that our backlog at any particular time is not meaningful as an
indicator of our future level of sales for any particular period. Because of
the nature of our products and our use of standard components, substantially
all of the backlog at the end of a quarter can be manufactured by us and is
intended to be shipped by the end of the following quarter. However, because
of the requirements of particular customers these backlogs may not be shipped
or, if shipped, the related revenues may not be recognized in that quarter.
Therefore, there is no direct correlation between the backlog at the end of
any quarter and our total sales for the following quarter or other periods.
Selling and Marketing
We sell and market our products in the United States primarily through a
direct field sales organization and internationally through direct sales and
independent agents and distributors, complemented by a coordinated marketing
effort of our marketing group. Direct sales activities in the United States
are conducted from our Massachusetts headquarters and seven field offices. In
October 1996, we entered into an exclusive sales and marketing services
agreement with a private Italian company to provide these services throughout
continental Europe. We also market certain of our products to systems
integrators and value-added resellers.
In light of the complexity of our digital video products, we primarily
employ a consultative direct sales process. Working closely with customers to
understand and define their needs enables us to obtain better information
regarding market requirements, enhance our expertise in our customers'
industries, and more effectively and precisely convey to customers how our
solutions address the customer's specific needs. In addition to the direct
sales process, customer references and visits by potential customers to sites
where our products are in place are often critical in the sales process.
We use several marketing programs focused on our targeted markets to
support the sale and distribution of our products. We use exhibitions at a
limited number of prominent industry trade shows and conferences and
presentations at technology seminars to promote awareness of us and our
products. We also publish technical articles in trade and technical journals
and promotional product literature.
Research and Product Development
Our management believes that our success will depend to a substantial
degree upon our ability to develop and introduce in a timely fashion new
products and enhancements to our existing products that meet changing customer
requirements in our current and new markets. We have in the past made, and
intend to continue to make, substantial investments in product and
technological development. Through our direct sales process we monitor
changing customer needs, changes in the marketplace and emerging industry
standards, and are therefore better able to focus our research and development
efforts to address these evolving industry requirements.
36
Our research and development expenditures totaled approximately $16.3
million, $20.3 and $17.6 million for the year ended December 31, 1999, the
year ended January 31, 2001, and the nine months ended October 31, 2001,
respectively. At October 31, 2001, 151 employees were engaged in research and
product development. We believe that the experience of our product development
personnel is an important factor in our success. We perform our research and
product development activities at our headquarters and in offices in
Greenville, New Hampshire; Atlanta, Georgia; and Fort Washington,
Pennsylvania. We have historically expensed our direct research and
development costs as incurred.
In December 1999, we enhanced our research and development capabilities
through the acquisition of Digital Video Arts, Ltd., a developer of custom
software products specializing in digital video and interactive television.
Manufacturing
Our manufacturing operations are located at facilities in Maynard,
Massachusetts and in Greenville, New Hampshire. The manufacturing operations
in Massachusetts consist primarily of component and subassembly procurement,
system integration and final assembly, testing and quality control of the
complete systems. Our operations in New Hampshire consist primarily of
component and subassembly procurement, video server integration and final
assembly, testing and quality control of the video servers. We rely on
independent contractors to manufacture components and subassemblies to our
specifications. Each of our products undergoes testing and quality inspection
at the final assembly stage.
Competition
The markets in which we compete are characterized by intense competition,
with a large number of suppliers providing different types of products to
different segments of the markets. In new markets for our products, we compete
principally based on price. In markets in which we have an established
presence, we compete principally on the basis of the breadth of our products'
features and benefits, including the flexibility, scalability, professional
quality, ease of use, reliability and cost effectiveness of our products, and
our reputation and the depth of our expertise, customer service and support.
While we believe that we currently compete favorably overall with respect to
these factors and that our ability to provide solutions to manage, store and
distribute digital video differentiates us from our competitors, in the future
we may not be able to continue to compete successfully with respect to these
factors.
In the market for long-form video products including video-on-demand, we
compete with various companies offering video server platforms such as
Concurrent Computer Corp., nCube and Diva Systems Corp. In the television
broadcast market, we compete against Grass Valley Group, Inc., Pinnacle
Systems, Inc., Sony Corporation and Leitch Incorporated. In the digital
advertisement insertion market, we generally compete only with nCube (formerly
SkyConnect, Inc.). In addition, our Advertising Management Software competes
against certain products of Columbine Cable Systems, Inc., Cable Computerized
Management Systems, Inc., a subsidiary of Indenet Inc., CAM Systems, Inc., a
subsidiary of Starnet Inc., LAN International USA, Inc., Visiontel, Inc. and
various suppliers of sales, scheduling and billing software products. We
expect the competition in each of these markets to intensify in the future.
Many of our current and prospective competitors have significantly greater
financial, technical, manufacturing, sales, marketing and other resources than
us. As a result, these competitors may be able to devote greater resources to
the development, promotion, sale and support of their products than us.
Moreover, these companies may introduce additional products that are
competitive with ours or enter into strategic relationships to offer complete
solutions, and in the future our products may not be able to compete
effectively with these products.
37
Proprietary Rights
Our success and our ability to compete is dependent, in part, upon our
proprietary rights. We have been granted one U.S. patent for our MediaCluster
technology and have filed a foreign patent application for the same
technology. We also have other patent applications in process for extensions
of our existing technology and for other technologies. In addition, we rely on
a combination of contractual rights, trademark laws, trade secrets and
copyright laws to establish and protect our proprietary rights in our
products. It is possible that in the future not all of these patents will be
issued or that, if issued, the validity of these patents would be upheld. It
is also possible that the steps taken by us to protect our intellectual
property will be inadequate to prevent misappropriation of our technology or
that our competitors will independently develop technologies that are
substantially equivalent or superior to our technology. In addition, the laws
of some foreign countries in which our products are or may be distributed do
not protect our proprietary rights to the same extent as do the laws of the
United States.
Employees
As of October 31, 2001, we employed 440 persons, including 151 in research
and development, 153 in customer service and support, 43 in selling and
marketing, 60 in manufacturing and 33 in finance and administration. We
believe that our relations with our employees are good.
Facilities
Our corporate headquarters, which is also our principal administrative,
selling, marketing, customer service and support and product development
facility, is located in Maynard, Massachusetts and consists of approximately
105,000 square feet under a lease which expires on March 31, 2005 with annual
base rent of $610,000. We purchased approximately 24,000 square feet of office
and manufacturing space in Greenville, New Hampshire on February 15, 2000 for
$280,000. We also lease two facilities totaling approximately 13,000 square
feet in Greenville, New Hampshire that are used for the development and final
assembly of our video servers. In connection with the acquisition in December
1999 of Digital Video Arts, we entered into a lease for approximately 8,000
square feet of office space in Fort Washington, Pennsylvania, which is
primarily used for the development of custom software products for companies
specializing in digital video and interactive television. We also lease small
research and development and/or sales and support offices in Atlanta, Georgia,
San Francisco, California, Denver, Colorado, St. Louis, Missouri, Reno,
Nevada, Valbonne, France, and Singapore.
Legal Proceedings
On June 13, 2000, we filed in the United States District Court for the
District of Delaware a lawsuit against one of our competitors, nCube Corp.,
whereby we alleged that nCube's MediaCube-4 product infringed a patent held by
us (Patent No. 5,862,312) relating to our MediaCluster technology. In
instituting the claim, we sought both a permanent injunction and damages in an
unspecified amount. nCube made a counterclaim against us that the patent held
by us was invalid and that nCube's MediaCube-4 product did not infringe our
patent. On September 6, 2000, nCube conceded that, based on a claim
construction ruling issued by the District Court on August 2000, nCube's
MediaCube-4 product infringed our patent. On September 25, 2000, a jury upheld
the validity of our patent. nCube has filed motions challenging both the
jury's verdict and the District Court's claim construction ruling. The
District Court has yet to rule on nCube's motions. At this time we are
awaiting the court's decision regarding a permanent injunction. Damages will
be determined in future proceedings.
On January 8, 2001, nCube Corp. filed a complaint against us in the United
States District Court for the District of Delaware alleging that our use of
our MediaCluster, MediaExpress and Media Server technology each infringe a
patent held by nCube (Patent No. 5,805,804). In instituting the claim, nCube
has sought both an injunction and monetary damages in an unspecified amount.
We responded on January 26, 2001, denying the claim of infringement. We also
asserted a counterclaim seeking a declaration from the District Court that
U.S. Patent No. 5,805,804 is invalid and not infringed. Currently, discovery
on this claim is scheduled to be completed in December 2001, following which
will be a claim construction hearing.
38
On June 14, 1999, we filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure our business and reputation in the marketplace.
The complaint further alleges that Mr. Putterman and Lathrop Investment
Management, Inc. defamed us through false postings on an Internet message
board. The complaint seeks unspecified amounts of compensatory and punitive
damages. On June 14, 2000, Concurrent filed a counterclaim under seal against
us seeking unspecified damages. On July 28, 2000, Concurrent filed a motion
for summary judgment on the claim of civil conspiracy and on January 4, 2001,
the trial court entered an order granting summary judgment for Concurrent on
that claim. We immediately requested reconsideration of this order or, in the
alternative, recertification for immediate appeal. On June 12, 2001, the trial
court denied the motion for reconsideration but made findings which permitted
an immediate appeal and on July 11, 2001 we filed an appeal. The motions
relating to these claims and counterclaims are currently pending and no trial
date has been set.
We cannot be certain of the outcome of the foregoing litigation, but do
plan to oppose allegations against us and assert our claims against other
parties vigorously. In addition, as these claims are subject to additional
discovery and certain claims for damages are as yet unspecified, we are unable
to estimate the impact to our business, financial condition and results of
operations or cash flows.
39
MANAGEMENT
The following table sets forth for each of our directors, and our executive
officers, their ages and the positions currently held by each such person with
us:
Name Age Position
---- --- --------
William C. Styslinger, III..... 55 President, Chief Executive Officer,
Chairman of the Board and Director
William L. Fiedler............. 57 Chief Financial Officer, Treasurer,
Secretary and Vice President, Finance and
Administration
Scott Blais.................... 43 Vice President, Customer Services
Jeffrey M. Boone............... 37 Vice President, Software Engineering
Branko J. Gerovac.............. 51 Vice President, Research
Ira Goldfarb................... 44 Vice President, Worldwide Sales
Bruce E. Mann.................. 53 Vice President, Network Storage
Engineering
Martin R. Hoffmann(1)(2)....... 69 Director
Thomas F. Olson(1)(2).......... 53 Director
Carmine Vona(1)(2)............. 63 Director
- --------
(1) Member of Compensation and Option Committee.
(2) Member of Audit Committee.
Directors
William C. Styslinger, III, has served as our President, Chief Executive
Officer and a Director since our inception in July 1993 and as Chairman of the
Board since January 1995. Prior to our formation in 1993, Mr. Styslinger was
employed at Digital Equipment Corporation since March 1978, most recently as
manager of the Cable Television Business Unit from October 1991 to May 1993.
Mr. Styslinger is a member of the Board of Directors of Omtool, Inc., a
provider of enterprise client/server facsimile software solutions.
Martin R. Hoffmann has served as one of our Directors since January 1995.
Mr. Hoffmann currently engages in consulting activities and is pursuing pro
bono opportunities. Mr. Hoffmann served as Of Counsel to the Washington D.C.
office of Skadden, Arps, Slate, Meagher & Flom LLP from January 1996 until
July 2000. From April 1995 to January 1996, Mr. Hoffmann maintained a law
practice and business consulting practice. He was a Visiting Senior Fellow at
the Center for Policy, Industry and Industrial Development at Massachusetts
Institute of Technology from May 1993 to April 1995, prior to which, from
April 1989, he served as Vice President and General Counsel for Digital
Equipment Corporation. Mr. Hoffmann is a member of the Board of Directors of
Castle Energy Corporation, an oil and gas exploration and production company,
and Chairman of the Board of Mitretek Systems, a non-profit technology and
services company.
Thomas F. Olson has served as one of our Directors since May 2001. Mr.
Olson has been Chief Executive Officer of National Cable Communications, a
company specializing in cable television advertising time sales since January
1999. From January 1995 to May 1998, Mr. Olson was Managing Partner of
National Cable Communications and Chief Executive Officer of Katz Media Group,
a radio, broadcast television and cable television national sales
representation firm. Mr. Olson was with Katz Media Group for 23 years.
Carmine Vona has served as one of our Directors since January 1995. Mr.
Vona has been President and Chief Executive Officer of Vona Information
Systems, Inc., a consulting firm, since June 1996. Prior to that, Mr. Vona was
Executive Vice President and Senior Managing Director for worldwide technology
at Bankers Trust Co. from November 1969 to June 1996. From August 1986 to June
1996 Mr. Vona was Chairman of BT-FSIS, a software development company and a
wholly owned subsidiary of Bankers Trust Co.
40
Executive Officers
Scott Blais has served as our Vice President, Customer Services since
October 1998. Prior to joining us, Mr. Blais spent three years holding various
positions including Vice President and General Manager at Adra Systems, Inc.,
a software company. Prior to that, Mr. Blais held the position of Director of
Customer Services and Quality Assurance for Keyfile Corporation, a software
company.
Jeffrey M. Boone has served as our Vice President, Software Engineering
since January 1998. Prior to that, Mr. Boone served as our Engineering Manager
from June 1996 to December 1997, and as a member of the our technical staff
from September 1995 to June 1996. Prior to joining us, Mr. Boone was a Systems
Architect at Logica North American, a software consulting company, from June
1994 to September 1995.
William L. Fiedler has served as our Chief Financial Officer, Treasurer and
Vice President, Finance and Administration since September 1998 and as our
Secretary since May 2000. Prior to joining us, Mr. Fiedler served from July
1984 to June 1998 as the Chief Financial Officer, Treasurer and Senior Vice
President, Finance and Administration of Matrix One, Inc., a developer of
product data management systems. Prior to that, Mr. Fiedler served as the
Chief Financial Officer of Hendrix Electronics Inc., a developer of text
processing and graphics publishing systems, and had also held controllership
positions at Bose Corporation and GTE Sylvania.
Branko J. Gerovac has served as our Vice President, Research since joining
us in February 1999. Prior to that, Mr. Gerovac served from 1994 to 1999 as an
Associate Director of Research at the Massachusetts Institute of Technology.
