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 July 31, 2001
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 preceding 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 September
10, 2001 was 22,916,517.
SEACHANGE INTERNATIONAL, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet
at July 31, 2001 and January 31, 2001................................ 3
Consolidated Statement of Operations
Three and six months ended July 31, 2001 and July 31, 2000........... 4
Consolidated Statement of Cash Flows
Six months ended July 31, 2001 and July 31, 2000..................... 5
Notes to Consolidated Financial Statements............................ 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................12-19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........... 20
SIGNATURES. .............................................................. 21
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share-related data)
ITEM I. Financial Statements
July 31, January 31,
2001 2001
---------- -----------
Assets
Current Assets
Cash and cash equivalents .......................... $ 8,994 $ 6,145
Accounts receivable, net of allowance for doubtful
accounts of $634 at July 31, 2001 and
$742 at January 31, 2001 .......................... 26,448 27,112
Inventories ........................................ 22,409 24,907
Prepaid expenses and other current assets .......... 3,358 2,671
Deferred income taxes .............................. 7,001 7,001
-------- --------
Total current assets ............................... 68,210 67,836
Property and equipment, net ............................ 18,297 15,886
Other assets ........................................... 1,444 1,833
Goodwill and intangibles, net .......................... 4,938 2,698
-------- --------
$ 92,889 $ 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................... 2,318 2,532
Accounts payable ................................... 16,688 17,332
Accrued expenses ................................... 1,435 1,816
Customer deposits .................................. 2,683 3,946
Deferred revenue ................................... 9,992 8,435
Income taxes payable ............................... 87 956
-------- --------
Total current liabilities .......................... 33,203 39,017
-------- --------
Long-term equipment line of credit and
obligations under capital lease .................... 2,899 3,934
-------- --------
Commitments and contingencies (Note 9)
Stockholders' Equity
Common stock, $.01 par value; 100,000,000
shares authorized; 22,913,262 and
22,037,811 shares issued at July 31, 2001 and
January 31, 2001, respectively ....................... 229 221
Additional paid-in capital ............................. 63,385 50,157
Deferred equity discount (Note 10) ..................... (1,205) --
Accumulated deficit .................................... (5,407) (4,905)
Accumulated other comprehensive loss ................... (215) (171)
-------- --------
Total stockholders' equity ............................. 56,787 45,302
-------- --------
$ 92,889 $ 88,253
======== ========
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 Six months ended
-------------------- --------------------
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues
Systems ............................................ $ 19,776 $ 19,848 $ 43,053 $ 36,684
Services ........................................... 7,248 5,508 14,127 10,976
-------- -------- -------- --------
27,024 25,356 57,180 47,660
Cost of revenues
Systems ............................................ 11,050 10,993 24,526 20,359
Services ........................................... 5,223 4,457 10,443 8,689
-------- -------- -------- --------
16,273 15,450 34,969 29,048
-------- -------- -------- --------
Gross profit ......................................... 10,751 9,906 22,211 18,612
-------- -------- -------- --------
Operating expenses
Research and development ........................... 6,093 5,002 11,677 9,355
Selling and marketing .............................. 3,583 2,625 7,189 5,115
General and administrative ......................... 1,993 1,799 3,831 3,302
-------- -------- -------- --------
11,669 9,426 22,697 17,772
-------- -------- -------- --------
Income (loss) from operations ........................ (918) 480 (486) 840
Interest income (expense), net ....................... (88) (1) (252) 24
-------- -------- -------- --------
Income (loss) before income taxes .................. (1,006) 479 (738) 864
Provision (benefit) for income taxes ................. (322) 149 (236) 271
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle ............................ (684) 330 (502) 593
Cumulative effect of change in accounting principle,
net of tax of $732 ................................. -- -- -- (1,100)
-------- -------- -------- --------
Net income (loss) .................................... ($ 684) $ 330 ($ 502) ($ 507)
======== ======== ======== ========
Basic earnings per share before
cumulative effect of change in accounting principle .. ($ 0.03) $ 0.02 ($ 0.02) $ 0.03
Cumulative effect of change in accounting principle .. -- -- -- ($ 0.05)
-------- -------- -------- --------
Basic earnings (loss) per share ...................... ($ 0.03) $ 0.02 ($ 0.02) ($ 0.02)
======== ======== ======== ========
Diluted earnings (loss) per share .................... ($ 0.03) $ 0.01 ($ 0.02) ($ 0.02)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ................................................ 22,895 21,759 22,725 21,570
======== ======== ======== ========
