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,
2010 |
|
OR |
|
o |
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 incorporation or organization) |
(IRS Employer
Identification No.) |
50 Nagog Park, Acton, MA 01720
(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 o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o |
Accelerated filer x |
|
|
|
|
Non-accelerated filer o |
Smaller reporting company o |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.): YES o NO x
The number of shares
outstanding of the registrant’s Common Stock on June 3, 2010 was
31,374,295.
SEACHANGE INTERNATIONAL,
INC.
Table of Contents
|
|
|
Page |
PART I. FINANCIAL
INFORMATION |
|
|
|
|
|
Item 1. |
Unaudited Financial Statements |
|
|
|
|
|
|
|
Consolidated Balance Sheets at April 30,
2010 and January 31, 2010 |
|
3 |
|
|
|
|
|
Consolidated Statements of Operations
for the three months ended April 30, 2010 and April 30, 2009 |
|
4 |
|
|
|
|
|
Consolidated Statements of Cash Flows
for the three months ended April 30, 2010 and April 30, 2009 |
|
5 |
|
|
|
|
|
Notes to Consolidated Financial
Statements |
|
6-21 |
|
|
|
|
Item 2. |
Management’s Discussion and Analysis of
Financial Condition and Results of Operations |
|
21-31 |
|
|
|
|
Item 3. |
Quantitative and Qualitative Disclosures
About Market Risk |
|
31-32 |
|
|
|
|
Item 4. |
Controls and Procedures |
|
32 |
|
|
|
|
PART II. OTHER
INFORMATION |
|
|
|
|
|
Item 1. |
Legal Proceedings |
|
33 |
|
|
|
|
Item
1A. |
Risk Factors |
|
33 |
|
|
|
|
Item 6. |
Exhibits |
|
33 |
|
|
|
|
SIGNATURES |
|
34 |
2
PART I – FINANCIAL
INFORMATION
ITEM 1. Financial
Statements
SEACHANGE INTERNATIONAL,
INC.
CONSOLIDATED BALANCE
SHEETS
(in thousands, except share data)
|
April 30, |
|
January 31, |
|
2010 |
|
2010 |
Assets |
(unaudited) |
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$
|
69,474 |
|
|
$
|
37,647 |
|
Restricted cash |
|
1,270 |
|
|
|
73 |
|
Marketable securities |
|
6,607 |
|
|
|
2,114 |
|
Accounts receivable, net of
allowance for doubtful accounts of $996 |
|
|
|
|
|
|
|
and $852, respectively |
|
43,554 |
|
|
|
50,337 |
|
Unbilled receivables |
|
4,511 |
|
|
|
3,941 |
|
Inventories, net |
|
17,874 |
|
|
|
17,830 |
|
Prepaid expenses and other current assets |
|
6,647 |
|
|
|
7,253 |
|
Deferred tax asset |
|
4,198 |
|
|
|
2,474 |
|
Total current assets |
|
154,135 |
|
|
|
121,669 |
|
Property and equipment, net |
|
39,280 |
|
|
|
39,682 |
|
Marketable securities,
long-term |
|
8,214 |
|
|
|
8,688 |
|
Investments in affiliates |
|
4,799 |
|
|
|
13,697 |
|
Intangible assets, net |
|
31,555 |
|
|
|
26,264 |
|
Goodwill |
|
64,836 |
|
|
|
55,876 |
|
Deferred tax assets, long-term |
|
810 |
|
|
|
|
|
Other assets |
|
2,013 |
|
|
|
1,271 |
|
Total assets |
$ |
305,642 |
|
|
$ |
267,147 |
|
Liabilities and Stockholders’
Equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
$ |
12,407 |
|
|
$ |
10,371 |
|
Income taxes payable |
|
7,029 |
|
|
|
360 |
|
Other accrued
expenses |
|
12,614 |
|
|
|
10,814 |
|
Customer deposits |
|
4,651 |
|
|
|
4,279 |
|
Deferred revenues |
|
36,343 |
|
|
|
34,158 |
|
Deferred tax
liabilities |
|
— |
|
|
|
800 |
|
Total current liabilities |
|
73,044 |
|
|
|
60,782 |
|
Deferred revenue, long-term |
|
12,398 |
|
|
|
12,635 |
|
Other liabilities, long-term |
|
14,914 |
|
|
|
6,574 |
|
Distribution and losses in excess of investment |
|
1,547 |
|
|
|
1,469 |
|
Deferred tax liabilities |
|
8,614 |
|
|
|
7,765 |
|
Total liabilities |
|
110,517 |
|
|
|
89,225 |
|
Stockholders Equity: |
|
|
|
|
|
|
|
Convertible preferred stock, $0.01 par value, 5,000,000 shares
authorized, |
|
|
|
|
|
|
|
none issued or
outstanding |
|
— |
|
|
|
— |
|
Common stock, $0.01 par value;100,000,000 shares authorized;
32,521,422 and |
|
|
|
|
|
|
|
32,563,063 shares issued;
31,370,887 and 31,216,267 shares outstanding |
|
327 |
|
|
|
326 |
|
respectively |
|
|
|
|
|
|
|
Additional paid-in capital |
|
212,931 |
|
|
|
211,504 |
|
Treasury stock, at cost 1,150,535 and 1,346,796 common shares,
respectively |
|
(8,757 |
) |
|
|
(8,757 |
) |
Accumulated earnings (deficit) |
|
1,422 |
|
|
|
(17,450 |
) |
Accumulated other comprehensive loss |
|
(10,798 |
) |
|
|
(7,701 |
) |
Total stockholders’ equity |
|
195,125 |
|
|
|
177,922 |
|
Total liabilities and
stockholders’ equity |
$ |
305,642 |
|
|
$ |
267,147 |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