Mr. Gerovac was previously employed from 1981 to 1994 by Digital Equipment
Corporation as a consulting engineer.
Ira Goldfarb has served as our Vice President, Worldwide Sales since
January 1998. Prior to that, Mr. Goldfarb served as our Vice President, U.S.
Systems Sales from August 1997 to January 1998, as our Vice President, Eastern
Region from January 1997 to August 1997, and as Vice President, Central
Region, from August 1994 to January 1997. Prior to joining us, Mr. Goldfarb
held several sales management positions at Digital Equipment Corporation from
September 1983 to July 1994.
Bruce E. Mann joined us in September 1994 as Vice President, Network
Storage Engineering. Mr. Mann is also President of SeaChange Systems, Inc.,
one of our subsidiaries which develops and manufactures video server-based
products. Prior to joining us, Mr. Mann served as Director of Engineering at
Ungermann-Bass, Inc., a subsidiary of Tandem Computers Inc., from March 1993
to September 1994. Prior to that, from September 1976 to March 1993, Mr. Mann
was an engineer at Digital Equipment Corporation, most recently as Senior
Consulting Engineer.
Our executive officers are appointed by, and serve at the discretion of,
our board of directors, and serve until their successors have been duly
elected and qualified. There are no family relationships among any of the our
executive officers or directors.
41
SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 31, 2001 by the stockholders who
are selling shares of our common stock in this offering.
Each of the selling stockholders is currently one of our executive officers
or, in the case of Mr. Hoffmann, a director. See "Management." Each person has
sole voting power and investment power, or shares such power with his or her
spouse, with respect to all shares of capital stock listed as owned by such
person or entity.
The number and percentage of shares beneficially owned is determined in
accordance with the rules of the Securities and Exchange Commission, and is
not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which a
person has sole or shared voting power or investment power and also any shares
of common stock underlying options or warrants that are exercisable by that
person within 60 days of October 31, 2001. However, these shares underlying
options or warrants are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or entity. Percentage
of beneficial ownership prior to the offering is based on 22,962,415 shares of
our common stock outstanding as of October 31, 2001.
After the Offering
------------------------
Number of
Number of Shares Shares Being Shares Percentage
Beneficially Owned Offered Beneficially of
Name Prior to the Offering Hereby Owned Outstanding
---- --------------------- ------------ ------------ -----------
William C.
Styslinger(1).......... 2,184,023 125,000 2,059,023 7.99%
Scott Blais(2).......... 23,936 5,000 18,936 *
Jeffrey M. Boone (3).... 84,077 10,000 74,077 *
William L. Fiedler(4)... 88,051 10,000 78,051 *
Ira Goldfarb(5)......... 121,468 15,000 106,468 *
Martin R. Hoffmann(6)... 205,009 35,000 170,009 *
Bruce E. Mann(7)........ 364,095 10,000 354,095 1.37%
- --------
* Less than one percent.
(1) Includes 215,000 shares of Common Stock owned by Merrill Lynch, Trustee
f/b/o William C. Styslinger, III, IRA. Excludes (i) 96,429 shares of
Common Stock owned by Thomas and Emily Franeta as Trustees of The
Styslinger Family Trust; (ii) 10,147 shares of Common Stock held by
Thomas Franeta as Custodian for Kimberly J. Styslinger; and (iii) 75,000
shares of Common Stock owned by his wife, Joyce Styslinger.
Mr. Styslinger disclaims beneficial ownership of the shares held by The
Styslinger Family Trust, by Thomas Franeta as Custodian for Kimberly J.
Styslinger and by his wife, Joyce Styslinger. Includes 41,344 shares of
Common Stock issuable pursuant to outstanding stock options that may be
exercised within 60 days of October 31, 2001.
(2) Includes 21,831 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of October 31, 2001.
(3) Includes 35,652 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of October 31, 2001.
(4) Includes 88,051 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of October 31, 2001.
(5) Includes 29,833 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of October 31, 2001.
(6) Includes 15,107 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of October 31, 2001.
(7) Includes (i) 34,045 shares of Common Stock issuable pursuant to
outstanding stock options that may be exercised within 60 days of October
31, 2001. Excludes an aggregate of 23,824 shares of Common Stock held by
Mr. Mann's three children. Mr. Mann disclaims beneficial ownership of
those shares held by his children.
42
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Thomas Weisel Partners LLC and RBC
Dain Rauscher, Inc. are acting as representatives, have each agreed to
purchase, and we and the selling stockholders have agreed to sell to them,
severally, the number of shares of our common stock indicated below:
Number of
Name Shares
---- ---------
Morgan Stanley & Co. Incorporated...............................
Thomas Weisel Partners LLC......................................
RBC Dain Rauscher, Inc..........................................
---------
Total......................................................... 3,000,000
=========
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for
all of the shares of common stock offered by this prospectus if any such
shares are taken. However, the underwriters are not required to take or pay
for the shares covered by the underwriters' over-allotment option described
below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to some dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 450,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to various
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the name of that underwriter in the
preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table. If the
underwriters exercise the option in full, the total price to the public would
be $ million and the total proceeds to us, before deducting estimated
offering expenses, would be $ million.
The common stock is listed on the NASDAQ National Market under the symbol
"SEAC."
SeaChange, our directors and executive officers and the selling
stockholders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it, he or she
will not, during the period ending 90 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
43
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant, either currently outstanding or that may be issued
pursuant to existing agreements, the conversion of a security
outstanding on the date of this prospectus, and the issuance by us of
warrants pursuant to existing agreements, in each case of which the
underwriters have been advised in writing;
. the issuance by us of shares of common stock or options to purchase
shares of common stock pursuant to our existing stock option and
purchase plans;
. the transfer by any individual of shares of common stock or any
securities convertible into or exercisable for common stock to members
of their immediate family or to a trust or limited partnership for the
benefit of such members or as a bona fide gift if each transferee or
donee agrees in writing as a condition precedent to such transfer or
gift to be bound by the same restrictions;
. the issuance by us of shares of common stock or options to purchase
shares of common stock in connection with the repurchase or exchange of
the currently issued and outstanding shares of common stock of SeaChange
Systems, Inc. held by persons other than us and the currently issued and
outstanding options to purchase shares of common stock of SeaChange
Systems, Inc.;
. the issuance by us of shares of common stock, warrants to purchase
shares of common stock or shares of common stock upon the exercise of
such warrants in an aggregate amount not to exceed 100,000 shares of
common stock in connection with strategic agreements as to which there
are current discussions underway; or
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to us.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act.
Transfer Agent and Registrar
Mellon Investor Services, L.L.C., 111 Founders Plaza, Suite 1100, East
Hartford, Connecticut 06108 is the transfer agent for our common stock.
44
LEGAL MATTERS
Certain legal matters with respect to the issuance of the shares offered
hereby will be passed upon for SeaChange International by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts. As of the date of this prospectus,
certain attorneys with the firm of Testa, Hurwitz & Thibeault, LLP
beneficially own an aggregate of 2,250 shares of our common stock. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1999, January 31,
2000 and January 31, 2001 and for each of the two years in the period ended
December 31, 1999, the one month ended January 31, 2000 and the year ended
January 31, 2001, included in this prospectus have been so included in
reliance upon the report (which contains an explanatory paragraph relating to
SeaChange International's change in method of recognizing revenue as described
in Note 3 to the consolidated financial statements) of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and accordingly file reports, proxy statements and
other information with the Securities and Exchange Commission. Reports, proxy
statements and other information filed by SeaChange International may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330. Our common stock is traded on the Nasdaq National
Market. Reports, proxy statements and other information concerning SeaChange
International may be inspected at the offices of the National Association of
Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C.
20006.
We have filed with the Securities and Exchange Commission a registration
statement on Form S-3 under the Securities Act of 1933, as amended, with
respect to the shares of our common stock offered hereby. This prospectus does
not contain all information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information regarding us and
the shares of our common stock offered hereby, we refer you to the
registration statement and to the exhibits and schedules filed with it.
Statements contained in this prospectus regarding the contents of any
agreement or other document filed as an exhibit to the registration statement
are necessarily summaries of those documents, and in each instance we refer
you to the copy of that document filed as an exhibit to the registration
statement for a more complete description of the matters involved. The
registration statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of all or any part thereof may be obtained from that office upon
payment of the prescribed fees. In addition, the Securities and Exchange
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission.
We will provide without charge to each person who is delivered a
prospectus, on written or oral request, a copy of any or all of the documents
incorporated by reference in this document, other than exhibits to those
documents unless those exhibits are specifically incorporated by reference
into those documents. Requests for copies should be directed to Investor
Relations, SeaChange International, Inc., 124 Acton Street, Maynard,
Massachusetts 01754, Telephone: (978) 897-0100.
45
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by us with the SEC pursuant to the Exchange
Act are incorporated in this prospectus by reference:
1. SeaChange's Amended Annual Report on Form 10-K/A for the fiscal year
ended January 31, 2001 (File No. 000-21393).
2. SeaChange's Quarterly Report on Form 10-Q for the period ended April 30,
2001 (File No. 000-21393).
3. SeaChange's Quarterly Report on Form 10-Q for the period ended July 31,
2001 (File No. 000-21393).
4. SeaChange's Quarterly Report on Form 10-Q for the period ended October
31, 2001 (File No. 000-21393).
5. The description of our common stock contained in the section titled
"Description of Registrant's Securities to be Registered" contained in
our registration statement on Form 8-A filed under the Exchange Act with
the SEC on September 18, 1996 (File No. 000-21393), and incorporating by
reference the information contained in our registration statements on
Form S-1 (File No. 333-12233), including any amendment or report filed
for the purpose of updating that description.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, subsequent to the filing by us of the initial registration
statement of which this prospectus is a part and prior to the termination of
this offering, shall be deemed incorporated by reference in this prospectus
and made a part hereof from the date of filing of those documents. Any
statement contained in a document incorporated or deemed incorporated by
reference in this prospectus shall be deemed modified or superseded for
purposes of this prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed
incorporated by reference herein or in any prospectus supplement modifies or
supersedes that statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
prospectus.
46
SEACHANGE INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 2001 (UNAUDITED)............. F-2
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31,
2000 AND 2001 (UNAUDITED)................................................ F-3
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 31,
2000 AND 2001 (UNAUDITED)................................................ F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).................... F-5
REPORT OF INDEPENDENT ACCOUNTANTS......................................... F-12
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND AS OF JANUARY 31,
2000 AND 2001............................................................ F-13
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1999, THE ONE MONTH ENDED JANUARY 31, 2000, THE YEAR ENDED JANUARY
31, 2001, AND THE ONE MONTH ENDED JANUARY 31, 1999....................... F-14
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999, THE ONE MONTH ENDED JANUARY 31, 1999 AND
JANUARY 31, 2000, AND THE YEAR ENDED JANUARY 31, 2001.................... F-15
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1999, THE ONE MONTH ENDED JANUARY 31, 2000, THE YEAR ENDED
JANUARY 31, 2001, AND THE ONE MONTH ENDED JANUARY 31, 1999............... F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-17
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE......... F-37
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES............................. F-38
F-1
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
October 31,
2001
-----------
Assets
Current assets:
Cash and cash equivalents........................................ $ 7,280
Accounts receivable, net of allowance for doubtful accounts of
$687 at October 31, 2001........................................ 24,316
Inventories...................................................... 24,923
Prepaid expenses and other current assets........................ 3,187
Deferred income taxes............................................ 7,001
--------
Total current assets........................................... 66,707
Property and equipment, net........................................ 17,526
Other assets....................................................... 1,117
Deferred income taxes.............................................. 1,481
Goodwill and intangibles, net...................................... 4,575
--------
$ 91,406
========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit................................................... $ --
Current portion of line of credit and obligations under capital
leases.......................................................... 316
Accounts payable................................................. 16,131
Accrued expenses................................................. 1,888
Customer deposits................................................ 946
Deferred revenue................................................. 9,362
Income taxes payable............................................. 471
--------
Total current liabilities...................................... 29,114
--------
Long-term line of credit and obligations under capital leases...... 6,442
--------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
22,962,415 shares issued at October 31, 2001.................... 230
Additional paid-in capital....................................... 63,630
Deferred equity discount......................................... (1,187)
Accumulated deficit.............................................. (6,619)
Accumulated other comprehensive loss............................. (204)
--------
Total stockholders' equity..................................... 55,850
--------
$ 91,406
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Nine months ended
---------------------------------
October 31, 2000 October 31, 2001
---------------- ----------------
Revenue:
Systems.................................... $55,794 $ 60,829
Services................................... 16,892 21,572
------- --------
72,686 82,401
Cost of revenues:
Systems.................................... 30,043 35,208
Services................................... 13,271 15,644
------- --------
43,314 50,852
------- --------
Gross profit................................. 29,372 31,549
------- --------
Operating expenses:
Research and development................... 14,456 17,560
Selling and marketing...................... 8,284 10,599
General and administrative................. 4,977 5,579
------- --------
27,717 33,738
------- --------
Income (loss) from operations................ 1,655 (2,189)
Interest income (expense), net............... (30) (332)
------- --------
Income (loss) before income taxes............ 1,625 (2,521)
Provision (benefit) for income taxes......... 520 (807)
------- --------
Income (loss) before cumulative effect of
change in accounting principle.............. 1,105 (1,714)
Cumulative effect of change in accounting
principle, net of tax of $732............... (1,100) --
------- --------
Net income (loss)............................ $ 5 $ (1,714)
======= ========
Basic earnings (loss) per share before
cumulative effect of change in accounting
principle................................... $ 0.05 $ (0.08)
Cumulative effect of change in accounting
principle................................... (0.05) $ --
------- --------
Basic earnings (loss) per share.............. $ 0.00 $ (0.08)
======= ========
Diluted earnings (loss) per share............ $ 0.00 $ (0.08)
======= ========
Weighted average common shares outstanding:
Basic...................................... 21,668 22,796
Diluted.................................... 23,170 22,796
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE IN CASH AND CASH EQUIVALENTS
(in thousands)
(unaudited)
For the nine months ended
---------------------------------
October 31, 2000 October 31, 2001
---------------- ----------------
Cash flows from operating activities:
Net income (loss)............................ $ 5 $(1,714)
Adjustments to reconcile net income (loss) to
net cash
provided by (used in) operating activities:
Depreciation and amortization.............. 3,546 5,268
Inventory valuation allowance.............. 149 --
Amortization of deferred equity discount... -- 1,142
Deferred taxes............................. -- (807)
Changes in operating assets and
liabilities:
Accounts receivable...................... (6,528) 2,796
Inventories.............................. (3,204) (533)
Prepaid expenses and other assets........ (2,459) (506)
Accounts payable......................... 4,476 (1,201)
Accrued expenses......................... (804) 72
Customer deposits........................ 1,445 (3,000)
Deferred revenue......................... 1,888 927
Income taxes payable..................... (508) (485)
------- -------
Net cash provided by (used in)
operating activities.................. (1,994) 1,959
------- -------
Cash flows from investing activities:
Purchases of property and equipment........ (7,367) (5,559)
Increase in intangible assets.............. (2,209) (2,709)
------- -------
Net cash used in investing activities.. (9,576) (8,268)
------- -------
Cash flows from financing activities:
Borrowings under construction loan......... 1,044 --
Borrowings under line of credit............ 4,324 5,409
Repayment of borrowings under revolving
line of credit............................ -- (4,000)
Repayment of borrowings under construction
loan and line of credit................... (1,017) (4,967)
Repayment of obligations under capital
lease..................................... (181) (150)
Net proceeds from issuance of common
stock..................................... 11,923 11,152
------- -------
Net cash provided by financing
activities............................ 16,093 7,444
------- -------
Net increase in cash and cash equivalents.... 4,523 1,135
Cash and cash equivalents, beginning of
period...................................... 2,721 6,145
------- -------
Cash and cash equivalents, end of period..... $ 7,244 $ 7,280
======= =======
Supplemental disclosure of noncash
activities:
Transfer of items originally classified as
fixed assets to inventories............... $ 497 $ 530
Transfer of items originally classified as
inventories to fixed assets............... $ -- $ 1,047
The accompanying notes are an integral part of these consolidated financial
statements
F-4
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of SeaChange International, Inc. and its subsidiaries. SeaChange
believes that the unaudited consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments), necessary for a
fair statement of SeaChange's financial position, results of operations and
cash flows at the dates and for the periods indicated. The results of
operations for the periods presented 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 January
31, 2001.