Diluted .............................................. 22,895 23,306 22,725 21,570
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
4
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
For the six months ended
------------------------
July 31, July 31,
2001 2000
-------- --------
Cash flows from operating activities
Net loss ............................................................... $ (502) $ (507)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .................................... 3,217 2,267
Inventory valuation allowance .................................... -- 92
Amortization of deferred equity discount ......................... 1,124 --
Changes in operating assets and liabilities:
Accounts receivable ........................................... 664 (3,867)
Inventories ................................................... 1,952 (2,446)
Prepaid expenses and other assets ............................. (343) (1,974)
Accounts payable .............................................. (644) 3,314
Accrued expenses .............................................. (381) (836)
Customer deposits ............................................. (1,263) 2,392
Deferred revenue .............................................. 1,557 2,515
Income taxes payable .......................................... (869) (724)
-------- --------
Net cash provided by operating activities ................. 4,512 226
-------- --------
Cash flows from investing activities
Purchases of property and equipment .................................... (4,613) (4,836)
Increase in intangible assets .......................................... (2,709) --
-------- --------
Net cash used in investing activities ..................... (7,322) (4,836)
-------- --------
Cash flows from financing activities
Borrowings under equipment line of credit .............................. -- 3,240
Repayment of borrowings under revolving line of credit ................. (4,000) --
Repayment of borrowings under equipment line of credit ................. (1,147) (625)
Repayment of obligations under capital lease ........................... (102) (126)
Net proceeds from issuance of common stock ............................. 10,908 11,299
-------- --------
Net cash provided by financing activities ................. 5,659 13,788
-------- --------
Net increase in cash and cash equivalents .................................. 2,849 9,178
Cash and cash equivalents, beginning of period ............................. 6,145 2,721
-------- --------
Cash and cash equivalents, end of period ................................... $ 8,994 $ 11,899
======== ========
Supplemental disclosure of noncash activities
Transfer of items originally classified as fixed assets to
inventories .......................................................... $ 141 $ 450
Transfer of items originally classified as inventories to
fixed assets ......................................................... $ 687 $ --
The accompanying notes are an integral part of these consolidated financial
statements
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except 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 January 31, 2001,
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. 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.
3. Earnings Per Share
For the three months ended July 31, 2001, and the six months ended July 31, 2001
and July 31, 2000, common shares of 3,496,000, 2,714,000 and 3,496,000,
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.
6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Below is a summary of the shares used in calculating basic and diluted earnings
per share for the periods indicated:
Three months ended Six months ended
------------------- -------------------
July 31, July 31, July 31, July 31,
-------- -------- -------- --------
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average shares used in calculating earnings per share-
Basic ......................................................... 22,895 21,759 22,725 21,570
Dilutive common stock equivalents ............................. -- 1,547 -- --
-------- -------- -------- --------
Weighted average shares used in calculating earnings per share-
Diluted ....................................................... 22,895 23,306 22,725 21,570
======== ======== ======== ========
4. Inventories
Inventories consist of the following:
July 31, January 31,
-------- -----------
2001 2001
---- ----
Components and assemblies ................. $14,821 $18,695
Finished products ......................... $ 7,588 $ 6,212
------- -------
$22,409 $24,907
======= =======
5. Comprehensive Income (Loss)
SeaChange's comprehensive income (loss) was as follows:
Three months ended Six months ended
--------------------- ---------------------
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
--------- -------- -------- ---------
Net income (loss) ................................... $(684) $ 330 $(502) $(507)
Other comprehensive (expense), net of tax:
Foreign currency translation adjustment, net of
tax of $(8), $8, $(14)
and $(33), respectively ........................ 16 (23) (30) (54)
----- ----- ----- -----
Other comprehensive income (expense) ................ 16 (23) (30) (54)
----- ----- ----- -----
Comprehensive income (loss) ........................ $(668) $ 307 $(532) $(561)
===== ===== ===== =====
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 $2.6 million in deferred legal costs were capitalized into
intangible assets as a result of the successful defense of patents.
