SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- - OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3197974
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
124 Acton Street, Maynard, MA 01754
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 897-0100
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 12 months (or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing requirements for the
past 90 days.
YES __X___ NO _______
The number of shares outstanding of the registrant's Common Stock on April 30,
2000 was 21,465,343.
================================================================================
SEACHANGE INTERNATIONAL, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at April 30, 2000, January 31, 2000 and December 31, 1999.......................... 3
Consolidated Statement of Operations
Three months ended April 30, 2000 and April 30, 1999
and one month ended April 30, 2000,
April 30, 1999, January 31, 2000 and January 31, 1999............................. 4
Consolidated Statement of Cash Flows
Three months ended April 30, 2000 and April 30, 1999
and one month ended April 30, 2000, April 30, 1999,
January 31, 2000 and January 31, 1999............................................. 5
Notes to Consolidated Financial Statements......................................... 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................................... 10-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................... 17
SIGNATURES................................................................................... 18
EXHIBIT INDEX................................................................................ 19
2
Item 1. Financial Statements
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share-related data)
April 30, January 31, December 31,
--------- ----------- ------------
2000 2000 1999
---- ----- -----
Assets
Current assets
Cash and cash equivalents $ 1,042 $ 2,721 $ 11,318
Accounts receivable, net of allowance for doubtful
accounts of $821 at April 30, 2000 and
$908 at January 31, 2000 and December 31, 1999 16,442 16,756 17,840
Inventories 22,770 20,089 17,128
Prepaid expenses and other current assets 2,093 1,634 1,568
Deferred income taxes 3,400 3,400 2,243
--------- --------- ---------
Total current assets 45,747 44,600 50,097
Property and equipment, net 11,517 10,492 10,538
Other assets 863 869 884
Goodwill and intangibles, net 648 751 785
--------- --------- ---------
$ 58,775 $ 56,712 $ 62,304
========= ========= =========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of equipment line of credit
and obligations under capital lease $ 1,716 $ 1,045 $ 1,048
Accounts payable 10,588 10,451 15,038
Accrued expenses 1,900 2,776 3,499
Customer deposits 2,287 2,428 2,092
Deferred revenue 6,339 6,292 4,380
Income taxes payable 457 625 675
--------- --------- ---------
Total current liabilities 23,287 23,617 26,732
--------- --------- ---------
Long-term equipment line of credit and
obligations under capital lease 2,160 1,144 1,231
--------- --------- ---------
Commitments and contingencies (Note 8)
Stockholders' Equity
Common stock, $.01 par value; 100,000,000
shares authorized; 21,465,343, 21,300,185 and
21,285,855 shares issued at April 30, 2000,
January 31, 2000 and December 31, 1999, respectively 214 213 213
Additional paid-in capital 36,768 35,696 35,634
Accumulated deficit (3,549) (3,898) (1,440)
Treasury stock, 60,750 shares (1) (1) (1)
Accumulated other comprehensive loss (104) (59) (65)
--------- --------- ---------
Total stockholders' equity 33,328 31,951 34,341
--------- --------- ---------
$ 58,775 $ 56,712 $ 62,304
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SeaChange International, Inc.
Consolidated Statement of Operations
(in thousands, except per share data)
Three months ended One month ended
----------------------- --------------------------------------------------
April 30, April 30, April 30, April 30, January 31, January 31,
--------- --------- --------- --------- ----------- -----------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Revenues
Systems $16,868 $17,434 $ 422 $ 1,207 $ 226 $ 697
Services 5,468 3,855 1,654 1,180 1,484 1,211
------- ------- ------- ------- ------- -------
22,336 21,289 2,076 2,387 1,710 1,908
------- ------- ------- ------- ------- -------
Costs of revenues
Systems 9,272 10,073 709 870 633 670
Services 4,232 3,424 1,516 1,029 1,445 1,049
------- ------- ------- ------- ------- -------
13,504 13,497 2,225 1,899 2,078 1,719
------- ------- ------- ------- ------- -------
Gross profit (loss) 8,832 7,792 (149) 488 (368) 189
------- ------- ------- ------- ------- -------
Operating expenses
Research and development 4,353 4,249 1,632 1,453 1,764 1,324
Selling and marketing 2,490 2,126 1,302 652 1,034 522
General and administrative 1,503 1,388 536 447 457 447
------- ------- ------- ------- ------- -------
8,346 7,763 3,470 2,552 3,255 2,293
------- ------- ------- ------- ------- -------
Income (loss) from operations 486 29 (3,619) (2,064) (3,623) (2,104)
Interest income, net 25 5 7 3 9 9
------- ------- ------- ------- ------- -------
Income (loss) before income taxes 511 34 (3,612) (2,061) (3,614) (2,095)
Provision (benefit) for income taxes 162 33 (1,157) (659) (1,156) (691)
------- ------- ------- ------- ------- -------
Net income (loss) $ 349 $ 1 $(2,455) $(1,402) $(2,458) $(1,404)
======= ======= ======= ======= ======= =======
Basic and diluted earnings (loss) per share $ 0.02 $ 0.00 $ (0.11) $ (0.07) $ (0.12) $ (0.07)
======= ======= ======= ======= ======= =======
Shares used in calculating:
Basic earnings per share 21,390 20,930 21,434 20,957 21,269 20,901
======= ======= ======= ======= ======= =======
Diluted earnings per share 22,979 21,103 21,434 20,957 21,269 20,901
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
SeaChange International, Inc.