2. Revenue Recognition
Revenues from sales of systems are recognized upon shipment provided title
and risk of loss has passed to the customer, there is evidence of an
arrangement, fees are fixed or determinable and collection of the related
receivable is probable. Installation, project management and training revenue
is deferred and recognized as these services are performed. Revenue from
technical support and maintenance is deferred and recognized ratably over the
period of the related agreements, generally twelve months. Customers are
billed for installation, project management, training and maintenance at the
time of the product sale. If a portion of the sales price is not due until
installation of the system is complete, that portion of the sales price is
deferred until installation is complete. Revenue from content fees, primarily
movies, is recognized based on the volume of monthly purchases that are made
by hotel guests. Revenue from product development contract services is
recognized based on the time and materials incurred to complete the work.
Shipping and handling costs are included in revenue and cost of revenues.
SeaChange's transactions frequently involve the sales of systems and
services under multiple element arrangements. Systems sales always include one
year of free technical support and maintenance services. Revenue under
multiple element arrangements is allocated to all elements except systems
based upon the fair value of those elements. The amounts allocated to
training, project management, technical support and maintenance and content
fees are based upon the price charged when these elements are sold separately
and unaccompanied by the other elements. The amount allocated to installation
revenue is based upon hourly rates and the estimated time required to complete
the service. The amount allocated to systems is done on a residual method
basis. Under this method, the total arrangement value is allocated first to
undelivered elements, based on their fair values, with the remainder being
allocated to systems revenue. Installation, training and project management
services are not essential to the functionality of systems as these services
do not alter the equipment's capabilities, are available from other vendors
and the systems are standard products.
F-5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
3. Earnings Per Share
For the nine months ended October 31, 2001, common shares of 3,503,315
issuable upon the exercise of stock options are antidilutive because SeaChange
recorded a net loss for the period, and therefore, have been excluded from the
diluted earnings per share computation.
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the periods indicated:
Nine months ended
-----------------------
October 31, October 31,
2000 2001
----------- -----------
Weighted average shares used in calculating earnings
per share--
Basic............................................... 21,668 22,796
Dilutive common stock equivalents................... 1,502 --
------ ------
Weighted average shares used in calculating earnings
per share--
Diluted............................................. 23,170 22,796
====== ======
4. Inventories
Inventories consist of the following:
October 31,
2001
-----------
Components and assemblies ........................................ $ 7,398
Finished products ................................................ $17,525
-------
$24,923
=======
5. Comprehensive Income (Loss)
SeaChange's comprehensive income (loss) was as follows:
Nine months ended
-----------------------
October 31, October 31,
2000 2001
----------- -----------
Net income (loss)..................................... $ 5 $ (1,714)
Other comprehensive (expense), net of tax:
Foreign currency translation adjustment, net of tax
of
$(34) and $(11), respectively...................... (72) (22)
----- --------
Other comprehensive income (expense).................. (72) (22)
----- --------
Comprehensive income (loss)........................... $ (67) $ (1,736)
===== ========
6. Deferred Legal Costs
SeaChange defers legal costs associated with defending its existing
patents. If the patent defense is successful, the costs are capitalized and
amortized over their estimated remaining useful life. If the patent defense is
unsuccessful, the amounts deferred are charged to operating expense. In July
2001, approximately $2.7 million in deferred legal costs were capitalized into
intangible assets as a result of the successful defense of patents.
F-6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
7. Change in Accounting Principle
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Historically, for
some of SeaChange's sales transactions, a portion of the sales price,
typically 25%, was not due until installation occurred. Under SAB 101 and the
new accounting method adopted retroactive to February 1, 2000, SeaChange now
defers the portion of the sales price not due until installation is complete.
During the fourth quarter of the twelve months ended January 31, 2001,
SeaChange implemented the SEC's SAB 101 guidelines, retroactive to the
beginning of the year. This was reported as a cumulative effect of a change in
accounting principle as of February 1, 2000. The cumulative effect of the
change in accounting principle on prior years resulted in a charge to income
of $1.1 million (net of income taxes of $732,000), or $0.05 per diluted share,
which has been included in income for the nine months ended October 31, 2000.
The results for the nine months ended October 31, 2000 have been restated to
conform with SAB 101.
8. Segment Information
SeaChange has three reportable segments: broadband systems, broadcast
systems and services. The broadband systems segment provides products to
digitally manage, store and distribute digital video for cable system
operators and telecommunications companies. 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 management, post-contract
support services for all of the above systems and content which is distributed
by the broadband product segment. SeaChange does not measure the assets
allocated to the segments. SeaChange measures results of the segments based on
the respective gross profits. There were no inter-segment sales or transfers
during the periods presented. Long-lived assets are principally located in the
United States. The following summarizes the revenues and cost of revenues by
reportable segment:
Nine months ended
-----------------------
October 31, October 31,
2000 2001
----------- -----------
Revenues:
Broadband........................................... $39,273 $48,158
Broadcast........................................... 16,521 12,671
Services............................................ 16,892 21,572
------- -------
Total............................................. $72,686 $82,401
======= =======
Cost of revenues:
Broadband........................................... $20,885 $27,956
Broadcast........................................... 9,158 7,252
Services............................................ 13,271 15,644
------- -------
Total............................................. $43,314 $50,852
======= =======
The following summarizes revenues by geographic
locations:
Revenues:
United States....................................... $57,969 $71,313
Canada and South America............................ 2,988 940
Europe.............................................. 5,802 5,185
Asian Pacific and rest of world..................... 5,927 4,963
------- -------
Total............................................. $72,686 $82,401
======= =======
F-7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
For the nine months ended October 31, 2001 and 2000, certain customers each
accounted for more than 10% of SeaChange's revenue. Individual customers each
accounted for 20% and 17% of revenues in the nine months ended October 31,
2001 and 11%, 11%, 10% and 10% in the nine months ended October 31, 2000.
Nine months ended
-----------------------
October 31, October 31,
2000 2001
----------- -----------
Customer A.............................................. 20%
Customer B.............................................. 11% 17%
Customer C.............................................. 11%
Customer D.............................................. 10%
Customer E.............................................. 10%
9. Legal Proceedings
On June 13, 2000, SeaChange filed in the United States District Court for
the District of Delaware a lawsuit against one of its competitors, nCube
Corp., whereby SeaChange alleged that nCube's MediaCube-4 product infringed a
patent (Patent No. 5,862,312) relating to our MediaCluster technology. In
instituting the claim, SeaChange sought both a permanent injunction and
damages in an unspecified amount. nCube made a counterclaim against SeaChange
that the patent held by SeaChange was invalid and that nCube's MediaCube-4
product did not infringe SeaChange's patent. On September 6, 2000, nCube
conceded that, based on a claim construction ruling issued by the District
Court on August 2000, nCube's MediaCube-4 product infringed SeaChange's
patent. On September 25, 2000, a jury upheld the validity of SeaChange's
patent. nCube has filed motions challenging both the jury's verdict and the
District Court's claim construction ruling. The District Court has yet to rule
on nCube's motions. At this time, SeaChange is awaiting the court's decision
regarding a permanent injunction. Damages will be determined in future
proceedings.
On January 8, 2001, nCube Corp. filed a complaint against SeaChange in the
United States District Court for the District of Delaware alleging that
SeaChange's use of SeaChange's MediaCluster, MediaExpress and Media Server
technology each infringe a patent held by nCube (Patent No. 5,805,804). In
instituting the claim, nCube has sought both an injunction and monetary
damages in an unspecified amount. SeaChange responded on January 26, 2001,
denying the claim of infringement. SeaChange also asserted a counterclaim
seeking a declaration from the District Court that U.S. Patent No. 5,805,804
is invalid and not infringed. Currently, discovery on this claim is scheduled
to be completed in December 2001, following which will be a claim construction
hearing.
On June 14, 1999, SeaChange filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure SeaChange's business and reputation in the
marketplace. The complaint further alleges that Mr. Putterman and Lathrop
Investment Management, Inc. defamed SeaChange through false postings on an
Internet message board. The complaint seeks unspecified amounts of
compensatory and punitive damages. On June 14, 2000, Concurrent filed a
counterclaim under seal against SeaChange seeking unspecified damages. On
July 28, 2000, Concurrent filed a motion for summary judgment on the claim of
civil conspiracy and on January 4, 2001, the trial court entered an order
granting summary judgment for Concurrent on that claim. SeaChange immediately
requested reconsideration of this order or, in the alternative,
recertification for immediate appeal. On June 12, 2001, the trial court denied
the motion for reconsideration but made findings which permitted an immediate
appeal and on July 11, 2001 SeaChange filed an appeal. The motions relating to
these claims and counterclaims are currently pending and no trial date has
been set.
F-8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
SeaChange cannot be certain of the outcome of the foregoing litigation, but
does plan to oppose allegations against it and assert its claims against other
parties vigorously. In addition, as these claims are subject to additional
discovery and certain claims for damages are as yet unspecified, SeaChange is
unable to estimate the impact to its business, financial condition and results
of operations or cash flows.
10. Comcast Equity Investment and Video-on-Demand Purchase Agreements
On December 1, 2000, SeaChange and Comcast Cable Communications, Inc.
entered into a video-on-demand purchase agreement for SeaChange's interactive
television video servers and related services. Under the terms of the video-
on-demand purchase agreement, Comcast has committed to purchase SeaChange's
equipment capable of serving a minimum of one million cable subscribers by
approximately December 2002. In addition, Comcast may earn up to an additional
450,000 incentive common stock purchase warrants through December 2003 based
on the number of cable subscribers in excess of one million who are served by
SeaChange's equipment which has been purchased by Comcast. In connection with
the execution of this commercial agreement, SeaChange entered into a common
stock and warrant purchase agreement, dated as of December 1, 2000, with
Comcast SC Investment, Inc., whereby Comcast SC agreed to purchase, subject to
certain closing conditions including registration of the shares purchased
thereby, 466,255 shares of SeaChange's common stock for approximately $10
million and Comcast SC would receive a warrant to purchase 100,000 shares,
exercisable at $21.445 per share, of SeaChange's common stock. This stock and
warrant purchase agreement was terminated by SeaChange and Comcast SC on
February 28, 2001. The terms and conditions of the video-on-demand purchase
agreement have not been modified.
On February 28, 2001, SeaChange and Comcast SC signed and closed a new
common stock and warrant purchase agreement on terms similar to the prior
agreement. Under the terms of this new agreement, SeaChange sold in a private
placement to Comcast SC for approximately $10,000,000 an aggregate of 756,144
shares of SeaChange's common stock and a warrant to purchase 100,000 shares of
SeaChange's common stock with an exercise price of $13.225 per share. Under
certain conditions determined upon the effectiveness of the registration of
the shares, the number of common shares purchased and the number of common
stock purchase warrants and related exercise price are subject to adjustment.
An additional number of shares of common stock would be issued to Comcast SC
without any additional consideration as is equal to the difference between
756,144, the number of shares of common stock issued on February 28, 2001, and
the number of shares obtained by dividing $10,000,000 by the lower of 1) 92%
of the closing market price of SeaChange's common stock on the date of
effectiveness of the registration statement, and 2) the average of the closing
market price of SeaChange's common stock for the five trading days ending on
the effective date of this registration statement, if either of such prices is
lower than $13.225. The warrant agreement contains an adjustment mechanism
such that the warrant would be exercisable for an additional 25,000 shares of
SeaChange's common stock if the registration statement has not been declared
effective on or before March 31, 2001 and an additional 333.33 shares of
SeaChange's common stock per day beginning on and including May 1, 2001 for
each day up to and including the day the registration statement is declared
effective. The warrant agreement also provides that the exercise price of the
warrant would be reduced on the effective date of the registration statement
to the lower of 1) 92% of the closing market price of SeaChange's common stock
on the effective date of the registration statement, and 2) the average of the
closing market prices of SeaChange's common stock for the five trading days
ending on the date of effectiveness of the registration statement, if either
of such prices is lower than $13.225, the exercise price as of the closing
date.