7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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
six months ended July 31, 2000. The results for the six months ended July 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 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 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:
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
------- ------- ------- -------
Revenues
Broadband $15,678 $14,018 $34,529 $27,896
Broadcast 4,098 5,830 8,524 8,788
Services 7,248 5,508 14,127 10,976
------- ------- ------- -------
Total $27,024 $25,356 $57,180 $47,660
======= ======= ======= =======
Costs of revenues
Broadband $ 8,726 $ 7,749 $19,700 $15,235
Broadcast 2,324 3,244 4,826 5,124
Services 5,223 4,457 10,443 8,689
------- ------- ------- -------
Total $16,273 $15,450 $34,969 $29,048
======= ======= ======= =======
The following summarizes revenues by geographic locations:
Revenues
United States $23,480 $21,363 $49,678 $40,347
Canada and South America 274 414 534 2,002
Europe 1,729 1,472 3,893 2,974
Asian Pacific and rest of world 1,541 2,107 3,075 2,337
------- ------- ------- -------
Total $27,024 $25,356 $57,180 $47,660
======= ======= ======= =======
8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the three and six months ended July 31, 2001 and 2000, certain customers
each accounted for more than 10% of SeaChange's revenue. Individual customers
each accounted for 32% and 10% of revenues in the three months ended July 31,
2001, 17% and 10% of revenues in the three months ended July 31, 2000, 26% and
11% of revenues in the six months ended July 31, 2001, and 13%, 12%, 12% and 11%
in the six months ended July 31, 2000.
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
------------------ -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Customer A........................................ 32% 17% 26% 13%
Customer B........................................ 10%
Customer C........................................ 10% 11% 12%
Customer D........................................ 12%
Customer E........................................ 11%
9. Legal Proceedings
The patent infringement action (Civil Action No. 2:00-CV-195) filed by Beam
Laser Systems, Inc. and Frank L. Beam in federal court in the Eastern District
of Virginia against SeaChange, one of SeaChange's customers, Cox Communications,
Inc., and two related companies of Cox Communications, has settled and been
dismissed. In that action, Beam Laser asserted that ad insertion technology,
including the SeaChange SPOT ad insertion system, used by Cox Communications and
its companies infringed two United States patents held by Beam Laser (Patents
No. 4,814,883 and 5,200,825), and sought both an injunction and monetary
damages. All parties reached a settlement of that action effective as of June
28, 2001, which settlement included a consent judgment entered by the federal
court in the Eastern District of Virginia on July 9, 2001. The settlement in
part provides a judgment that all versions of SeaChange's SPOT product do not
and have not infringed either of Beam Laser's two patents in the action, that
Cox Communications' and its companies' use of those products and certain
products of third parties does not infringe either of those two patents, waiving
all rights to appeal, and dismissing with prejudice all other claims in the
action. The settlement also contains both covenants by Beam Laser not to sue
SeaChange, Cox Communications and its companies and customers for infringement
of those patents regarding any products or uses and a fully paid-up, irrevocable
license by Beam Laser to SeaChange under those two patents.
On June 13, 2000, SeaChange filed in the United States District Court for the
District of Delaware a lawsuit against one of our 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 the SeaChange
patent. On September 6, 2000, nCube conceded, based on the District Court's
prior claim construction ruling, that its MediaCube-4 product infringed the
SeaChange patent. On September 25, 2000 the court upheld the validity of the
SeaChange 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.
9
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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 its 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. SeaChange responded on January 26, 2001, denying that 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.
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
SeaChange plans 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.
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 this
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
10
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
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.
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 this 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 and July 31, 2001, SeaChange amortized $449,000 and $675,000, 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 ("FASB") 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 SFAS 142 will not impact its current financial position and
results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") 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. SFAS 142 also requires SeaChange to complete a transitional
goodwill impairment test within six months from the date of adoption. SeaChange
is currently assessing but has not yet determined the impact of SFAS 142 on its
financial position and results of operations.
11
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; changes in the Company's customers' capital
expenditures and purchasing plans; 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 January
31, 2001. 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. 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.