Consolidated Statement of Cash Flows
INCREASE IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
For the three months ended For the one month ended
-------------------------- -----------------------------------------------------
April 30, April 30, April 30, April 30, January 31, January 31,
--------- --------- --------- --------- ----------- -----------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Cash flows from operating activities
Net income (loss) $ 349 $ 1 $(2,455) $(1,402) $(2,458) $(1,404)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,113 1,006 391 342 355 379
Deferred income taxes -- -- (1,157) (659) (1,156) (691)
Changes in operating assets
and liabilities:
Accounts receivable 314 (983) 4,429 4,479 1,084 5,019
Inventories (2,501) 420 (2,360) (2,692) (2,961) (1,630)
Prepaid expenses and other assets (498) 125 123 (593) (46) (743)
Accounts payable 137 573 (3,972) (2,226) (4,587) (2,678)
Accrued expenses (876) 328 (329) (375) (723) (652)
Customer deposits (141) 857 14 1,138 336 188
Deferred revenue 47 (88) (703) (656) 1,912 1,037
Income taxes payable (168) 130 (50) -- (50) (115)
------- ------ ------- ------- ------- -------
Net cash provided by (used in)
operating activities (2,224) 2,369 (6,069) (2,644) (8,294) (1,290)
------- ------ ------- ------- ------- -------
Cash flows from investing activities
Purchases of property and equipment (2,215) (334) (535) (54) (275) (62)
------- ------ ------- ------- ------- -------
Net cash used in investing activities (2,215) (334) (535) (54) (275) (62)
------- ------ ------- ------- ------- -------
Cash flows from financing activities
Proceeds from borrowings under
equipment line of credit 2,000 -- -- -- -- --
Repayments under line of credit
and equipment line of credit (247) (123) (127) (41) (72) (2,039)
Repayments of obligation under
capital lease (66) (11) (15) (5) (18) (11)
Proceeds from issuance of common
stock 1,073 200 386 36 62 50
------- ------ ------- ------- ------- -------
Net cash provided by (used in)
financing activities 2,760 66 244 (10) (28) (2,000)
------- ------ ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents (1,679) 2,101 (6,360) (2,708) (8,597) (3,352)
Cash and cash equivalents,
beginning of period 2,721 2,090 7,402 6,899 11,318 5,442
------- ------ ------- ------- ------- -------
Cash and cash equivalents, end of
period $ 1,042 $4,191 $ 1,042 $ 4,191 $ 2,721 $ 2,090
======= ====== ======= ======= ======= =======
Supplemental disclosure of noncash
activity:
Transfer of items originally classified
as inventories to fixed assets $ -- $ 731 $ -- $ 111 $ -- $ 109
Transfer of items originally classified
as fixed assets to inventories $ 180 $ 109 $ 77 $ 53 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of SeaChange International, Inc. and its subsidiaries. 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 December 31, 1999, included in SeaChange's Annual Report
on Form 10-K for such fiscal year.
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. 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.
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.
3. Earnings Per Share
For the one month ended April 30, 2000, April 30, 1999, January 31, 2000
and January 31, 1999 common shares of 1,578,000, 323,000, 1,674,000 and
157,000, respectively, 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:
Three months ended One month ended
------------------ -----------------------------------------------------------
April 30, April 30, April 30, April 30, January 31, January 31,
-------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------
Weighted average shares used in 21,390,000 20,930,000 21,434,000 20,957,000 21,269,000 20,901,000
calculating earnings per share-
Basic..........................
Dilutive stock options 1,589,000 173,000 -- -- -- --
......................................