F-9
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
SeaChange determined the intrinsic value of $586,000 related to the 756,144
shares of common stock purchased on February 28, 2001 and measured the fair
value of $1.1 million related to the 100,000 common stock purchase warrants as
of the closing date and recorded these amounts as contra-equity. On April 30,
2001, SeaChange recorded an additional contra-equity amount of $325,000 for
the fair value of the additional 25,000 common stock purchase warrants of
SeaChange common stock as the registration statement had not been declared
effective on or before March 31, 2001. On June 13, 2001, the effective date of
the registration statement, SeaChange issued an additional 14,667 common stock
purchase warrants in accordance with the agreement, and recorded an additional
contra equity amount of $335,000, representing the incremental fair value of
the total warrants issued. Based on the closing market price on the date of
effectiveness of the registration statement and the five trading days
preceding the date of effectiveness of this registration statement, no
additional common shares were issued to Comcast SC pursuant to the terms of
the purchase agreement and Comcast is not entitled to the issuance in the
future of additional shares pursuant to the terms of the purchase agreement.
Also, based on the then prevailing market prices of SeaChange's common stock,
the exercise price of the warrant was not reduced and is not subject to
reduction in the future, other than equitable adjustment in connection with a
stock split or other comparable event and future dilutive issuances. The
contra-equity amount is being amortized as an offset to gross revenue in
proportion to the revenue recognized from the sale of equipment with respect
to the first one million subscribers Comcast has committed to under the video-
on-demand purchase agreement. During the three months ended April 30, 2001,
July 31, 2001 and October 31, 2001, SeaChange amortized $449,000, $675,000 and
$18,000, respectively, of the deferred equity discount. The fair value of the
additional incentive common stock purchase warrants will also be recorded as
an offset to gross revenue as the warrants are earned by Comcast, if any.
11. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interest method.
SeaChange believes the adoption of SFAS 141 will not have a material impact on
its current financial position and results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets", which is effective for SeaChange on February 1, 2002. SFAS
142 requires, among other things, the discontinuance of goodwill amortization
and includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, and reclassification of certain intangibles
out of previously reported goodwill. SeaChange believes the adoption of SFAS
142 will not have a material impact on its current financial position and
results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." SFAS 143
provides the accounting requirements for retirement obligations associated
with tangible long-lived assets. SFAS 143 is effective for financial
statements for fiscal years beginning after June 15, 2002. SeaChange believes
the adoption of SFAS 143 will not have a material impact on its current
financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets."
F-10
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
(unaudited)
SFAS 144 requires one method of accounting for long-lived assets disposed of
by sale. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. SeaChange believes the adoption of
SFAS 144 will not have a material impact on its current financial position and
results of operations.
12. Income Taxes
At October 31, 2001, SeaChange had net deferred tax assets of $8.5 million.
Although realizability is not assured, based on the weight of available
evidence, SeaChange believes it is more likely than not that all remaining
deferred tax assets will be realized. The amount of the deferred tax assets
considered realizable is subject to change based on future events, including
generating taxable income in future periods. SeaChange will continue to assess
the need for the valuation allowance at each balance sheet date based on all
available evidence. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if SeaChange does not
generate sufficient taxable income in future periods.
13. Debt Agreement
SeaChange has entered into a $10.0 million revolving line of credit with a
bank that expires in October 2003. Loans made under this revolving line of
credit will bear interest at a rate per annum equal to the bank's prime rate,
5.50% at October 31, 2001. As of October 31, 2001, SeaChange has borrowings of
$5.4 million under this revolving line of credit. Borrowings under this line
of credit are collateralized by substantially all of SeaChange's assets. The
loan agreement requires that SeaChange provide the bank with certain periodic
financial reports and comply with certain financial ratios including a minimum
level of earnings before interest, taxes and depreciation and amortization on
a trailing twelve month basis. As of October 31, 2001, SeaChange was in
compliance with these financial covenants.
This line of credit replaces SeaChange's prior revolving line of credit and
equipment line with a different bank. In conjunction with entering into the
new bank line, SeaChange repaid to its prior lender all outstanding borrowings
under the equipment line of financing in an amount of $3.4 million.
F-11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SeaChange International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
SeaChange International, Inc. and its subsidiaries at December 31, 1999,
January 31, 2000 and January 31, 2001 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1999, the one month ended January 31, 2000 and the year ended January 31,
2001, in conformity with accounting principles generally accepted in the
United States of America. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America 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 audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, during the
year ended January 31, 2001, the Company changed its method of recognizing
revenue.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 2001 (except for the
information presented in Note 12
for which the date is June 12, 2001)
F-12
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
December 31, January 31, January 31,
1999 2000 2001
------------ ----------- -----------
Assets
Current assets:
Cash and cash equivalents............... $ 11,318 $ 2,721 $ 6,145
Accounts receivable, net of allowance
for doubtful accounts of $908 at
December 31, 1999 and January 31, 2000
and $742 at January 31, 2001........... 17,840 16,756 27,112
Inventories............................. 17,128 20,089 24,907
Prepaid expenses and other current
assets................................. 1,568 1,634 2,671
Deferred income taxes................... 2,243 3,400 7,001
-------- ------- -------
Total current assets.................. 50,097 44,600 67,836
Property and equipment, net............... 10,538 10,492 15,886
Other assets.............................. 884 869 1,833
Goodwill and intangibles.................. 785 751 2,698
-------- ------- -------
$ 62,304 $56,712 $88,253
======== ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit.......................... $ -- $ -- $ 4,000
Current portion of equipment line of
credit and obligations under capital
lease.................................. 1,048 1,045 2,532
Accounts payable........................ 15,038 10,451 17,332
Accrued expenses........................ 3,499 2,776 1,816
Customer deposits....................... 2,092 2,428 3,946
Deferred revenue........................ 4,380 6,292 8,435
Income taxes payable.................... 675 625 956
-------- ------- -------
Total current liabilities............. 26,732 23,617 39,017
-------- ------- -------
Long-term portion of equipment line of
credit and obligations under capital
lease.................................... 1,231 1,144 3,934
-------- ------- -------
Commitments and contingencies (Note 12)
Stockholders' Equity:
Convertible preferred stock, 5,000,000
shares authorized, none outstanding.... -- -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
21,285,855, 21,300,185 and 22,037,811
shares issued at December 31, 1999 and
January 31, 2000 and 2001,
respectively........................... 213 213 221
Additional paid-in capital.............. 35,633 35,695 50,157
Deferred equity discount................ -- -- --
Accumulated deficit..................... (1,440) (3,898) (4,905)
Accumulated other comprehensive loss.... (65) (59) (171)
-------- ------- -------
Total stockholders' equity............ 34,341 31,951 45,302
-------- ------- -------
$ 62,304 $56,712 $88,253
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year ended One One
December 31, month ended Year ended month ended
---------------- January 31, January 31, January 31,
1998 1999 2000 2001 1999
------- ------- ----------- ----------- -----------
(unaudited)
Revenues:
Systems................. $58,033 $68,457 $ 226 $74,986 $ 697
Services................ 14,891 16,764 1,484 23,482 1,211
------- ------- ------- ------- -------
72,924 85,221 1,710 98,468 1,908
------- ------- ------- ------- -------
Costs of revenues:
Systems................. 35,772 38,889 633 39,928 670
Services................ 13,611 14,962 1,445 18,798 1,049
------- ------- ------- ------- -------
49,383 53,851 2,078 58,726 1,719
------- ------- ------- ------- -------
Gross profit (loss)..... 23,541 31,370 (368) 39,742 189
------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 15,763 16,302 1,764 20,283 1,324
Selling and marketing... 8,566 8,595 1,034 12,472 522
General and
administrative......... 6,132 5,335 457 7,372 447
Restructuring of
operations............. 676 -- -- -- --
Acquisition costs....... -- 684 -- -- --
------- ------- ------- ------- -------
31,137 30,916 3,255 40,127 2,293
------- ------- ------- ------- -------
Income (loss) from
operations.............. (7,596) 454 (3,623) (385) (2,104)
Interest income
(expense), net.......... 235 28 9 (212) 9
------- ------- ------- ------- -------
Income (loss) before
income taxes............ (7,361) 482 (3,614) (597) (2,095)
Provision (benefit) for
income taxes............ (2,789) (15) (1,156) (690) (691)
------- ------- ------- ------- -------
Income (loss) before
cumulative effect of
change in accounting
principle............... (4,572) 497 (2,458) 93 (1,404)
Cumulative effect of
change in accounting
principle, net of tax of
$732.................... -- -- -- (1,100) --
------- ------- ------- ------- -------
Net income (loss)........ $(4,572) $ 497 $(2,458) $(1,007) $(1,404)
======= ======= ======= ======= =======
Basic and diluted
earnings (loss) per
share before cumulative
effect of change in
accounting principle.... $(0.24) $ 0.02 $ (0.12) $ 0.00 $ (0.07)
Cumulative effect of
change in accounting
principle............... -- -- -- (0.05) --
------- ------- ------- ------- -------
Basic and diluted
earnings (loss) per
share................... $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ (0.07)
======= ======= ======= ======= =======
Pro forma amounts
assuming the change in
accounting principle is
applied retroactively:
Net income (loss)....... $(5,276) $ 323 $(2,163) $ 93
======= ======= ======= =======
Earnings (loss) per
share--Basic........... $ (0.28) $ 0.02 $ (0.10) $ 0.00
======= ======= ======= =======
Earnings (loss) per
share--Diluted......... $ (0.28) $ 0.01 $ (0.10) $ 0.00
======= ======= ======= =======
Shares used in
calculating:
Basic earnings (loss)
per share.............. 18,982 20,883 21,269 21,745 20,901
======= ======= ======= ======= =======
Diluted earnings (loss)
per share.............. 18,982 21,774 21,269 23,234 20,901
======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Retained Total Compre-
------------------ Additional earnings Cumulative Stock- hensive
Number of Par paid-in (accumulated) translation Holders' income
shares value capital deficit adjustment Equity (Loss)
----------- ----- ---------- ------------- ----------- -------- -------
Balance at December 31,
1997................... 20,703,313 $207 $32,148 $ 2,635 $ 14 $35,004
Issuance of common stock
pursuant to exercise of
stock options.......... 135,790 1 507 -- -- 508
Issuance of common stock
in connection with
employee stock purchase
plan................... 79,157 1 405 -- -- 406
Compensation expense
associated with stock
issuance............... -- -- 47 -- -- 47
Translation adjustment.. -- -- -- -- (73) (73) (73)
Net loss................ -- -- -- (4,572) -- (4,572) (4,572)
----------- ------- ------- ----- ------- -------
Comprehensive loss...... $(4,645)
=======
Balance at December 31,
1998................... 20,918,260 209 33,107 (1,937) (59) 31,320
Issuance of common stock
pursuant to exercise of
stock options.......... 13,905 -- 50 -- -- 50
Translation adjustment.. 25 25 25
Net loss................ -- -- -- (1,404) -- (1,404) (1,404)
----------- ------- ------- ----- ------- -------
Comprehensive loss...... $(1,379)
=======
Balance at January 31,
1999 (unaudited)....... 20,932,165 209 33,157 (3,341) (34) 29,991
Issuance of common stock
pursuant to exercise of
stock options.......... 296,848 3 1,145 -- -- 1,148
Issuance of common stock
in connection with
employee stock purchase
plan................... 87,014 1 422 -- -- 423
Issuance of common stock
in connection with
Digital Video Arts,
Ltd. acquisition....... 17,078 -- 528 -- -- 528
Purchase and retirement
of treasury stock...... (47,250) -- (1) -- -- (1)
Tax benefit from stock
options................ -- -- 382 -- -- 382
Translation adjustment.. -- -- -- -- (31) (31) (31)
Net income.............. -- -- -- 1,901 -- 1,901 1,901
----------- ------- ------- ----- ------- -------
Comprehensive income.... $ 1,870
=======
Balance at December 31,
1999................... 21,285,855 213 35,633 (1,440) (65) 34,341
Issuance of common stock
pursuant to exercise of
stock options.......... 14,330 -- 62 -- -- 62
Translation adjustment.. -- -- -- -- 6 6 6
Net loss................ -- -- -- (2,458) -- (2,458) (2,458)
----------- ------- ------- ----- ------- -------
Comprehensive loss...... $(2,452)
=======
Balance at January 31,
2000................... 21,300,185 213 35,695 (3,898) (59) 31,951
Issuance of common stock
pursuant to exercise of
stock options.......... 392,669 4 1,802 -- -- 1,806
Issuance of common stock
in connection with
employee stock purchase
plan................... 67,795 1 1,013 -- -- 1,014
Issuance of common stock
in connection with
Microsoft Corporation
investment............. 277,162 3 9,997 -- -- 10,000
Tax benefit from stock
options................ -- -- 1,650 -- -- 1,650
Translation adjustment.. -- -- -- -- (112) (112) (112)
Net loss................ -- -- -- (1,007) -- (1,007) (1,007)
----------- ------- ------- ----- ------- -------
Comprehensive loss...... $(1,119)
=======
Balance at January 31,
2001................... 22,037,811 $221 $50,157 $(4,905) $(171) $45,302
=========== ==== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Year ended One month One month
December 31, ended Year ended ended
---------------- January 31, January 31, January 31,
1998 1999 2000 2001 1999
------- ------- ----------- ----------- -----------
(unaudited)
Cash flows from operating
activities:
Net income (loss)....... $(4,572) $ 497 $(2,458) $ (1,007) $(1,404)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 4,813 4,218 355 4,920 379
Inventory valuation
allowance............. 2,016 458 -- 823 --
Compensation expense
associated with stock
and stock options..... 47 -- -- -- --
Amortization of
deferred equity
discount.............. -- -- -- -- --
Acquisition costs...... -- 684 -- -- --
Deferred income taxes.. (876) (933) (1,156) (3,601) (691)
Changes in operating
assets and
liabilities:
Accounts receivable.... (6,525) (177) 1,084 (10,356) 5,019
Inventories............ (4,368) (4,257) (2,961) (5,126) (1,630)
Prepaid expenses and
other current assets
and other assets...... (1,610) 2,249 (46) (2,113) (743)
Accounts payable....... 1,255 4,935 (4,587) 6,881 (2,678)
Accrued expenses....... 656 (61) (723) (960) (652)
Customer deposits...... (345) 388 336 1,518 188
Deferred revenue....... 1,644 441 1,912 2,143 1,037
Income taxes payable... 390 200 (50) 1,981 (115)
------- ------- ------- -------- -------
Net cash provided by
(used in) operating
activities........... (7,475) 8,642 (8,294) (4,897) (1,290)
------- ------- ------- -------- -------
Cash flows from investing
activities:
Purchases of property
and equipment......... (3,816) (3,130) (275) (10,276) (62)
Proceeds from sale and
maturity of marketable
securities............ 10,212 -- -- -- --
Purchases of marketable
securities............ (902) -- -- -- --
Increase in intangible
assets................ -- -- -- (2,500) --
------- ------- ------- -------- -------
Net cash provided by
(used in) investing
activities........... 5,494 (3,130) (275) (12,776) (62)
------- ------- ------- -------- -------
Cash flows from financing
activities:
Proceeds from
borrowings under line
of credit............. 2,000 -- -- 4,000 --
Proceeds from
borrowings under
equipment line of
credit................ 1,226 1,106 -- 4,823 --
Proceeds from
borrowings under
construction loan..... -- -- -- 1,183 --
Repayments under line
of credit and
equipment line of
credit................ -- (2,245) (72) (1,569) (2,039)
Repayment of obligation
under capital lease... (18) (500) (18) (160) (11)
Proceeds from issuance
of common stock....... 914 2,003 62 12,820 50
------- ------- ------- -------- -------
Net cash provided by
(used in) financing
activities........... 4,122 364 (28) 21,097 (2,000)
------- ------- ------- -------- -------
Net increase (decrease)
in cash and cash
equivalents............. 2,141 5,876 (8,597) 3,424 (3,352)
Cash and cash
equivalents, beginning
of period............... 3,301 5,442 11,318 2,721 5,442
------- ------- ------- -------- -------
Cash and cash
equivalents, end of
period.................. $ 5,442 $11,318 $ 2,721 $ 6,145 $ 2,090
======= ======= ======= ======== =======
Supplemental disclosure
of cash flow
information:
Income taxes paid...... $ 132 $ 81 $ -- $ 303 $ --
Interest paid.......... $ 35 $ 210 $ 19 $ 473 $ 17
Supplemental disclosure
of noncash activity:
Transfer of items
originally classified
as inventories to
fixed assets.......... $ 584 $ 227 $ -- $ -- $ 109
Transfer of items
originally classified
as fixed assets to
inventories........... $ 668 $ 3,055 $ -- $ 515 $ --
Equipment acquired
under capital lease... $ 374 $ 336 $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
SeaChange develops, manufactures and sells systems, known as video storage
servers, that automate the management and distribution of both short-form
video streams, such as advertisements, and long-form video streams, such as
movies or other feature presentations, each of which requires precise,
accurate and continuous execution, to cable system operators,
telecommunications companies and broadcast television companies. Through
January 31, 2001, substantially all of SeaChange's revenues were derived from
the sale of broadband and broadcast systems and related services and content
to cable system operators, broadcast and telecommunications companies in the
United States and internationally.