3
SEACHANGE INTERNATIONAL,
INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except share
data)
(unaudited)
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
Revenues: |
|
|
|
|
|
|
|
Products |
$ |
24,634 |
|
|
$ |
26,370 |
|
Services |
|
29,432 |
|
|
|
22,506 |
|
Total revenues |
|
54,066 |
|
|
|
48,876 |
|
Cost of revenues: |
|
|
|
|
|
|
|
Products |
|
9,644 |
|
|
|
9,969 |
|
Services |
|
17,532 |
|
|
|
13,889 |
|
Total cost of revenues |
|
27,176 |
|
|
|
23,858 |
|
Gross profit |
|
26,890 |
|
|
|
25,018 |
|
Operating expenses: |
|
|
|
|
|
|
|
Research and development |
|
13,564 |
|
|
|
12,104 |
|
Selling and
marketing |
|
6,384 |
|
|
|
6,264 |
|
General and administrative |
|
6,801 |
|
|
|
4,867 |
|
Amortization of
intangibles |
|
898 |
|
|
|
479 |
|
Restructuring |
|
4,311 |
|
|
|
- |
|
Total operating expenses |
|
31,958 |
|
|
|
23,714 |
|
(Loss) income from operations |
|
(5,068 |
) |
|
|
1,304 |
|
Gain on sale of investment in affiliate |
|
25,188 |
|
|
|
- |
|
Other (expense) income, net |
|
(542 |
) |
|
|
135 |
|
Income before income taxes and
equity loss in earnings of |
|
|
|
|
|
|
|
affiliates |
|
19,578 |
|
|
|
1,439 |
|
Income tax provision |
|
594 |
|
|
|
244 |
|
Equity loss in earnings of affiliates, net of tax |
|
(112 |
) |
|
|
(197 |
) |
Net income |
$ |
18,872 |
|
|
$ |
998 |
|
Earnings per share: |
|
|
|
|
|
|
|
Basic |
$ |
0.60 |
|
|
$ |
0.03 |
|
Diluted |
$ |
0.59 |
|
|
$ |
0.03 |
|
Weighted average common shares
outstanding: |
|
|
|
|
|
|
|
Basic |
|
31,270 |
|
|
|
30,847 |
|
Diluted |
|
31,732 |
|
|
|
31,220 |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
4
SEACHANGE INTERNATIONAL,
INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
Cash flows from operating
activities: |
|
|
|
|
|
|
|
Net income |
$ |
18,872 |
|
|
$ |
998 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
Depreciation |
|
2,020 |
|
|
|
1,784 |
|
Amortization of intangibles and capitalized software |
|
1,343 |
|
|
|
530 |
|
Inventory valuation charge |
|
112 |
|
|
|
120 |
|
Provision for doubtful accounts receivable |
|
(4 |
) |
|
|
50 |
|
Discounts earned and amortization of premiums on marketable
securities |
|
16 |
|
|
|
27 |
|
Equity loss in earnings of affiliates |
|
112 |
|
|
|
197 |
|
Gain on sale of investment in affiliate |
|
(25,188 |
) |
|
|
- |
|
Stock-based compensation expense |
|
498 |
|
|
|
761 |
|
Deferred income taxes |
|
(5,976 |
) |
|
|
(98 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
9,350 |
|
|
|
(2,233 |
) |
Unbilled receivables |
|
(570 |
) |
|
|
761 |
|
Inventories |
|
(490 |
) |
|
|
(1,784 |
) |
Prepaid expenses and other assets |
|
268 |
|
|
|
(572 |
) |
Accounts payable |
|
1,888 |
|
|
|
1,784 |
|
Income taxes payable |
|
6,794 |
|
|
|
212 |
|
Accrued expenses |
|
2,103 |
|
|
|
(1,680 |
) |
Customer deposits |
|
372 |
|
|
|
7,373 |
|
Deferred revenues |
|
898 |
|
|
|
1,671 |
|
Other |
|
(199 |
) |
|
|
26 |
|
Net cash provided by operating activities |
|
12,219 |
|
|
|
9,927 |
|
Cash flows from investing
activities: |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
(1,543 |
) |
|
|
(2,434 |
) |
Purchases of marketable securities |
|
(5,154 |
) |
|
|
(11,118 |
) |
Proceeds from sale and maturity of marketable securities |
|
1,072 |
|
|
|
10,555 |
|
Payments for acquisitions, net of cash acquired |
|
(9,538 |
) |
|
|
(723 |
) |
Payment for equity investments |
|
- |
|
|
|
(212 |
) |
Gross proceeds from sale of investment in affiliate |
|
34,086 |
|
|
|
- |
|
Net cash provided (used) by investing activities |
|
18,923 |
|
|
|
(3,932 |
) |
Cash flows from financing
activities: |
|
|
|
|
|
|
|
Purchases of treasury stock |
|
- |
|
|
|
(1,720 |
) |
Proceeds from issuance of common stock relating to the stock
plans |
|
931 |
|
|
|
- |
|
Net cash provided (used) in financing activities |
|
931 |
|
|
|
(1,720 |
) |
Effect of exchange rate changes on cash
and cash equivalents |
|
(246 |
) |
|
|
127 |
|
Net increase in cash and cash equivalents |
|
31,827 |
|
|
|
4,402 |
|
Cash and cash equivalents, beginning of
period |
|
37,647 |
|
|
|
62,458 |
|
Cash and cash equivalents, end of period |
$ |
69,474 |
|
|
$ |
66,860 |
|
Supplemental disclosure of non-cash
activities: |
|
|
|
|
|
|
|
Transfer of items
originally classified as inventories to equipment |
$ |
310 |
|
|
$ |
1,185 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