-------------------------------------------------------------------------------------------
Weighted average shares used in
calculating earnings per share- Diluted 22,979,000 21,103,000 21,434,000 20,957,000 21,269,000 20,901,000
.....................
========== ========== ========== ========== ========== ==========
6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
4. Inventories
Inventories consist of the following:
April 30, January 31, December 31,
2000 2000 1999
--------------------------------------
Components and assemblies $ 19,679 $ 17,602 $ 14,739
Finished products 3,091 2,487 2,389
--------------------------------------
$ 22,770 $ 20,089 $ 17,128
========= ========= =========
5. Comprehensive Income (Loss)
SeaChange's comprehensive income (loss) was as follows:
Three months ended One month ended
------------------ --------------------------------------------------
April 30, April 30, April 30, April 30, January 31, January 31,
--------------------------- ---------------------------------------------------
2000 1999 2000 1999 2000 1999
--------------------------- ---------------------------------------------------
Net income (loss) $ 349 $ 1 $(2,455) $(1,402) $(2,458) $(1,404)
Other comprehensive income (expense), net of
tax:
Foreign currency translation adjustment, net of
tax of $(14), ($42), $(1) , $(4), $2 and $8, (31) 20 (2) (10) 4 17
respectively
--------------------------- ---------------------------------------------------
Other comprehensive income (expense) (31) 20 (2) (10) 4 17
--------------------------- ---------------------------------------------------
Comprehensive income (loss) $ 318 $ 21 $(2,457) $(1,412) $(2,454) $(1,387)
======== ======= ======== ======== ======== ========
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments 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. SeaChange will
adopt SFAS 133 as required by SFAS 137, "Deferral of the Effective Date of
FASB Statement No. 133," in fiscal year 2002. To date SeaChange has not
utilized derivative instruments or hedging activities and, therefore, the
adoption of SFAS 133 is not expected to have a material impact on
SeaChange's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
the SEC's view in applying generally accepted accounting principles to
selected revenue recognition issues. The application of the guidance in SAB
101 is required in SeaChange's second quarter of its current fiscal year.
The effects of applying this guidance, if any, will be
7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
reported as a cumulative effect adjustment resulting from a change in
accounting principle. SeaChange's evaluation of SAB 101 is not yet
complete.
7. 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 television 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. Long-lived assets
are principally located in the United States. SeaChange has changed its
reportable segments from the prior quarter and prior year-end and has reclassed
prior period amounts to conform to these current segments. The following
summarizes the revenues and cost of revenues by reportable segment:
Three months ended One month ended
------------------------ -------------------------------------------------------
April 30, April 30, April 30, April 30, January 31, January 31,
2000 1999 2000 1999 2000 1999
----------- ---------- ----------- ---------- ------------ ------------
Revenues
Broadband $13,591 $14,337 $ 414 $1,011 $ 190 $ 467
Broadcast 3,277 3,097 8 196 36 230
Services 5,468 3,855 1,654 1,180 1,484 1,211
----------- ---------- ----------- ----------- ----------- -----------
Total $22,336 $21,289 $2,076 $2,387 $1,710 $1,908
----------- ---------- ----------- ----------- ----------- -----------
Costs of revenues
Broadband $ 7,422 $ 8,295 $ 709 $ 719 $ 503 $ 463
Broadcast 1,850 1,778 -- 151 130 207
Services 4,232 3,424 1,516 1,029 1,445 1,049
----------- ---------- ----------- ----------- ----------- -----------
Total $13,504 $13,497 $2,225 $1,899 $2,078 $1,719
----------- ---------- ----------- ----------- ----------- -----------
The following summarizes revenues by geographic locations:
Revenues
United States $18,811 $18,272 $1,851 $1,960 $1,398 $1,185
Canada and 44 626
South America 1,562 275 75 45
Europe 1,735 1,843 108 239 234 19
Asian Pacific and
rest of world 228 899 42 143 34 78
----------- ----------- ------------ ------------ ----------- -----------
$22,336 $21,289 $2,076 $2,387 $1,710 $1,908
----------- ----------- ------------ ------------ ----------- -----------
For the three months ended April 30, 2000 and 1999 and the one month
period ended April 30, 2000, April 30, 1999, January 31, 2000 and January
31, 1999, certain customers accounted for more than 10% of SeaChange's
revenue. Individual customers accounted for 15% and 13% of revenues in
the three months ended April 30, 2000, 18%, 17% and 14% of revenues in
the three months ended April 30, 1999, 13%, 12% and 10% in the one month
ended April 30, 2000, 24%, 14% and 10% in the one month ended April 30,
1999, 16% and 11% in the one month ended January 31, 2000 and 17%, 12%
and 10% in the one month ended January 31, 1999.