SeaChange has experienced fluctuations in its 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) customer 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
12
system before delivery. Because the average sales price of a SeaChange system is
high, the delay in the timing of receipt and shipment of any one customer order
can result in quarterly fluctuations in SeaChange's revenue.
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.
Three Months Ended July 31, 2001 Compared to the Three Months Ended July 31,
2000
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 remained flat at $19.8
million in the three months ended July 31, 2001 and July 31, 2000. Revenues from
the broadband segment, which accounted for 58% and 55% of total revenues in the
three months ended July 31, 2001 and 2000, respectively, increased to $15.7
million in 2001 as compared to $14.0 million in 2000. Interactive television
system revenues were $10.9 million for the three months ended July 31, 2001 as
compared to $4.4 million in the prior year primarily due to the initial
deployment of residential video-on-demand systems in the U.S. for U.S. cable
operators. Included in the interactive television systems revenue was the
amortization of $675,000 related to the deferred equity discount associated with
the Comcast equity investment. Digital advertising system revenues were $4.8
million for the three months ended July 31, 2001 as compared to $9.6 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 $4.1 million in the three months ended July 31, 2001 as compared
to $5.8 million in the three months ended July 31, 2000. The decrease in
broadcast revenues is primarily attributable to the decrease in advertising
revenues earned by the broadcast companies resulting in a decrease in their
capital expenditures for new broadcast systems. 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 expands. As revenues from broadcast
and interactive television products increase, the digital advertising products
will become a smaller portion of total system revenues. However, SeaChange
believes that there will be a continued demand for expansions to existing
digital advertising insertion systems within the U.S. and growth potential for
new interactive advertising systems in the future.
Services. SeaChange's services revenues consist of fees for installation,
training, product maintenance, technical support services, product development
services and movie content fees. SeaChange's services revenues increased 32% to
$7.2 million in the three months ended July 31, 2001 from $5.5 million in the
three months ended July 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 three-month periods ended July 31, 2001 and July 31, 2000, a limited
number of our customers each accounted for more than 10% of SeaChange's total
revenues. Single customers accounted for 32% and 10% of total revenues in three
months ended July 31, 2001 and 17% and 10% of total revenues in the three months
ended July 31, 2000. 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 13% and 16% of total revenues in
the three-month periods ended July 31, 2001 and July 31, 2000, respectively.
SeaChange expects that international sales will remain a significant portion of
SeaChange's business in the future. As of July 31, 2001, substantially all sales
of SeaChange's products were made in United States dollars. 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.
13
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of purchased
components and subassemblies, labor and overhead relating to the final assembly
and testing of complete systems and related expenses. Costs of systems revenues
increased 1% to $11.1 million in the three months ended July 31, 2001 as
compared to $11.0 million in the three months ended July 31, 2000. In the three
months ended July 31, 2001, the increase in costs of systems revenues reflects
higher systems revenue offset in part by 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 44% and 45% in the
three months ended July 31, 2001 and July 31, 2000, respectively. The decrease
in systems gross profit in the three months ended July 31, 2001 was primarily
due to the shift within broadband product sales from higher gross profit ad
insertion systems to lower gross profit interactive television systems. Gross
profit for the broadband segment decreased to 44% for the three months ended
July 31, 2001 from 45% for the three months ended July 31, 2000. Gross profit
for the broadcast segment decreased to 43% for the three months ended July 31,
2001 compared to 44% for the three months ended July 31, 2000.
Services. Costs of services revenues consist primarily of labor, materials and
overhead relating to the installation, training, product maintenance and
technical support services provided by SeaChange and costs associated with
providing movie content. Costs of services revenues increased 17% to $5.2
million in the three months ended July 31, 2001 from $4.5 million in the three
months ended July 31, 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 28% in the three months
ended July 31, 2001 and 19% in the three months ended July 31, 2000. Product
development service revenues contributed approximately $800,000 for the quarter
ended July 31, 2001 compared to $400,000 for the three months ended July 31,
2000. 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 22% to $6.1 million in the three months ended July 31, 2001 as
compared to $5.0 million in the three months ended July 31, 2000. The increase
in the three months ended July 31, 2001 was primarily attributable to the hiring
and contracting of additional development personnel which reflects SeaChange's
continuing investment in new products. The current quarter included additional
prototype expenses associated with new board development efforts. 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 36% to $3.6
million in the three months ended July 31, 2001 from $2.6 million in the three
months ended July 31, 2000. The increase was primarily due to the hiring of
additional sales personnel for SeaChange's interactive television and broadcast
products and higher tradeshow and other promotional 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 11%
to $2.0 million in the three-month period ended July 31, 2001, as compared to
$1.8 million in the three-month period ended July 31, 2000. This increase is
primarily due to the amortization of capitalized patent costs and accounting and
filing fees related to the registration statement covering the shares of
SeaChange common stock in the Comcast transaction.