In April 2000, SeaChange's Board of Directors voted to change SeaChange's
fiscal accounting year from December 31 to January 31, such that its fiscal
year began on February 1, 2000 and ended on January 31, 2001.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of SeaChange and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
Revenue Recognition
Revenues from sales of systems are recognized upon shipment provided title
and risk of loss has passed to the customer, there is evidence of an
arrangement, fees are fixed or determinable and collection of the related
receivable is probable. Installation, project management and training revenue
is deferred and recognized as these services are performed. Revenue from
technical support and maintenance is deferred and recognized ratably over the
period of the related agreements, generally twelve months. Customers are
billed for installation, project management, training and maintenance at the
time of the product sale. If a portion of the sales price is not due until
installation of the system is complete, that portion of the sales price is
deferred until installation is complete. Revenue from content fees, primarily
movies, is recognized based on the volume of monthly purchases that are made
by hotel guests. Revenue from product development contract services is
recognized based on the time and materials incurred to complete the work.
Shipping and handling costs are included in revenue and cost of revenues.
SeaChange's transactions frequently involve the sales of systems and
services under multiple element arrangements. Systems sales always include one
year of free technical support and maintenance services. Revenue under
multiple element arrangements is allocated to all elements except systems
based upon the fair value of those elements. The amounts allocated to
training, project management, technical support and maintenance and content
fees is based upon the price charged when these elements are sold separately
and unaccompanied by the other elements. The amount allocated to installation
revenue is based upon hourly rates and the estimated time required to complete
the service. The amount allocated to systems is done on a residual method
basis. Under this method, the total arrangement value is allocated first to
undelivered elements, based on their fair values, with the remainder being
allocated to systems revenue. Installation, training and project management
services are not essential to the functionality of systems as these services
do not alter the equipment's capabilities, are available from other vendors
and the systems are standard products.
F-17
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments which potentially expose SeaChange to concentrations
of credit risk include trade accounts receivable. To minimize this risk,
SeaChange evaluates customers' financial condition, requires advance payments
from certain of its customers and maintains reserves for potential credit
losses. At December 31, 1998 and 1999, and at January 31, 2000 and 2001,
SeaChange had an allowance for doubtful accounts of $870,000, $908,000,
$908,000, and $742,000, respectively, to provide for potential credit losses
and such losses to date have not exceeded management's expectations.
In the years ended December 31, 1998 and 1999, the month ended January 31,
2000, and the year ended January 31, 2001, revenues from SeaChange's five
largest customers represented approximately 55%, 47%, 47%, and 44%
respectively, of SeaChange's total revenues. In the years ended December 31,
1998 and 1999, the one month ended January 31, 2000, and the year ended
January 31, 2001, two customers each accounted for more than 10% of
SeaChange's revenues. The same two customers accounted for more than 10% of
SeaChange's revenues in the years ended December 31, 1998 and 1999, and the
one month ended January 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash, Cash Equivalents and Marketable Securities
SeaChange considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. SeaChange invests its excess cash in money market funds,
municipal securities and corporate debt securities that are subject to minimal
credit and market risk. Marketable securities are classified as available-for-
sale and are carried at market value, and any unrealized gains or losses are
recorded as a part of stockholders' equity. Gross unrealized gains and losses
on securities for the years ended December 31, 1998 and 1999, the one month
ended January 31, 2000 and the year ended January 31, 2001, the cost of which
is based upon the specific identification method, were not significant.
Property and Equipment
Property and equipment consist of land and buildings, office and computer
equipment, leasehold improvements, demonstration equipment, deployed assets
and spare components and assemblies used to service SeaChange's installed
base. Demonstration equipment consists of systems manufactured by SeaChange
for use in marketing and selling activities. Property and equipment are
recorded at cost and depreciated using the straight-line method over their
estimated useful lives. Leasehold improvements are amortized over the shorter
of their estimated useful lives or the term of the respective leases by use of
the straight-line method. Deployed assets are the movie systems owned and
manufactured by us that are installed in a hotel environment. Deployed assets
are depreciated over the life of the related service agreements ranging from 3
to 7 years. Maintenance and repair costs are expensed as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the
cost of the assets disposed of, and the related accumulated depreciation, are
removed from the accounts, and any resulting gain or loss is included in the
determination of net income.
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 and finished products held for sale.
F-18
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rapid technological change and new product introductions and enhancements
could result in excess or obsolete inventory. To minimize this risk, SeaChange
evaluates inventory levels and expected usage on a periodic basis and records
valuation allowances as required.
SeaChange is dependent upon certain vendors for the manufacture of
significant components of its digital advertising insertion, movie and
broadcast systems. If these vendors were to become unwilling or unable to
continue to manufacture these products in required volumes, SeaChange 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 and thereby adversely affect SeaChange's
revenue and profits.
Goodwill and Intangible Assets
Goodwill and assembled workforce are amortized on a straight-line basis
over five to seven years. Software acquired in connection with acquisitions is
amortized over the greater of the amount computed using (a) the ratio that
current gross revenues for related products bear to total current and
anticipated future gross revenues for that product or (b) on a straight-line
basis over the estimated remaining life of the software. The carrying value of
goodwill and intangible assets is reviewed on a quarterly basis for the
existence of facts and circumstances both internally and externally that may
suggest impairment or that the useful lives of these assets are no longer
appropriate. To date, no such impairment has occurred. SeaChange determines
whether an impairment has occurred based on gross expected future cash flows
and measures the amount of impairment based on the related future flow
estimated discounted cash flows. The cash estimates used to determine the
impairment, if any, contain management's best estimates, using appropriate and
customary assumptions and projections at that time.
SeaChange defers legal costs associated with defending its existing
patents. If the patent defense is successful, the costs are capitalized and
amortized over their estimated remaining useful life. If the patent defense is
unsuccessful, the amounts deferred are charged to operating expense. Included
in goodwill and intangible assets at January 31, 2001 is approximately
$2,500,000 of capitalized legal costs associated with the successful defense
of SeaChange's patents. The patent intangible is being amortized over four
years. Included in other assets at January 31, 2001 is approximately $715,000
in deferred legal costs associated with the on-going defense of certain of our
patents. Accumulated amortization of goodwill and intangible assets was
$850,000, $884,000 and $1,438,000 at December 31, 1999, January 31, 2000 and
January 31, 2001, respectively.
Research and Development and Software Development Costs
Costs incurred in the research and development of SeaChange'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 SeaChange's financial
statements. Costs associated with acquired software rights are capitalized if
technological feasibility of the software has been established.
Stock Compensation
Employee stock awards under SeaChange's and its subsidiaries' compensation
plans are accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", ("APB 25") and related
interpretations. SeaChange provides the disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("SFAS 123") and related interpretations. Non-employee stock
awards are accounted for in accordance with Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments That are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
F-19
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
SeaChange has determined that the functional currency of its foreign
subsidiaries is the local currency. Accordingly, assets and liabilities are
translated to U.S. dollars at current exchange rates as of each balance sheet
date. Income and expense items are translated using average exchange rates
during the year. Cumulative currency translation adjustments are presented as
a separate component of stockholders' equity. Transaction gains and losses and
unrealized gains and losses on intercompany receivables are recognized in the
Statement of Operations and have not been material to date.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. SeaChange has presented accumulated
other comprehensive income and other comprehensive income in the Statement of
Stockholders' (Deficit) Equity. Other comprehensive loss consists primarily of
cumulative translation adjustments.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs
were $624,000, $857,000, $40,000, and $1,089,000, for the years ended December
31, 1998 and 1999, the month ended January 31, 2000, and the year ended
January 31, 2001, respectively.
Earnings Per Share
Earnings per share are presented in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128") which
requires the presentation of "basic" earnings per share and "diluted" earnings
per share. Basic earnings per share is computed by dividing income available
to common shareholders by the weighted-average shares of common stock
outstanding during the period. For the purposes of calculating diluted
earnings per share the denominator includes both the weighted average number
of shares of common stock outstanding during the period and the weighted
average number of potential common stock, such as stock options and restricted
stock.
For the year ended December 31, 1998, the one month ended January 31, 2000
and the one month ended January 31, 1999, 2,114,000, 2,055,000 and 2,057,000
common shares issuable upon the exercise of stock options, respectively, and
1,792,000 shares of unvested restricted common stock for the year ended
December 31, 1998, are antidilutive because SeaChange recorded a net loss for
the periods and, therefore, have been excluded from the diluted earnings per
share computations.
F-20
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the periods indicated:
Year Ended December
31, Month Ended Year Ended Month Ended
--------------------- January 31, January January 31,
1998 1999 2000 31, 2001 1999
---------- ---------- ----------- ---------- -----------
(unaudited)
Weighted average shares
used in calculating
earnings per share--
Basic.................. 18,982,000 20,883,000 21,269,000 21,745,000 20,901,000
Dilutive common stock
equivalents............ -- 891,000 -- 1,489,000 --
---------- ---------- ---------- ---------- ----------
Weighted average shares
used in calculating
earnings per share--
Diluted................ 18,982,000 21,774,000 21,269,000 23,234,000 20,901,000
========== ========== ========== ========== ==========
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, collectively referred to
as derivatives, and for hedging activities. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133. This accounting standard amended the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and hedging activities. We will adopt SFAS No. 133, as amended, in
fiscal year 2002. To date we have not utilized derivative instruments or
hedging activities and, therefore, the adoption of SFAS 133 is not expected to
have a material impact on our financial position or results of operations.
3. Change in Accounting Principle
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Historically, for
some of SeaChange's sales transactions, a portion of the sales price,
typically 25%, was not due until installation occurred. Under SAB 101 and the
new accounting method adopted retroactive to February 1, 2000, SeaChange now
defers the portion of the sales price not due until installation is complete.
During the fourth quarter of the twelve months ended January 31, 2001,
SeaChange implemented the SEC's SAB 101 guidelines, retroactive to the
beginning of the year. This was reported as a cumulative effect of a change in
accounting principle as of February 1, 2000. The cumulative effect of the
change in accounting principle on prior years resulted in a charge to income
of $1.1 million (net of income taxes of $732,000), or $0.05 per diluted share,
which has been included in income for the twelve months ended January 31,
2001. For the twelve months ended January 31, 2001, SeaChange recognized $1.5
million in revenue that is included in the cumulative effect adjustment as of
February 1, 2000. During the twelve months ended January 31, 2001, SeaChange
changed its standard payment terms such that no portion of the sales price is
due upon installation. The results for the first three quarters of twelve
months ended January 31, 2001 have been restated to conform with SAB 101. The
pro forma results for prior periods presented in the consolidated statement of
operations were calculated assuming the accounting change was made
retroactively to all prior periods presented.
F-21
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Consolidated Balance Sheet Detail
Inventories consist of the following:
January 31,
December -----------------------
31, 1999 2000 2001
----------- ----------- -----------
Components and assemblies............... $14,739,000 $17,602,000 $18,695,000
Finished products....................... 2,389,000 2,487,000 6,212,000
----------- ----------- -----------
$17,128,000 $20,089,000 $24,907,000
=========== =========== ===========
Property and equipment consist of the following:
Estimated
useful January 31,
life December 31, -----------------------
(years) 1999 2000 2001
--------- ------------ ----------- -----------
Land........................ $ -- $ -- $ 283,000
Buildings................... 20 -- -- 1,201,000
Office furniture and
equipment.................. 5 1,645,000 2,268,000 2,454,000
Computer and demonstration
equipment.................. 3 12,213,000 11,752,000 17,317,000
Deployed assets............. 3-7 4,065,000 4,209,000 5,413,000
Service and spare
components................. 5 2,584,000 2,584,000 2,951,000
Leasehold improvements...... 1-7 1,096,000 1,065,000 1,676,000
Automobiles................. 5 56,000 56,000 101,000
----------- ----------- -----------
21,659,000 21,934,000 31,396,000
----------- ----------- -----------
Less--Accumulated
depreciation and
amortization............... 11,121,000 11,442,000 15,510,000
----------- ----------- -----------
$10,538,000 $10,492,000 $15,886,000
=========== =========== ===========
Depreciation expense was $3,857,000, $3,806,000, $319,000, and $4,345,000
for the years ended December 31, 1998 and 1999, for the month ended January
31, 2000, and the year ended January 31, 2001, respectively.