8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands, except share and per share data)
8. Legal Proceedings
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 SeaChange's customers, Cox
Communications, Inc. Beam Laser has asserted that the ad insertion
technology, which includes SeaChange's 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, SeaChange
filed a motion seeking to intervene in the action between its customer and
Beam Laser, and to transfer the case to the District Court of
Massachusetts. In addition, SeaChange has agreed to indemnify its customer
for claims brought against the customer that are related to the customer's
use of SeaChange's products.
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 held by SeaChange (Patent No. 5,862,312). 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 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. These motions are currently pending and no trial date has been
set.
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 in the early
stages of 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.
9. Fiscal Year Change
In April 2000, SeaChange's Board of Directors voted to change SeaChange's
fiscal accounting year from December 31 to January 31, such that
SeaChange's current fiscal year began on February 1, 2000 and will end on
January 31, 2001. SeaChange has recast its financial statements to present
the comparable prior year periods to conform to the current year fiscal
periods.
10. 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.
In addition to the ability to use the technology owned by Microsoft and
licensed to SeaChange pursuant to the licensing and development agreement
Microsoft agreed pursuant to the terms of an investment term sheet, dated
as of May 8, 2000, by and between SeaChange and Microsoft Corporation to
purchase 277,162 shares of SeaChange's common stock for $10 million and to
purchase approximately $10 million of additional shares of SeaChange's
common stock upon the satisfaction of certain commercial milestones. The
initial share purchase for $10 million was completed by SeaChange and
Microsoft on May 23, 2000.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Factors That May Affect Future Results
Any statements contained in this Form 10-Q that do not describe
historical facts, including without limitation statements concerning
expected revenues, earnings, product introductions and general market
conditions, may constitute forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Any
such forward-looking statements contained herein are based on current
expectations, but are subject to a number of risks and uncertainties
that may cause actual results to differ materially from expectations.
The factors that could cause actual future results to differ materially
from current expectations include the following: SeaChange's ability to
integrate the operations of acquired subsidiaries; fluctuations in
demand for SeaChange's products and services; SeaChange's ability to
manage its growth; SeaChange's ability to develop, market and introduce
new and enhanced products and services on a timely basis; the rapid
technological change which characterizes SeaChange's markets;
SeaChange's significant concentration of customers; SeaChange's
dependence on certain sole source suppliers and third-party
manufacturers; the risks associated with international sales as
SeaChange expands its markets; and the ability of SeaChange to compete
successfully in the future. Further information on factors that could
cause actual results to differ from those anticipated is detailed in
various filings made by SeaChange from time to time with the Securities
and Exchange Commission, including but not limited to, those appearing
under the caption "Certain Risks Affecting Our Business" in SeaChange's
Annual Report on Form 10-K for the year ended December 31, 1999. Any
forward-looking statements should be considered in light of those
factors.
Overview
SeaChange develops, manufactures and sells systems 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, and the related services and movie content to
television operators, telecommunications companies and broadcast
television companies. 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. 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.
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.
SeaChange has experienced fluctuations in the number of orders being
placed from quarter to quarter. SeaChange believes this is principally
attributable to the buying patterns and budgeting cycles of television
operators and broadcast companies, the primary buyers of digital
advertising insertion systems and broadcast systems, respectively.
SeaChange expects that there will continue to be fluctuations in the
number and value of orders received and that at least in the near
future, SeaChange's revenue and results of operations will reflect these
fluctuations.
SeaChange's results are significantly influenced by a number of factors,
including SeaChange's pricing, the costs of materials used in
SeaChange's products and the expansion of SeaChange's operations.
SeaChange prices its products and services based upon its costs as well
as in consideration of the prices of competitive products and services
in the marketplace. The costs of SeaChange's products primarily consist
of the costs of components and subassemblies that have generally
declined over time. As a result of the growth of SeaChange's business,
operating expenses of SeaChange have increased in the areas of research
and development, selling and marketing, customer service and support and
administration.
10
In April 2000, SeaChange's Board of Directors voted to change SeaChange's
fiscal accounting year from December 31 to January 31, such that the
current fiscal year began on February 1, 2000 and will end on January 31,
2001. SeaChange has recast its financial statements to present the
comparable prior year periods to conform to the current year fiscal
periods.