14
Interest income (expense), net. Interest expense, net was $88,000 for the three
months ended July 31, 2001 and interest expense, net was $1,000 for the three
months ended July 31, 2000. The increase in interest expense, net in the three
months ended July 31, 2001 primarily resulted from interest expense on
borrowings under SeaChange's lines of credit and borrowings under SeaChange's
construction loan. Bank debt was reduced by $2.2 million during the quarter.
Provision (benefit) for Income Taxes. SeaChange's effective tax benefit rate was
32% in the three months ended July 31, 2001. The effective tax rate for the
three months ended July 31, 2001 was favorably impacted by the utilization of
research and development tax credits.
SeaChange had net deferred tax assets of $7.7 million at July 31, 2001 and
January 31, 2001. 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.
Six Months Ended July 31, 2001 Compared to the Six Months Ended July 31, 2000
Revenues
Systems. Systems revenues increased 17% to $43.1 million in the six months ended
July 31, 2001 from $36.7 million in the six months ended July 31, 2000. Revenues
from the broadband segment, which accounted for 60% and 59% of total revenues in
the six months ended July 31, 2001 and 2000, respectively, increased to $34.5
million in 2001 as compared to $27.9 million in 2000. Interactive television
system revenues were $22.7 million for the six months ended July 31, 2001 as
compared to $6.7 million in the prior year primarily due to the initial
deployment of residential video-on-demand systems in the United States for U.S.
cable operators. Included in the interactive television systems revenue was the
amortization of $1.1 million related to the deferred equity discount associated
with the Comcast equity investment. Digital advertising system revenues were
$11.9 million for the six months ended July 31, 2001 as compared to $21.2
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 $8.5 million in the six months ended July 31, 2001
as compared to $8.8 million in the six months ended July 31, 2000. The decrease
in broadcast revenues is primarily attributable to the decrease in advertising
revenues earned by the broadcast companies resulting in a decrease in their
capital expenditures for new broadcast systems. 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, SeaChange believes that there will be a demand for expansions to
existing digital advertising insertion systems within the U.S. and growth
potential for new interactive advertising systems in the future.
Services. SeaChange's services revenues increased 29% to $14.1 million in the
six months ended July 31, 2001 from $11.0 million in the six months ended July
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 six-month periods ended July 31, 2001 and July 31, 2000, a limited
number of our customers each accounted for more than 10% of SeaChange's total
revenues. Single customers accounted for 26% and 11% of total revenues in six
months ended July 31, 2001 and 13%, 12%, 12% and 11% of total revenues in the
six months ended July 31, 2000. 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 13% and 15% of total revenues in
the six-month periods ended July
15
31, 2001 and July 31, 2000, respectively. SeaChange expects that international
sales will remain a significant portion of SeaChange's business in the future.
As of July 31, 2001, substantially all sales of SeaChange's products were made
in United States dollars. 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 increased 21% to $24.5 million in the six
months ended July 31, 2001 as compared to $20.4 million in the six months ended
July 31, 2000. In the six months ended July 31, 2001, the increase in costs of
systems revenues reflects higher systems revenue offset in part by 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 43% and 45% in the
six months ended July 31, 2001 and July 31, 2000, respectively. The decrease in
systems gross profit in the six months ended July 31, 2001 was primarily due to
the shift within broadband product sales from higher gross profit ad insertion
systems to lower gross profit interactive television systems. Gross profit for
the broadband segment decreased to 43% for the six months ended July 31, 2001 as
compared to 45% for the six months ended July 31, 2000 while gross profit for
the broadcast segment increased to 43% for the six months ended July 31, 2001
compared to 42% for the six months ended July 31, 2000.