Accrued expenses consist of the following:
January 31,
December 31, ---------------------
1999 2000 2001
------------ ---------- ----------
Accrued software license fees............ $1,565,000 $1,565,000 $ 157,000
Accrued sales and use taxes.............. 647,000 -- 581,000
Other accrued expenses................... 1,287,000 1,211,000 1,078,000
---------- ---------- ----------
$3,499,000 $2,776,000 $1,816,000
========== ========== ==========
5. Segment Information
SeaChange has three reportable segments: broadband systems, broadcast
systems and services. The broadband systems segment provides products to
digitally manage, store and distribute digital video for cable system
operators and telecommunications companies. The broadcast systems segment
provides products for the storage, archival, on-air playback of advertising
and other video programming for the broadcast television
F-22
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
industry. The service segment provides installation, training, product
maintenance and technical support for all of the above systems and content
which is distributed by the broadband product segment. SeaChange does not
measure the assets allocated to the segments. SeaChange measures results of
the segments based on the respective gross profits. There were no inter-
segment sales or transfers. Long-lived assets are principally located in the
United States. SeaChange has changed its reportable segments from the prior
year and has reclassed prior period amounts to conform to these current
segments. The following summarizes the revenues and cost of revenues by
reportable segment:
One month One month
Year ended December 31, ended Year ended ended
----------------------- January January 31, January 31,
1998 1999 31, 2000 2001 1999
----------- ----------- ---------- ----------- -----------
(unaudited)
Revenues:
Broadband............. $53,810,000 $51,664,000 $ 190,000 $54,412,000 $ 467,000
Broadcast............. 4,223,000 16,793,000 36,000 20,574,000 230,000
Services.............. 14,891,000 16,764,000 1,484,000 23,482,000 1,211,000
----------- ----------- ---------- ----------- ----------
$72,924,000 $85,221,000 $1,710,000 $98,468,000 $1,908,000
=========== =========== ========== =========== ==========
Costs of revenues:
Broadband............. $33,352,000 $29,702,000 $ 503,000 $28,481,000 $ 463,000
Broadcast............. 2,420,000 9,187,000 130,000 11,447,000 207,000
Services.............. 13,611,000 14,962,000 1,445,000 18,798,000 1,049,000
----------- ----------- ---------- ----------- ----------
$49,383,000 $53,851,000 $2,078,000 $58,726,000 $1,719,000
=========== =========== ========== =========== ==========
The following summarizes revenues by geographic locations:
One month One month
Year ended December 31, ended Year ended ended
----------------------- January January 31, January 31,
1998 1999 31, 2000 2001 1999
----------- ----------- ---------- ----------- -----------
(unaudited)
Revenues:
United States......... $63,497,000 $65,730,000 $1,398,000 $78,025,000 $1,185,000
Canada and South
America.............. 691,000 5,371,000 44,000 4,161,000 626,000
Europe................ 4,272,000 9,777,000 234,000 8,827,000 19,000
Rest of world......... 4,464,000 4,343,000 34,000 7,455,000 78,000
----------- ----------- ---------- ----------- ----------
$72,924,000 $85,221,000 $1,710,000 $98,468,000 $1,908,000
=========== =========== ========== =========== ==========
For the years ended December 31, 1998 and 1999, the one month ended January
31, 2000, and the year ended January 31, 2001, certain customers accounted for
more than 10% of SeaChange's revenues. Individual customers accounted for 24%
and 15% in 1998; 15% and 10% in 1999; 16% and 11% in the one month ended
January 31, 2000; and 12% and 10% in the twelve months ended January 31, 2001.
The following summarizes revenues by significant customer:
Year ended One month
December 31, ended Year ended
--------------- January 31, January 31,
1998 1999 2000 2001
------ ------ ----------- -----------
Customer A......................... 24% 15% 16% --
Customer B......................... 15% 10% 11% 12%
Customer C......................... -- -- -- 10%
F-23
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Acquisition and Restructuring of Operations
Acquisition
On December 30, 1999, SeaChange acquired all of the authorized and
outstanding common stock of Digital Video Arts, Ltd. in exchange for 330,000
shares of SeaChange's common stock using an exchange ratio of 0.033 of one
share of SeaChange's common stock for each share of Digital Video Arts. The
acquisition was accounted for as a pooling of interests. Digital Video Arts is
a developer of custom software products specializing in digital video and
interactive television. As a result of the acquisition, Digital Video Arts
became a wholly-owned subsidiary of SeaChange. Total revenues of $85.2 million
for the year ended December 31, 1999 consisted of $84.2 million of SeaChange's
revenues and $1.0 million of Digital Video Arts' revenues. Net income of
$497,000 for the same period consisted of SeaChange's net income of $1.1
million and Digital Video Arts' net loss of $592,000. Included in net income
were acquisition costs of $684,000 consisting primarily of professional
service fees. All intercompany transactions were eliminated in consolidation.
Due to the acquisition, Digital Video Arts' previously unrecognized tax
benefits of operating loss carryforwards were recognized by the combined
Company in the applicable period. The accompanying consolidated financial
statements for all the periods presented have been restated to include the
results of operations, financial position and cash flows of Digital Video
Arts.
Restructuring of Operations
In March 1998, SeaChange 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,
SeaChange had notified all terminated employees. All restructuring charges
were paid as of December 31, 1998.
7. Lines of Credit and Long-term Bank Debt
SeaChange had a $6.0 million revolving line of credit and a $5.0 million
equipment line of credit with a bank. This revolving line of credit expired in
March 2000 and SeaChange's ability to make purchases under the equipment line
of credit expired in March 2000. In July 2000, SeaChange renewed its revolving
line of credit and equipment line of credit with a bank. The revolving line of
credit was extended until March 2001 and borrowings under the facility
increased to $7.5 million. The equipment line of credit was extended to
provide SeaChange additional equipment financing of $4.0 million through March
2001. In addition, SeaChange entered into a $3.0 million line of credit
facility with the Export-Import Bank of the United States ("EXIM") which
allows SeaChange to borrow money based upon eligible foreign customer account
balances. The ability to borrow funds by SeaChange under this facility also
expired in March 2001. SeaChange is currently in the process of negotiating
the renewal of all the lines of credit. Borrowings under all the lines of
credit are collateralized by substantially all of SeaChange's assets. Loans
made under the revolving line of credit would generally bear interest at a
rate per annum equal to the LIBOR rate plus 2% (9.05% at January 31, 2001).
Loans under the EXIM line of credit bear interest at a rate per annum equal to
the prime rate (9.5% at January 31, 2001). Loans made under the equipment line
of credit bear interest at a rate per annum equal to the bank's base rate plus
1.0% (10.5% at January 31, 2001). The loan agreement relating to the lines of
credit requires that SeaChange provide the bank with certain periodic
financial reports and comply with certain financial ratios including the
maintenance of total liabilities, excluding deferred revenue, to net worth
ratio of at least .80 to 1.0. At January 31, 2001, SeaChange was not in
compliance with certain financial covenants of the loan agreement for all the
lines of credit. Subsequent to year-end, SeaChange received a waiver of non-
compliance from the bank. As of January 31, 2001, there were $4.0 million in
borrowings against the revolving line of credit and borrowings
F-24
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding under the equipment line of credit were $4.9 million. There were
no borrowings outstanding under the EXIM line of credit at January 31, 2001.
In October 2000, SeaChange entered into an agreement with a bank to finance
$1.2 million of the construction costs related to the purchase and renovation
of a manufacturing mill in New Hampshire that SeaChange previously purchased
in February 2000. During the construction period, interest is accrued and
payable at a per annum rate of 8.875%. Upon occupancy of the building, the
loan converted into two promissory notes whereby SeaChange will pay principal
and interest based upon a fixed interest rate per annum over a five and ten
year period, respectively (8.875% at January 31, 2001). Borrowings under the
loan are secured by the land and buildings of the renovated mill. The loan
agreement requires that SeaChange provide the bank with certain periodic
financial reports and comply with certain financial ratios. At January 31,
2001, SeaChange were in compliance with all covenants. As of January 31, 2001,
borrowings outstanding under the loan were $1.2 million.
Principal payments under the lines of credit and the construction loan are
payable over the next five years as follows:
Payments
-----------
Year ended January 31, 2002...................................... $ 6,329,000
2003.................................................. 2,074,000
2004.................................................. 938,000
2005.................................................. 186,000
2006.................................................. 203,000
Thereafter............................................ 349,000
-----------
Total........................................................ $10,079,000
===========
8. Income Taxes
The components of income (loss) before income taxes are as follows:
Year ended December
31, Month ended Year ended
---------------------- January 31, January 31,
1998 1999 2000 2001
------------ -------- ----------- -----------
Domestic.................... $ (7,361,000) $331,000 $(3,614,000) $(2,704,000)
Foreign..................... -- 151,000 -- 2,107,000
------------ -------- ----------- -----------
$(7,361,000) $482,000 $(3,614,000) $ (597,000)
============ ======== =========== ===========
F-25
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the provision (benefit) for income taxes are as follows:
Year
Year ended December ended
31, Month ended January
----------------------- January 31, 31,
1998 1999 2000 2001
------------ --------- ----------- ---------
Current provision
(benefit):
Federal................ $ (1,913,000) $ 532,000 $ -- $ --
State.................. -- 354,000 -- --
Foreign................ -- 56,000 -- --
------------ --------- ----------- ---------
(1,913,000) 942,000 -- --
============ ========= =========== =========
Deferred benefit:
Federal................ (124,000) (586,000) (889,000) (538,000)
State.................. (752,000) (371,000) (267,000) (86,000)
Foreign................ -- -- -- (66,000)
------------ --------- ----------- ---------
(876,000) (957,000) (1,156,000) (690,000)
------------ --------- ----------- ---------
$(2,789,000) $ (15,000) $(1,156,000) $(690,000)
============ ========= =========== =========
The components of deferred income taxes are as follows:
December
31, January 31, January 31,
1999 2000 2001
----------- ----------- -----------
Deferred tax assets:
Inventories....................... $ 1,282,000 $ 1,133,000 $ 1,396,000
Allowance for doubtful accounts... 405,000 366,000 207,000
Deferred revenue.................. 115,000 -- --
Software.......................... 107,000 106,000 97,000
Accrued expenses.................. 135,000 335,000 8,000
Property and equipment............ 104,000 200,000 57,000
Research and development credit
carryforwards.................... 198,000 268,000 1,358,000
Federal net operating loss
carryforwards.................... -- 1,339,000 3,769,000
State net operating loss
carryforwards.................... 554,000 573,000 717,000
Foreign net operating loss
carryforwards.................... -- -- 66,000
Acquired net operating loss
carryforwards and basis
differences...................... 3,361,000 3,361,000 3,361,000
----------- ----------- -----------
6,261,000 7,681,000 11,036,000
Valuation allowance............... (3,361,000) (3,361,000) (3,361,000)
----------- ----------- -----------
Total deferred tax assets....... 2,900,000 4,320,000 7,675,000
----------- ----------- -----------
Deferred tax liabilities:
Property and equipment............ -- -- --
Deferred Revenue.................. -- 246,000 --
----------- ----------- -----------
Total deferred tax liabilities.. -- 246,000 --
----------- ----------- -----------
Net deferred income taxes........... $ 2,900,000 $ 4,074,000 $ 7,675,000
=========== =========== ===========
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Under Statement of
F-26
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
benefit associated with future deductible temporary differences is recognized
if it is more likely than not that the benefit will be realized. The
measurement of deferred tax assets is reduced by a valuation allowance if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
The valuation allowance of $3,361,000 at December 31, 1999, January 31,
2000 and January 31, 2001 relates to net operating loss carryforwards and tax
basis differences acquired in SeaChange's purchase of SC Asia. These acquired
deferred tax assets may only be utilized to offset future taxable income
attributable to SC Asia. In addition, the recognition of these deferred tax
assets is subject to Internal Revenue Code change in ownership rules which may
limit the amount that can be utilized to offset future taxable income.
SeaChange believes that the valuation allowance is appropriate given the
weight of objective evidence, including the historical operating results of
IPC. Any tax benefits subsequently recognized related to these assets will
first reduce the remaining balance in goodwill and then other acquired
intangible assets.
Although realizability is not assured, based on the weight of available
evidence, SeaChange believes it is more likely than not that all remaining
deferred tax assets will be realized. The amount of the deferred tax asset
considered realizable is subject to change based on future events, including
generating taxable income in future periods. SeaChange will continue to assess
the need for the valuation allowance at each balance sheet date based on all
available evidence. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if SeaChange does not
generate sufficient taxable income in future periods.
In accordance with APB 23, SeaChange does not provide for U.S. federal
income taxes on the earnings of its non-U.S. subsidiaries, as it is
management's plan to permanently reinvest in operations outside the U.S. At
January 31, 2001, undistributed earnings of approximately $163,000 are
considered by SeaChange to be permanently invested in certain foreign
subsidiaries. The amount of tax that would be owed if the profits were
distributed is $56,000.
At January 31, 2001, SeaChange had federal and state net operating loss
carryforwards of approximately $10,341,000 and $15,467,000, respectively,
which expire at various dates through 2021. Of these amounts, $4,030,000 and
$4,030,000, respectively, relate to deductions for disqualifying dispositions
of incentive stock options that will be credited to paid-in capital, when
realized.
At January 31, 2001, SeaChange had federal and state research and
development tax credit carryforwards of approximately $1,098,000 and $359,000,
respectively, which expire at various dates through 2016. Of these amounts,
$38,000 and $0, respectively, relate to qualified wage expenses incurred as a
result of disqualifying dispositions of incentive stock options by employees
that will be credited to paid-in capital, when realized.