Three Months Ended April 30, 2000 Compared to the Three Months Ended April
30, 1999
Revenues
Systems. SeaChange's systems revenues consist of sales within its broadband
segment (primarily digital advertising insertion and interactive television
systems) and its broadcast segment. Systems revenues decreased 3% from
$17.4 million in the three months ended April 30, 1999 to $16.9 million in
the three months ended April 30, 2000. Revenues from the broadband segment,
which accounted for 61% and 67% of total revenues in the three months ended
April 30, 2000 and 1999, respectively, decreased from $14.3 million in 1999
to $13.6 million in 2000. This decrease in broadband revenues is primarily
attributable to a shift in the timing of orders by U.S. cable operators
between quarters this year versus the previous year. SeaChange expects
future growth, if any, in the broadband business to come primarily from its
interactive television systems. Broadcast system segment revenues were $3.2
million in the three months ended April 30, 2000 compared to $3.1 million
in the three months ended April 30, 1999.
Services. SeaChange's services revenues consist of fees for installation,
training, project management, technical support and maintenance contract
services, product development services and movie content fees. SeaChange's
services revenues increased 42% to $5.5 million in the three months ended
April 30, 2000 from $3.9 million in the three months ended April 30, 1999.
This increase in services revenues primarily resulted from the renewals of
technical support and maintenance contracts, price increases on certain
technical support and maintenance contracts, the impact of a growing
installed base of systems and a higher level of product development
services.
For the three-month periods ended April 30, 2000 and April 30, 1999, a
limited number of our customers each accounted for more than 10% of
SeaChange's total revenues. Single customers accounted for 15% and 13% of
total revenues in three months ended April 30, 2000 and 18%, 17% and 14% of
total revenues in the three months ended April 30, 1999. Revenue from these
customers was primarily in the broadband segment. SeaChange believes that
revenues from current and future large customers will continue to represent
a significant proportion of total revenues.
International sales accounted for approximately 16% and 14% of total
revenues in the three-month periods ended April 30, 2000 and April 30,
1999, respectively. SeaChange expects that international sales will remain
a significant portion of SeaChange's business in the future. As of April
30, 2000, substantially all sales of SeaChange's products were made in
United States dollars. SeaChange does not expect to change this practice in
the foreseeable future. Therefore, SeaChange has not experienced, nor does
it expect to experience in the near term, any material impact from
fluctuations in foreign currency exchange rates on its results of
operations or liquidity. If this practice changes in the future, SeaChange
will reevaluate its foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of
purchased components and subassemblies, labor and overhead relating to the
final assembly and testing of complete systems and related expenses. Costs
of systems revenues decreased 8% from $10.1 million in the three months
ended April 30, 1999 to $9.3 million in the three months ended April 30,
2000. In the three months ended April 30, 2000, the decrease in costs of
systems revenues reflects lower systems revenue and improved manufacturing
efficiencies and lower material costs through improved purchasing
efficiencies primarily within the digital advertising insertion products.
SeaChange expects 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 SeaChange improves its
manufacturing and material purchasing efficiencies.
Systems gross profit as a percentage of systems revenues was 45% and 42% in
the three months ended April 30, 2000 and April 30, 1999, respectively. The
increase in systems gross profit in the three month ended April 30, 2000
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. Gross
profit for the broadband segment improved from 42% for the three months
ended April 30, 1999 to 45% for the three months ended April 30, 2000 while
gross profit for the broadcast segment increased to 44% for the three
months ended April 30, 2000 compared to 43% for the three months ended
April 30, 1999.
11
Services. Costs of services revenues consist primarily of labor, materials
and overhead relating to the installation, training, project management,
product development, and technical support and maintenance contract
services provided by SeaChange and costs associated with providing movie
content. Costs of services revenues increased 24% from $3.4 million in the
three months ended April 30, 1999 to $4.2 million in the three months ended
April 30, 2000, primarily as a result of increased revenues and the costs
associated with SeaChange 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 23% in the
three months ended April 30, 2000 and 11% in the three months ended April
30, 1999. Improvements in the services gross profit in the three months
ended April 30, 2000 reflect the increase in the installed base of systems
under technical support and maintenance service contracts, price increases
on certain annual technical support and maintenance contracts and higher
product development revenues. SeaChange expects that it will continue to
experience fluctuations in gross profit as a percentage of services revenue
as a result of the timing of revenues from technical support and other
services to support the growing installed base of systems and the timing of
costs associated with SeaChange's ongoing investment required to build a
service organization to support the installed base of systems and new
products.