Services. Costs of services revenues increased 20% to $10.4 million in the six
months ended July 31, 2001 from $8.7 million in the six months ended July 31,
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 26% in the six months ended July 31, 2001 and
21% in the six months ended July 31, 2000. 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 increased 25% to
$11.7 million in the six months ended July 31, 2001 as compared to $9.4 million
in the six months ended July 31, 2000. The increase in the six months ended July
31, 2001 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 consist primarily of
compensation expenses, including sales commissions, travel expenses and certain
promotional expenses. Selling and marketing expenses increased 41% to $7.2
million in the six months ended July 31, 2001 from $5.1 million in the six
months ended July 31, 2000. The increase was primarily due to the hiring of
additional sales personnel for SeaChange's interactive television and broadcast
products and higher tradeshow and other promotional related costs.
General and Administrative. General and administrative expenses increased 16% to
$3.8 million in the six-month period ended July 31, 2001, as compared to $3.3
million in the six-month period ended July 31, 2000. This increase is primarily
due to the amortization of capitalized patent costs and filing fees related to
the registration statement covering the shares of SeaChange common stock in the
Comcast transaction.
Interest income (expense), net. Interest expense, net was $252,000 for the six
months ended July 31, 2001 and interest income, net was $24,000 for the six
months ended July 31, 2000. The increase in interest expense, net in the six
months ended July 31, 2001 primarily resulted from interest expense on
borrowings under SeaChange's lines of credit and borrowings under SeaChange's
construction loan.
16
Provision (benefit) for Income Taxes. SeaChange's effective tax benefit rate was
32% in the six months ended July 31,2001. The effective tax rate for the six
months ended July 31, 2001 was favorably impacted by the utilization of research
and development tax credits.
SeaChange had net deferred tax assets of $7.7 million at July 31, 2001 and
January 31, 2001. 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.
Cumulative effect change in accounting principle. 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.
Historically, for some of SeaChange's sales transactions, a portion of the sales
price, typically 25%, was not due until installation occurred. SeaChange now
defers 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 six months
ended July 31, 2000.
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 increased $2.9 million from $6.1
million at January 31, 2001 to $9.0 million at July 31, 2001. Working capital
increased from approximately $28.8 million at January 31, 2001 to approximately
$35.0 million at July 31, 2001.
Net cash provided by operating activities was approximately $4.5 million and
$226,000 for the six months ended July 31, 2001 and July 31, 2000, respectively.
The net cash provided by operating activities in the six months ended July 31,
2001 was the result of the net loss adjusted for non-cash expenses including
depreciation and amortization of $4.3 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
inventories of $2.0 million, a decrease in accounts receivable of $664,000 and
an increase in deferred revenues of $1.6 million. These items that generated
cash from operations were offset by a decrease in accounts payable of $644,000
and a decrease in customer deposits of $1.3 million. We expect inventory levels
to continue to decline as revenues from both the broadband and broadcast product
segment 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.
Net cash used in investing activities was approximately $7.3 million and $4.8
million for the six months ended July 31, 2001 and July 31, 2000, respectively.
Intangible assets increased by $2.7 million as a result of the successful
defense of its patents. Investment activity consisted primarily of capital
expenditures related to capital equipment required to support the expansion and
growth of the business.
Net cash provided by financing activities was approximately $5.7 million and
approximately $13.8 million for the six months ended July 31, 2001 and July 31,
2000, respectively. In the six months ended July 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). During the same period, cash used in
financing activities included approximately $4.0 million in repayments under
SeaChange's revolving line of credit and $1.1 million in principal payments
under its equipment line of credit and capital lease obligations.
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
17
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 extended the revolving line of credit and the EXIM line of credit
through June 30, 2001 and is currently in the process of negotiating the renewal
of all its lines of credit. No borrowings were outstanding under the revolving
line of credit at July 31, 2001. 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 July 31, 2001). Loans under the EXIM line of
credit bear interest at a rate per annum equal to the prime rate (9.5% at July
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 July 31, 2001). The
loan agreements 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 July 31, 2001,
SeaChange was not in compliance with certain covenants of the loan agreement for
all the lines of credit. Seachange received a waiver of non-compliance from the
bank.