F-27
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The income tax provision (benefit) computed using the federal statutory
income tax rate differs from SeaChange's effective tax rate primarily due to
the following:
Year
Ended
Year Ended December 31 Month Ended January
----------------------- January 31, 31,
1998 1999 2000 2001
------------ --------- ----------- ---------
Statutory U.S. federal tax
rate......................... $(2,552,000) $ 164,000 $(1,239,000) $(203,000)
State taxes after state tax
credits, net of federal tax
benefits................... (496,000) (12,000) (176,000) (28,000)
Other....................... 355,000 98,000 278,000 (93,000)
Research and development tax
credits.................... (316,000) (446,000) (25,000) (443,000)
Non-deductible acquisition
costs...................... -- 233,000 -- --
Acquired net operating
losses....................... -- (192,000) -- --
Nondeductible expenses,
including write-off of
acquired in-process
research and development in
1997....................... 220,000 140,000 6,000 77,000
------------ --------- ----------- ---------
$(2,789,000) $ (15,000) $(1,156,000) $(690,000)
============ ========= =========== =========
SeaChange's effective tax benefit rate was 38% and 3% in the year ended
December 31, 1998 and 1999, respectively, 32% in the month ended January 31,
2000 and 116% in the year ended January 31, 2001. In the second quarter of
1999, the separate return limitation year (SRLY) regulations were finalized to
allow for the use of acquired net operating loss carryforwards where an
ownership change and an acquisition has taken place within a six month period.
As a result of SeaChange's acquisition of Digital Video Arts, SeaChange
recorded a tax benefit of $192,000 in the second quarter of 1999 related to
the use of Digital Video Arts net operating loss carryforwards. In the fourth
quarter of 1999, the federal research and development tax credit was
retroactively extended through June 30, 2004. As a result, SeaChange recorded
a tax benefit of $446,000 in the fourth quarter of 1999 related to the
utilization of these tax credits.
9. Preferred Stock
Stock Authorization
The Board of Directors is authorized to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock, in one or more series. Each
such series of preferred stock shall have the number of shares, designations,
preferences, voting powers, qualifications and special or relative rights or
privileges to be determined by the Board of Directors, including dividend
rights, voting rights, redemption rights and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
10. Common Stock
Microsoft Investment
On May 8, 2000, SeaChange and Microsoft Licensing, Inc. entered into a
licensing and development agreement whereby Microsoft agreed to license to
SeaChange certain technology to be used by SeaChange in connection with the
development by SeaChange of plug-ins for the streaming media server software
update currently being developed by Microsoft to its Windows NT/Windows 2000
operating system. Under the terms of the agreement, SeaChange is also entitled
to use the Microsoft technology to enhance SeaChange's software to use the
updated streaming media server software being developed by Microsoft. The
parties intend that SeaChange will be able to promote and ship the enhanced
SeaChange software as its primary streaming media system for all Microsoft
Windows 2000-based SeaChange systems.
F-28
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the ability to use the technology owned by Microsoft and
licensed to SeaChange pursuant to the licensing and development agreement,
Microsoft purchased 277,162 shares of SeaChange's common stock for $10
million. In addition, under the terms of the agreement, Microsoft may purchase
approximately $10 million of additional shares of SeaChange's common stock
upon the satisfaction of certain commercial milestones. The initial shares
purchased for $10 million was completed by SeaChange and Microsoft on May 23,
2000.
Stock Split
On December 10, 1999, the Board of Directors authorized a 3-for-2 stock
split of SeaChange's common stock, which became effective on December 27,
1999. All shares of common stock, common stock options, preferred stock
conversion ratios and per share amounts included in the accompanying
consolidated financial statements have been adjusted to give retroactive
effect to the stock split for 1999.
Treasury Stock
In 1999, SeaChange repurchased and retired 47,250 shares of its common
stock from employees of SeaChange. All of the shares were held for more than
six months from the time the shares became vested. Accordingly, no
compensation expense was recorded for the difference between the repurchase
price and the original purchase price paid by the stockholder.
Reserved Shares
At January 31, 2001, SeaChange had 3,982,183 shares of common stock
reserved for issuance upon the exercise of common stock options and the
purchase of stock under the Employee Stock Purchase Plan.
F-29
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock Plans
Employee Stock Purchase Plan
In September 1996, SeaChange's Board of Directors adopted and the
stockholders approved an employee stock purchase plan (the "Stock Purchase
Plan"), effective January 1, 1997, which provides for the issuance of a
maximum of 450,000 shares of common stock to participating employees who meet
eligibility requirements. Employees who would immediately after the grant own
5% or more of the total combined voting power or value of SeaChange's stock
and directors who are not employees of SeaChange may not participate in the
Stock Purchase Plan. The purchase price of the stock is 85% of the lesser of
the average market price of the common stock on the first or last business day
of each six-month plan period. During the year ended December 31, 1998, and
1999, the one month ended January 31, 2000 and the year ended January 31,
2001, 79,157, 87,014, 0, and 67,795 shares of common stock, respectively, were
issued under the Stock Purchase Plan. As of January 31, 2001, 171,992 shares
are available under the Stock Purchase Plan for issuance.
1995 Stock Option Plan
The Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option
Plan") provides for the grant of incentive stock options and nonqualified
stock options for the purchase of up to an aggregate of 4,800,000 shares of
SeaChange's common stock by officers, employees, consultants and directors of
SeaChange. The Board of Directors is responsible for administration of the
1995 Stock Option Plan and determining the term of each option, option
exercise price, number of shares for which each option is granted and the rate
at which each option is exercisable. Options generally vest ratably over five
years. SeaChange may not grant an employee incentive stock options with a fair
value in excess of $100,000 that are initially exercisable during any one
calendar year.
Incentive stock options may be granted to employees at an exercise price
per share of not less than the fair value per common share on the date of the
grant (not less than 110% of the fair value in the case of holders of more
than 10% of SeaChange's voting stock). Nonqualified stock options may be
granted to any officer, employee, director or consultant at an exercise price
per share as determined by SeaChange's Board of Directors.
Options granted under the 1995 Stock Option Plan generally expire ten years
from the date of the grant (five years for incentive stock options granted to
holders of more than 10% of SeaChange's voting stock).
Director Stock Option Plan
In June 1996, SeaChange's Board of Directors adopted and the stockholders
approved a director stock option plan (the "Director Option Plan") which
provides for the grant of options to full time directors of SeaChange to
purchase a maximum of 45,000 shares of common stock under the Director Option
Plan. Under the Director Option Plan, participating directors receive an
option to purchase 5,062 shares of common stock per annum. Options granted
under the Director Option Plan vest as to 33 1/3% of the shares underlying the
option immediately upon the date of the grant, and vest as to an additional 8
1/3% of the shares underlying the option at the end of each of the next 8
quarters, provided that the optionee remains a director. Directors will also
receive, on each three-year anniversary of such director's option grant date,
an additional option to purchase 5,062 shares of common stock, provided that
such director continues to serve on the Board of Directors. All options
granted under the Director Option Plan have an exercise price equal to the
fair value of the common stock on the date of grant and a term of ten years
from the date of grant.
F-30
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Transactions under the 1995 Stock Option Plan and the Director Option Plan
during the years ended December 31, 1998 and 1999, the one month ended January
31, 2000 and the year ended January 31, 2001 are summarized as follows:
Month ended Year ended
Year ended December 31, January 31, January 31,
--------------------------------------- ------------------- -------------------
1998 1999 2000 2001
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
--------- -------- --------- -------- --------- -------- --------- --------
Outstanding at beginning
of period 1,714,586 $ 7.60 2,113,824 $ 5.34 2,040,053 $ 7.79 2,054,539 $ 8.29
Granted................. 1,334,594 4.95 524,739 14.76 35,400 35.50 2,006,977 26.82
Exercised............... (135,790) 3.71 (310,753) 3.94 (14,330) 4.28 (392,669) 4.57
Cancelled............... (799,566) 9.99 (287,757) 6.00 (6,584) 6.61 (203,883) 19.57
========= ========= ========= =========
Outstanding at period
end.................... 2,113,824 $ 5.34 2,040,053 $ 7.79 2,054,539 $ 8.29 3,464,964 $18.80
========= ========= ========= =========
Options exercisable at
period end............. 473,465 594,265 625,387 834,024
Weighted average fair
value of options
granted during the
period................. $ 3.54 $ 7.11 $26.57 $22.36
The following table summarizes information about employee and director
stock options outstanding at January 31, 2000 and January 31, 2001:
Options outstanding at Options outstanding at
January 31, 2000 January 31, 2001
-------------------------------- --------------------------------
Weighted Weighted
average average
remaining Weighted remaining Weighted
contractual average contractual average
Number life exercise Number life exercise
outstanding (years) price outstanding (years) price
----------- ----------- -------- ----------- ----------- --------
Range of exercise
prices:
$0.33 to 0.82......... 142,580 3.48 $ 0.75 34,496 4.68 $ 0.70
2.80 to 4.00.......... 540,831 8.51 3.87 393,814 7.72 3.95
4.45 to 6.25.......... 697,412 8.01 5.48 543,049 7.02 5.47
6.58 to 10.00......... 285,505 8.50 7.47 237,247 7.59 7.49
10.33 to 14.33........ 143,677 9.17 11.55 128,271 8.24 11.46
19.17 to 23.31........ 74,138 6.73 19.46 1,017,361 9.60 23.08
26.75 to 39.13........ 170,396 9.91 33.92 1,110,726 9.22 30.49
--------- ---- ------ --------- ---- ------
2,054,539 8.09 $ 8.29 3,464,964 8.62 $18.80
========= ==== ====== ========= ==== ======
F-31
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options exercisable Options exercisable
at January 31, 2000 at January 31, 2001
-------------------- --------------------
Weighted Weighted
average average
Number exercise Number exercise
exercisable price exercisable price
----------- -------- ----------- --------
Range of exercise prices $0.33 to
0.82............................... 117,781 $0.76 34,496 $ 0.70
2.80 to 4.00........................ 152,791 3.72 143,364 3.87
4.45 to 6.25........................ 250,966 5.41 288,960 5.41
6.58 to 10.00....................... 48,899 7.64 97,122 7.54
10.33 to 14.33...................... 12,812 12.91 41,847 11.63
19.17 to 23.31...................... 42,138 19.33 39,343 19.47
26.75 to 39.13...................... -- -- 188,892 30.68
------- ----- ------- ------
625,387 $5.39 834,024 $11.90
======= ===== ======= ======
Fair Value Disclosures
SeaChange applies APB 25 in accounting for employee stock awards.
Compensation expense associated with equity awards of $47,000 has been
recorded for the year ended December 31, 1998. Had compensation expense for
SeaChange's employee stock plans been determined based on the fair value at
the grant dates, as prescribed in SFAS 123, SeaChange's net income (loss) and
earnings (loss) per share would have been as follows:
Year ended December Month ended Year ended
31, January 31, January 31,
--------------------- ----------- ------------
1998 1999 2000 2001
----------- -------- ----------- ------------
Net income (loss)
As reported................ $(4,572,000) $497,000 $(2,458,000) $ (1,007,000)
Pro forma.................. $(6,456,000) $122,000 $(2,703,000) $(14,825,000)
Basic earnings (loss) per
share
As reported.................. $ (0.24) $ 0.02 $ (0.12) $ (0.05)
Pro forma.................. $ (0.34) $ 0.01 $ (0.13) $ (0.68)
Diluted earnings (loss) per
share
As reported................ $ (0.24) $ 0.02 $ (0.12) $ (0.05)
Pro forma.................. $ (0.34) $ 0.01 $ (0.13) $ (0.68)
The fair value of each option granted was estimated on the date of grant
assuming a weighted average volatility factor of 67% for the year ended
December 31, 1998, 46% for the year ended December 31, 1999, and 100% for the
month ended January 31, 2000 and twelve months ended January 31, 2001.
Additional weighted average assumptions used for grants during the years ended
December 31, 1998 and 1999, the one month ended January 31, 2000 and the year
ended January 31, 2001 included: dividend yield of 0.0% for all periods; risk-
free interest rates of 6.00% for options granted during the year ended
December 31, 1998, 5.54% for options granted during the year ended December
31, 1999 and the one month ended January 31, 2000 and 4.94% for option granted
the year ended January 31, 2001; and an expected option term of 5 years for
all periods.
Because additional option grants are expected to be made each year and
options vest over several years, the above pro forma disclosures are not
representative of pro forma effects of reported net income for future years.
F-32
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Repricing
On January 23, 1998, the Compensation and Option Committee of the Board of
Directors of SeaChange ("Committee") determined that, because certain stock
options held by employees of SeaChange had an exercise price significantly
higher than the fair market value of SeaChange's common stock, such stock
options were not providing the desired long-term incentive to employees.
Accordingly, the Committee granted those employees whose options were between
$10.00 and $16.42 per share an opportunity to cancel their existing options
for new options on a 1-for-1 basis, with a new five-year vesting schedule
beginning on January 23, 1998. Employees whose options were above $16.42 were
offered an opportunity to cancel their existing options for new options on a
2-for-3 basis, with no change in their original vesting schedule. As a result
of this stock option repricing, new options were granted to purchase 319,169
shares of common stock and the average exercise price of such options was
reduced from $14.79 per share to $5.50 per share, the fair market value of
SeaChange's common stock at the close of the market on January 22, 1998. With
the exception of one executive officer, SeaChange's directors and executive
officers were not eligible to participate in this stock option repricing.
During the execution of the stock option repricing plan, SeaChange's stock
price was below $5.50 per share and, therefore, no compensation charge was
recorded as a result of the stock option repricing.
12. Commitments and Contingencies
SeaChange leases its operating facilities and certain office equipment
under non-cancelable capital and operating leases, which expire at various
dates through 2007. Rental expense under operating leases was approximately
$1,341,000, $1,681,000, $167,000, and $2,307,000 for the years ended December
31, 1998 and 1999, the month ended January 31, 2000, and the year ended
January 31, 2001, respectively. Future commitments under minimum lease
payments as of January 31, 2001 are as follows:
Capital Operating
-------- ----------
Year ended January 31, 2002................................ $221,000 $1,638,000
2003............................................ 145,000 1,334,000
2004............................................ 60,000 871,000
2005............................................ -- 861,000
2006............................................ -- 295,000
Thereafter...................................... -- 327,000
-------- ----------
Minimum lease payments..................................... 426,000 $5,326,000
==========
Less: Amount representing interest....................... 39,000
--------
$387,000
========
SeaChange had non-cancelable purchase commitments for inventories of
approximately $5,400,000 at January 31, 2001.