Research and Development. Research and development expenses consist
primarily of compensation of development personnel, depreciation of
equipment and an allocation of related facilities expenses. Research and
development expenses increased 2% from $4.2 million in the three months
ended April 30, 1999 to $4.4 million in the three months ended April 30,
2000. The increase in the three months ended April 30, 2000 was primarily
attributable to the hiring and contracting of additional development
personnel which reflects SeaChange's continuing investment in new products.
All internal software development costs to date have been expensed by
SeaChange. SeaChange expects that research and development expenses will
continue to increase in dollar amount as SeaChange continues its
development and support of new and existing products.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation expenses, including sales commissions, travel expenses and
certain promotional expenses. Selling and marketing expenses increased 17%
to $2.5 million in the three months ended April 30, 2000 from $2.1 million
in the three months ended April 30, 1999. The increase was primarily due to
the hiring of additional sales personnel for SeaChange's interactive
television and broadcast products and higher tradeshow related costs.
General and Administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation
of related facilities expenses. General and administrative expenses
increased 8% from $1.4 million in the three-month period ended April 30,
1999 to $1.5 million in the three-month period ended April 30, 2000. This
increase is primarily due to increased legal expenses associated with
various litigation matters.
Interest Income, net. Interest income, net was approximately $25,000 and
$5,000 in the three months ended April 30, 2000 and April 30, 1999,
respectively. The increase in interest income, net in the three months
ended April 30, 2000 primarily resulted from interest income earned on a
higher average cash and cash equivalent balance during the period.
Provision for Income Taxes. SeaChange's effective tax rate was 32% in the
three months ended April 30, 2000. The effective tax rate for the three
months ended April 30, 2000 was favorably impacted by the utilization of
research and development tax credits.
SeaChange had net deferred tax assets of $3.4 million at April 30, 2000 and
January 31, 2000 and $2.2 million at December 31, 1999. SeaChange has made
the determination it is more likely than not that it will realize the
benefits of the net deferred tax assets.
One Month Ended April 30, 2000 Compared to the One Month Ended April 30,
1999
Revenues
Systems. Systems revenues decreased 65% from $1.2 million in the one month
ended April 30, 1999 to $422,000 in the one month ended April 30, 2000.
This decreased systems revenues resulted primarily from the timing of
receipt of customer orders and related shipments within both the broadband
and broadcast segments.
Services. SeaChange's services revenues increased 40% from approximately
$1.2 million in the one month ended April 30, 1999 to $1.7 million in the
one month ended April 30, 2000. This increase in services revenues resulted
primarily from renewals of technical support and maintenance contracts,
price increases on certain maintenance fees, higher product development
revenues and the impact of a growing installed base of systems.
12
For the one month period ended April 30, 2000 and April 30, 1999, a limited
number of customers each accounted for more than 10% of SeaChange's total
revenues. Single customers accounted for 13%, 12% and 10% of total revenues
in one month ended April 30, 2000 and 24%,14% and 10% of total revenues in
the one month ended April 30, 1999. Revenue from these customers was
primarily in the broadband segment. SeaChange believes that revenues from
current and future large customers will continue to represent a significant
proportion of total revenues.
International sales accounted for approximately 11% and 18% of total
revenues for the one month ended April 30, 2000 and April 30, 1999,
respectively. SeaChange expects that international sales will remain a
significant portion of revenues of SeaChange in the future. As of April 30,
2000, substantially all sales of SeaChange's products were made in United
States dollars. SeaChange does not expect any material change to this
practice in the foreseeable future. Therefore, SeaChange has not
experienced, nor does it expect to experience in the near term, any
material impact from fluctuations in foreign currency exchange rates on its
results of operations or liquidity. If this practice changes in the future,
SeaChange will reevaluate its foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues decreased 19% from $870,000 in the one
month ended April 30, 1999 to $709,000 in the one month ended April 30,
2000. For the one month ended April 30, 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 68%
in the one month ended April 30, 2000. In the one month ended April 30,
1999, gross profit as a percentage of systems revenues was 28%. 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. Costs of services revenues increased 47% from approximately $1.0
million in the one month ended April 30, 1999 to $1.5 million in the one
month ended April 30, 2000, primarily as a result of the costs associated
with SeaChange 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 8% in the one month
ended April 30, 2000 compared to a gross profit margin of 13% in the one
month ended April 30, 1999. SeaChange expects that it will continue to
experience fluctuations in gross profit as a percentage of services revenue
as a result of the timing of revenues from technical support and
maintenance and other services to support the growing installed base of
systems and the timing of costs associated with SeaChange's ongoing
investment required to build a service organization to support the
installed base of systems and new products.