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. Upon occupancy of the building in November 2000, 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 July 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 July 3, 2001, SeaChange was in
compliance with all covenants. As of July 31, 2001, borrowings outstanding under
the loan were $1.1 million.
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 believes that existing funds are adequate to satisfy its working
capital and capital expenditure requirements for the foreseeable future.
SeaChange had no material capital expenditure commitments as of July 31, 2001.
Effects of Inflation
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 ("FASB") 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 SFAS 142 will not impact its current financial position and
results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") 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.
18
SFAS 142 also requires SeaChange to complete a transitional goodwill impairment
test within six months from the date of adoption. SeaChange is currently
assessing but has not yet determined the impact of SFAS 142 on its financial
position and results of operations.
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 July 31, 2001, SeaChange had approximately $5,000,000
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 $37,000.
The carrying amounts reflected in the consolidated balance sheet of cash and
cash equivalents, trade receivables, and trade payables approximates fair value
at July 31, 2001 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 July 31, 2001, 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
The patent infringement action (Civil Action No. 2:00-CV-195) filed by Beam
Laser Systems, Inc. and Frank L. Beam in federal court in the Eastern District
of Virginia against SeaChange, one of SeaChange's customers, Cox Communications,
Inc., and two related companies of Cox Communications, has settled and been
dismissed. In that action, Beam Laser asserted that ad insertion technology,
including the SeaChange SPOT ad insertion system, used by Cox Communications and
its companies infringed two United States patents held by Beam Laser (Patents
No. 4,814,883 and 5,200,825), and sought both an injunction and monetary
damages. All parties reached a settlement of that action effective as of June
28, 2001, which settlement included a consent judgment entered by the federal
court in the Eastern District of Virginia on July 9, 2001. The settlement in
part provides a judgment that all versions of SeaChange's SPOT product do not
and have not infringed either of Beam Laser's two patents in the action, that
Cox Communications' and its companies' use of those products and certain
products of third parties does not infringe either of those two patents, waiving
all rights to appeal, and dismissing with prejudice all other claims in the
action. The settlement also contains both covenants by Beam Laser not to sue
SeaChange, Cox Communications and its companies and customers for infringement
of those patents regarding any products or uses and a fully paid-up, irrevocable
license by Beam Laser to SeaChange under those two patents.
On June 13, 2000, SeaChange filed in the United States District Court for the
District of Delaware a lawsuit against one of our 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 the SeaChange
patent. On September 6, 2000, nCube conceded, based on the District Court's
prior claim construction ruling, that its MediaCube-4 product infringed the
SeaChange patent.
On September 25, 2000 the court upheld the validity of the SeaChange 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.
19
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 its 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. SeaChange responded on January 26, 2001, denying that 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.
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
SeaChange plans 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the security holders of SeaChange was held on July 17,
2001. Matters considered and acted upon the meeting included the election of two
(2) members to the SeaChange's Board of Directors, each to serve for a three-
year term as a Class II Director, and the approval of an amendment to
SeaChange's Amended and Restated 1995 Stock Option Plan to increase the number
of shares of SeaChange's common stock available for issuance thereunder from
4,800,000 to 9,200,000 shares.
Martin R. Hoffmann was elected as a Class II Director of the Company with
20,678,085 shares of SeaChange's common stock voted for and 472,906 shares of
SeaChange's common stock withheld from the election of Mr. Hoffmann. Thomas F.
Olson was elected as a Class II Director of the Company with 20,675,447 shares
of SeaChange's common stock voted for and 475,544 shares of SeaChange's common
stock withheld from the election of Mr. Olson. In addition, after the annual
meeting, the following persons continued to serve as directors of the Company:
William C. Styslinger, III and Carmine Vona.
With respect to the approval of the amendment to SeaChange's Amended and
Restated 1995 Stock Option Plan to increase the number of shares of SeaChange's
common stock available for issuance thereunder from 4,800,000 to 9,200,000
shares, 9,986,988 shares of SeaChange's common stock voted for, 4,767,709 shares
of SeaChange's common stock voted against, and 786,301 shares of SeaChange's
common stock abstained from such vote.
20
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: September 14, 2001
SEACHANGE INTERNATIONAL, INC.
by: /s/ William L. Fiedler
----------------------
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer;
Authorized Officer)
21