On March 17, 2000, Beam Laser Systems, Inc. and Frank L. Beam instituted a
claim (Civil Action No. 2:00-CV-195) in the federal courts in the Eastern
District of Virginia against one of our customers, Cox Communications, Inc.
This claim was later amended by Beam Laser on June 16, 2000 to also include
two related companies of Cox Communications: CableRep, Inc. and CoxCom, Inc.
Beam Laser has asserted that the ad insertion technology, which includes our
spot ad insertion system, used by Cox Communications, CableRep and CoxCom
infringes two of the patents held by Beam Laser (Patents No. 4,814,883 and
5,200,825). Beam Laser is seeking both an injunction and monetary damages from
the defendants in that case. The defendants have made a counterclaim against
Beam Laser seeking a declaration of non-infringement, invalidity and
unenforceability of the two patents held by Beam Laser that are at question.
On May 19, 2000, we filed a motion seeking to intervene in the action between
our customer and Beam Laser, and to transfer the case to the District Court of
F-33
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Massachusetts. On June 23, 2000, the court granted our intervention motion and
deferred ruling on the issue of transfer. Also on June 23, 2000, we filed our
intervenor complaint in the Virginia action seeking, among other things, a
declaratory judgment of non-infringement, invalidity and unenforceability
regarding the two patents of Beam Laser that are at question. In addition, we
have agreed to indemnify our customer for claims brought against the customer
that are related to the customer's use of our products. On October 23, 2000,
the court denied our motion to transfer. On November 29, 2000, Beam Laser
filed a motion to amend its pleading to add claims against us seeking
equitable relief, a finding of willful or contributory infringement, and
attorneys' fees. On January 26, 2001, the magistrate denied Beam Laser's
motion to amend. Beam Laser has filed an objection to this denial, and on
March 16, 2001, the court allowed Beam's motion to amend the complaint, to add
charges of infringement against SeaChange, but not allowing any claims for
damages or willful infringement. In addition, on April 20, 2001, the court
denied a motion for summary judgement of laches, stating it will schedule an
evidentiary hearing. On June 1, 2001, the court granted our motion for summary
judgment of non-infringement disposing of all claims asserted against
SeaChange. Also, on June 1, 2001, the court granted our customer's motion for
summary judgment of non-infringement of one of its facilities. Our motions and
those of the Cox companies for summary judgment are still pending, as are the
counterclaims against Beam Laser. The court has set a date of July 16, 2001
for trial on all remaining claims.
On June 13, 2000, we filed in the United States District Court for the
District of Delaware a lawsuit against one of our competitors, nCube Corp.,
whereby we alleged that nCube's MediaCube-4 product infringed a patent held by
us (Patent No. 5,862,312). In instituting the claim, we sought both a
permanent injunction and damages in an unspecified amount. nCube made a
counterclaim against us that the patent held by us was invalid and that
nCube's MediaCube-4 product did not infringe our patent. On September 6, 2000,
nCube conceded, based on the District Court's prior claim construction ruling,
that its MediaCube-4 product infringed our patent. On September 25, 2000 a
jury upheld the validity of our patent. nCube has filed motions challenging
both the jury's verdict and the District Court's claim construction ruling.
The District Court has yet to rule on nCube's motions. At this time we are
awaiting the court's decision regarding a permanent injunction. Damages will
be determined in future proceedings.
On January 8, 2001, nCube Corp. filed a complaint against us in the United
States District Court for the District of Delaware alleging that our use of
our Media Cluster, Media Express and Media Server technology each infringe a
patent held by nCube (Patent No. 5,805,804). In instituting the claim, nCube
has sought both an injunction and monetary damages in an unspecified amount.
We responded on January 26, 2001, denying that the claim of infringement. We
also asserted a counterclaim seeking a declaration from the District Court
that U.S. Patent No. 5,805,804 is invalid and not infringed.
On June 14, 1999, we filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure our business and reputation in the marketplace.
The complaint further alleges that Mr. Putterman and Lathrop Investment
Management, Inc. defamed us through false postings on an Internet message
board. The complaint seeks unspecified amounts of compensatory and punitive
damages. On June 14, 2000, Concurrent filed a counterclaim under seal against
us seeking unspecified damages. These motions are currently pending and no
trial date has been set.
We cannot be certain of the outcome of the foregoing litigation, but do
plan to oppose allegations against us and assert our claims against other
parties vigorously. In addition, as these claims are subject to additional
discovery and certain claims for damages are as yet unspecified, we are unable
to estimate the impact to our business, financial condition, and results of
operations or cash flows.
F-34
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Employee Benefit Plan
SeaChange sponsors a 401(k) retirement savings plan (the "Plan").
Participation in the Plan is available to full-time employees who meet
eligibility requirements. Eligible employees may contribute up to 15% of their
annual salary, subject to certain limitations. SeaChange matches contributions
up to 25% of the first 6% of compensation contributed by the employee to the
Plan. During the years ended December 31, 1998 and 1999, the month ended
January 31, 2000, and the year ended January 31, 2001, SeaChange contributed
$189,000, $225,000, $19,000, and $286,000, respectively, to the Plan.
14. Comcast Equity Investment and Video-On-Demand Purchase Agreements
On December 1, 2000, SeaChange and Comcast Cable Communications, Inc.
entered into a video-on-demand purchase agreement for SeaChange's interactive
television video servers and related services. Under the terms of the video-
on-demand purchase agreement, Comcast has committed to purchase SeaChange's
equipment capable of serving a minimum of one million cable subscribers by
approximately December 2002. In addition, Comcast may earn up to an additional
450,000 incentive common stock purchase warrants through December 2003 based
on the number of cable subscribers in excess of one million who are served by
SeaChange's equipment which has been purchased by Comcast. In connection with
the execution of this commercial agreement, SeaChange entered into a common
stock and warrant purchase agreement, dated as of December 1, 2000, with
Comcast SC Investment, Inc., whereby Comcast SC agreed to purchase, subject to
certain closing conditions including registration of the shares purchased
thereby, 466,255 shares of SeaChange's common stock for approximately $10
million and Comcast SC would receive a warrant to purchase 100,000 shares,
exercisable at $21.445 per share, of SeaChange's common stock. This stock and
warrant purchase agreement was terminated by SeaChange and Comcast SC on
February 28, 2001. The terms and conditions of the video-on-demand purchase
agreement have not been modified.
On February 28, 2001, SeaChange and Comcast SC signed and closed a new
common stock and warrant purchase agreement on terms similar to the prior
agreement. Under the terms of this new agreement, SeaChange sold in a private
placement to Comcast SC for approximately $10,000,000 an aggregate of 756,144
shares of SeaChange's common stock and a warrant to purchase 100,000 shares of
SeaChange's common stock with an exercise price of $13.225 per share. Under
certain conditions determined upon the effectiveness of the registration of
the shares, the number of common shares purchased and the number of common
stock purchase warrants and related exercise price are subject to adjustment.
An additional number of shares of common stock shall be issued to Comcast SC
without any additional consideration as is equal to the difference between
756,144, the number of shares of common stock issued on February 28, 2001, and
the number of shares obtained by dividing $10,000,000 by the lower of 1) 92%
of the closing market price of SeaChange's common stock on the date of
effectiveness of the registration statement, and 2) the average of the closing
market price of SeaChange's common stock for the five trading days ending on
the effective date of the registration statement, if either of such prices is
lower than $13.225. The warrant agreement contains an adjustment mechanism
such that the warrant is exercisable for an additional 25,000 shares of
SeaChange's common stock if the registration statement has not been declared
effective on or before March 31, 2001 and an additional 333.33 shares of
SeaChange's common stock per day beginning on and including May 1, 2001 for
each day up to and including the day the registration statement is declared
effective. The warrant agreement also provides that the exercise price of the
warrant will be reduced on the effective date of the registration statement to
the lower of 1) 92% of the closing market price of SeaChange's common stock on
the effective date of the registration statement, and 2) the average of the
closing market prices of SeaChange's common stock for the five trading days
ending on the date of effectiveness of the registration statement, if either
of such prices is lower than $13.225, the exercise price as of the closing
date.
F-35
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SeaChange will determine the intrinsic value of the common stock purchase
and will measure the fair value of the 100,000 common stock purchase warrants
at the closing date and will record these amounts as contra-equity. Upon
effectiveness of the registration statement, SeaChange will measure the fair
value of the additional common shares issued, if any, and the incremental fair
value of the common stock warrants, and will add those amounts to the amount
of contra-equity initially recorded at the closing date. The contra-equity
amount will be amortized in future periods as an offset to gross revenue in
proportion to the revenue recognized from the sale of equipment with respect
to the first one million subscribers Comcast has committed to under the video-
on-demand purchase agreement. The fair value of the additional incentive
common stock purchase warrants will also be recorded as an offset to gross
revenue as the warrants are earned by Comcast, if any.
F-36
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of SeaChange International, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 5, 2001, except for the information presented in Note 12
for which the date is June 12, 2001, appearing in the Annual Report to
Shareholders of SeaChange International Inc. also included an audit of the
financial statement schedule listed in Item 14(a)(2) of Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 2001
F-37
Schedule II
SEACHANGE INTERNATIONAL, INC.
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
Balance at Charged to Deductions Balance at
beginning costs and and end of
of period expenses write-offs Other period
---------- ---------- ---------- ----- ----------
Allowance for Doubtful
Accounts:
Year ended December 31,
1998.................... $ 559,000 $ 497,000 $(186,000) $ -- $ 870,000
Year ended December 31,
1999.................... $ 870,000 $ 225,000 $(187,000) $ -- $ 908,000
Month ended January 31,
2000.................... $ 908,000 $ -- $ -- $ -- $ 908,000
Year ended January 31,
2001.................... $ 908,000 $ 516,000 $(682,000) $ -- $ 742,000
Inventory Valuation
Allowance:
Year ended December 31,
1998.................... $1,504,000 $2,016,000 $(919,000) $ -- $2,601,000
Year ended December 31,
1999.................... $2,601,000 $ 458,000 $(395,000) $ -- $2,664,000
Month ended January 31,
2000.................... $2,664,000 $ 11,000 $ -- $ -- $2,675,000
Year ended January 31,
2001.................... $2,675,000 $ 823,000 $(722,000) $ -- $2,776,000
F-38
[Logo appears here]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
SEC Registration Fee............................................ $ 23,681.00
NASD filing fee................................................. 10,408.00
Transfer agent and registrar fees............................... 5,000.00
Legal fees and expenses......................................... 100,000.00
Accounting fees and expenses.................................... 100,000.00
Printing and engraving expenses................................. 125,000.00
Miscellaneous................................................... 35,911.00
-----------
TOTAL....................................................... $400,000.00
===========
We will bear all expenses shown above.
Item 15. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our Certificate of Incorporation
provide for indemnification of our directors and officers for liabilities and
expenses that they may incur in those capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
SeaChange, and with respect to any criminal action or proceeding, actions that
the indemnitee had no reasonable cause to believe were unlawful. We refer you
to our Certificate of Incorporation filed as Exhibit 4.2 to our registration
statement on Form S-8 filed with the SEC on December 8, 1996 (File No. 333-
17379) and the amendment thereto filed as Exhibit 4.2 to our registration
statement on Form S-3 filed with the SEC on December 6, 2000 (File No. 333-
51386).
We maintain directors' and officers' liability insurance to insure our
directors and certain officers against certain liabilities and expenses which
arise out of or in connection with their capacities as directors and officers.
Item 16. Exhibits.
Exhibit
No. Description
------- -----------
1.1* --Form of Underwriting Agreement.
4.1 --Specimen certificate representing the Common Stock (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-1 previously
filed on November 4, 1996 with the Commission (File No. 333-12233)
and incorporated herein by reference).
4.2 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on Form
S-1 previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.3 --Certificate of Amendment, filed May 25, 2000 with the Secretary of
State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.2 to
the Company's registration statement on Form S-3 previously filed on
December 6, 2000 with the Commission (Filed No. 333-51386) and
incorporated herein by reference).
5.1** --Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1** --Loan and Security Agreement, dated October 22, 2001, by and between
the Company and Citizens Bank of Massachusetts
II-1
Exhibit
No. Description
------- -----------
23.1* --Consent of PricewaterhouseCoopers LLP
23.2** --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1** --Power of Attorney (included on signature page)
- --------
* Filed herewith.
** Previously filed.
Item 17. Undertakings.
The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (and, where appropriate, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Maynard, Commonwealth of
Massachusetts on January 9, 2002.
SeaChange International, Inc.
By: /s/ William L. Fiedler* ___
William L. Fiedler
Chief Financial Officer,
Secretary, Treasurer and
Vice President, Finance and
Administration
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* President, Chief Executive January 9, 2002
______________________________________ Officer, Director and
William C. Styslinger III Chairman (Principal
Executive Officer)
/s/ William L. Fiedler Chief Financial Officer, January 9, 2002
______________________________________ Secretary, Treasurer and
William L. Fiedler Vice President, Finance
and Administration
(Principal Financial
Officer and Principal
Accounting Officer)
* Director January 9, 2002
______________________________________
Martin R. Hoffmann
* Director January 9, 2002
______________________________________
Thomas F. Olson
* Director January 9, 2002
______________________________________
Carmine Vona
/s/ William L. Fiedler Attorney-in-fact January 9, 2002
______________________________________
William L. Fiedler
II-3
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
1.1* --Form of Underwriting Agreement.
4.1 --Specimen certificate representing the Common Stock (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-1 previously
filed on November 4, 1996 with the Commission (File No. 333-12233)
and incorporated herein by reference).
4.2 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on Form
S-1 previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.3 --Certificate of Amendment, filed May 25, 2000 with the Secretary of
State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.2 to
the Company's registration statement on Form S-3 previously filed on
December 6, 2000 with the Commission (Filed No. 333-51386) and
incorporated herein by reference).
5.1** --Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1** --Loan and Security Agreement, dated October 22, 2001, by and between
the Company and Citizens Bank of Massachusetts
23.1* --Consent of PricewaterhouseCoopers LLP
23.2** --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1** --Power of Attorney (included on signature page)
- --------
* Filed herewith.
** Previously filed.