Research and Development. Research and development expenses increased 12%
from approximately $1.5 million in the one month ended April 30, 1999 to
$1.6 million in the one month ended April 30, 2000. The increase in the
dollar amount was primarily attributable to the hiring and contracting of
additional development personnel which reflects SeaChange's continuing
investment in new products. SeaChange expects that research and development
expenses will continue to increase in dollar amount as SeaChange continues
its development and support of new and existing products.
Selling and Marketing. Selling and marketing expenses increased 100% from
$652,000 in the one month ended April 30, 1999 to $1.3 million in the one
month ended April 30, 2000. This increase is primarily due to the hiring of
additional sales personnel for SeaChange's broadcast and interactive
television products and higher tradeshow expenses.
General and Administrative. General and administrative expenses increased
20% from $447,000 in the one month ended April 30, 1999 to $536,000 in the
one month ended April 30, 2000.
Interest Income, net. Interest income, net, was approximately $7,000 and
$3,000 in the one month ended April 30, 2000 and April 30,1999,
respectively.
13
One Month Ended January 31, 2000 Compared to the One Month Ended January 31,
1999
Revenues
Systems. 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. SeaChange's 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, a
limited number of our customers each accounted for more than 10% of
SeaChange's total revenues. Single customers accounted for 16% and 11% of
total revenues in one 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. SeaChange believes that
revenues from current and future large customers will continue to represent a
significant proportion of total revenues.
International sales accounted for approximately 18% and 38% of total revenues
for the one month ended January 31, 2000 and January 31, 1999, respectively.
SeaChange expects that international sales will remain a significant portion
of revenues of SeaChange in the future. As of January 31, 2000, substantially
all sales of SeaChange's products were made in United States dollars.
SeaChange does not expect any material change to this practice in the
foreseeable future. Therefore, SeaChange has not experienced, nor does it
expect to experience in the near term, any material impact from fluctuations
in foreign currency exchange rates on its results of operations or liquidity.
If this practice changes in the future, SeaChange will reevaluate its foreign
currency exchange rate risk.
Gross Profit
Systems. 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. 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 SeaChange 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. SeaChange expects that it will continue to
experience fluctuations in gross profit as a percentage of services revenue
as a result of the timing of revenues from technical support and maintenance
and other services to support the growing installed base of systems and the
timing of costs associated with SeaChange's ongoing investment required to
build a service organization to support the installed base of systems and new
products.
Research and Development. Research and development expenses increased 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 SeaChange's continuing
investment in new products. SeaChange expects that research and development
expenses will continue to increase in dollar amount as SeaChange continues
its development and support of new and existing 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 SeaChange's 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.
14
Interest Income, net. Interest income, net, was approximately $9,000 in the
one month ended January 31, 2000 and January 31, 1999, respectively.
Benefit for Income Taxes. SeaChange's effective tax benefit rate was 32%
and 33% in the one month ended January 31, 2000 and January 31,1999,
respectively.
Liquidity and Capital Resources
SeaChange has financed its operations and capital expenditures primarily with
the proceeds of SeaChange's common stock, borrowings and cash flows generated
from operations. Cash and cash equivalents decreased $1.7 million from $2.7
million at January 31, 2000 to $1.0 million at April 30, 2000. Working
capital increased from approximately $21.0 million at January 31, 2000 to
approximately $22.5 million at April 30, 2000.
Net cash used in operating activities was approximately $2.2 million for the
three months ended April 30, 2000. Net cash provided by operating activities
was approximately $2.4 million in the three months ended April 30, 1999. The
net cash used in operating activities in the three months ended April 30,
2000 was the result of the net income adjusted for non-cash expenses
including depreciation and amortization of $1.1 million and the changes in
certain operating assets and liabilities. The significant net changes in
assets and liabilities that used cash in operations included an increase in
inventories of $2.5 million, an increase in prepaids, other current assets
and other assets of approximately $500,000 and a decrease in accrued
liabilities of approximately $900,000. Inventory levels increased during the
period principally as a result of procurement of long lead components for the
interactive television and broadcast products. SeaChange expects these
inventory levels to decrease as revenues from both these products increase.
SeaChange expects 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 $2.2 million and
$334,000 for the three months ended April 30, 2000 and April 30, 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 $2.8 million and
approximately $66,000 for the three months ended April 30, 2000 and April 30,
1999, respectively. In the three months ended April 30, 2000, the cash
provided by financing included $2.0 million in borrowings under the equipment
line of credit and $1.1 million in connection with the issuance of common
stock. During the same period, cash used in financing activities included
approximately $300,000 in principal payments under SeaChange's equipment line
of credit and capital lease obligations. Microsoft entered into an agreement
with SeaChange 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 SeaChange's common stock for $10 million. Microsoft has
agreed to purchase additional shares of SeaChange's 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 one month periods ended April 30, 2000, April 30, 1999, January
31, 2000 and January 31, 1999, SeaChange used cash in operations of $6.1
million, $2.6 million, $8.3 million, and $1.3 million, respectively. It is
typical for SeaChange to experience fluctuations in its 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, SeaChange may experience an increase in its inventories as a
result of procurement of both short and long lead components for anticipated
orders for both its product segments, a decrease in its 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.
SeaChange had a $6.0 million revolving line of credit and a $5.0 million
equipment line of credit with a bank. The revolving line of credit expired in
March 2000 and the ability of SeaChange to make purchases applied to the
equipment line of credit expired in March 2000. As of April 30, 2000
SeaChange was in process of renewing both lines of credit. Borrowings under
these lines of credit are secured 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 bank's base rate plus 0.5%. Loans made under
the equipment line of credit bear
15
interest at a rate per annum equal to the bank's base rate plus 1.0% (9.5% at
April 30, 2000). The loan agreement relating to these 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 of at least .80
to 1.0. At April 30, 2000, SeaChange was in compliance with all covenants. As
of April 30, 2000, there were no borrowings against the revolving line of
credit and borrowings outstanding under the equipment line of credit were
$3.3 million.
SeaChange believes that existing funds together with available borrowings
under the revolving line of credit and equipment line facility are adequate
to satisfy its working capital and capital expenditure requirements for the
foreseeable future.
SeaChange had no material capital expenditure commitments as of April 30,
2000.
Effects of Inflation
Management believes that financial results have not been significantly
impacted by inflation and price changes.
Recent Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments 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. SeaChange will adopt
SFAS 133 as required by SFAS 137, "Deferral of the Effective Date of FASB
Statement No. 133," in fiscal year 2002. To date SeaChange has not utilized
derivative instruments or hedging activities and, therefore, the adoption of
SFAS 133 is not expected to have a material impact on SeaChange's financial
position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The application of the guidance in SAB 101 is
required in SeaChange's second quarter of its current fiscal year. The
effects of applying this guidance, if any, will be reported as a cumulative
effect adjustment resulting in a change in accounting principle. SeaChange's
evaluation of SAB 101 is not yet complete.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
SeaChange faces exposure to financial market risks, including adverse movements
in foreign currency exchange rates and changes in interest rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on SeaChange's financial results. SeaChange's primary
exposure has been related to local currency revenue and operating expenses in
Europe and Asia. Historically, SeaChange has not hedged specific currency
exposures as gains and losses on foreign currency transactions have not been
material to date. At April 30, 2000, SeaChange had approximately $3,300,000
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 $31,000.
The carrying amounts reflected in the consolidated balance sheet of cash and
cash equivalents, trade receivables, and trade payables approximates fair value
at April 30, 2000 due to the short maturities of these instruments.
SeaChange maintains investment portfolio holdings of various issuers, types, and
maturities. SeaChange's cash and marketable securities include cash equivalents,
which SeaChange considers investments to be purchased with original maturities
of three months or less given the short maturities and investment grade quality
of the portfolio holdings at April 30, 2000, a sharp rise in interest rates
should not have a material adverse impact on the fair value of SeaChange's
investment portfolio. As a result, SeaChange does not currently hedge these
interest rate exposures.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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 SeaChange's customers, Cox Communications,
Inc. Beam Laser has asserted that the ad insertion technology, which includes
SeaChange's spot ad insertion system, used by Cox
16
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, SeaChange filed a motion
seeking to intervene in the action between its customer and Beam Laser, and to
transfer the case to the District Court of Massachusetts. In addition,
SeaChange has agreed to indemnify its customer for claims brought against the
customer that are related to the customer's use of SeaChange's products.
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
held by SeaChange (Patent No. 5,862,312). 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 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. These
motions are currently pending and no trial date has been set.
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 in the early stages of
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.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, SeaChange International, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 2001
SEACHANGE INTERNATIONAL, INC.
by: /s/ William L. Fiedler
--------------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer;
Authorized Officer)
18