5
SEACHANGE INTERNATIONAL,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying
unaudited consolidated financial statements include the accounts of SeaChange
International, Inc. and its subsidiaries (“SeaChange” or the “Company”) in
accordance with U.S. generally accepted accounting principles (U.S. GAAP) for
interim financial reports and the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared under generally accepted
accounting principles have been condensed or omitted pursuant to such
regulations.
However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the Company’s most recently audited financial statements and
the notes thereto included in the Company’s Annual Report on Form 10-K and Form
10-K/A as filed with the SEC for the fiscal year ended January 31, 2010. In the
opinion of management, the accompanying financial statements include all
adjustments necessary to present a fair presentation of the consolidated
financial statements for the periods shown. Interim results are not necessarily
indicative of the operating results for the full fiscal year or any future
periods. The preparation of these financial statements in conformity with U.S.
GAAP requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and disclosure
of contingent assets and liabilities. Actual results may differ from
management’s estimates.
There have been no
significant changes in our accounting policies during the three months ended
April 30, 2010, as compared to the significant accounting policies described in
our Annual Report on Form 10-K and Form 10-K/A for the year ended January 31,
2010.
2. Fair Value Measurements
The Company determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. SeaChange’s
investment portfolio consists of money market funds, corporate debt investments,
asset-backed securities, government-sponsored enterprises, and state and
municipal obligations. All highly liquid investments with an original maturity
of three months or less when purchased are considered to be cash equivalents.
All cash equivalents are carried at cost, which approximates fair value.
SeaChange’s marketable securities are classified as available-for-sale and are
reported at fair value with unrealized gains and losses, net of tax, reported in
stockholders’ equity as a component of accumulated other comprehensive income or
loss. The amortization of premiums and accretions of discounts to maturity are
computed under the effective interest method and is included in interest income.
Interest on securities is recorded as earned and is also included in interest
income. Any realized gains or losses would be shown in the accompanying
consolidated statements of operations in other income or expense. The Company
provides fair value measurement disclosures of its available for sale securities
in accordance with one of three levels of fair value measurement.
Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Fair value is a market-based measurement, not an
entity-specific measurement. A fair value hierarchy enables the reader of the
financial statements to assess the inputs used to develop fair value
measurements by establishing a hierarchy for ranking the quality and reliability
of the information used to determine fair values. Assets and liabilities carried
at fair value will be classified and disclosed in one of the following three
categories:
Level 1: Quoted market
prices in active markets for identical assets or liabilities.
Level 2: Observable
market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable
inputs that are not corroborated by market data.
6
The
Company’s financial assets and liabilities that are measured at fair value on a
recurring basis as of April 30, 2010 are as follows:
|
April 30, |
|
Fair Value Measurements Using |
|
2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
(in thousands ) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
Money market accounts (a) |
$ |
3,409 |
|
$ |
3,409 |
|
$ |
- |
|
$ |
- |
U.S. government agency issues
(a) |
|
14,570 |
|
|
14,570 |
|
|
- |
|
|
- |
Certificate of deposit (a) |
|
251 |
|
|
251 |
|
|
- |
|
|
- |
Total assets |
$ |
18,230 |
|
$ |
18,230 |
|
$ |
- |
|
$ |
- |
|
Forward exchange contract (a) |
$ |
1,589 |
|
$ |
1,589 |
|
$ |
- |
|
$ |
- |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related consideration (b) |
$ |
16,188 |
|
$ |
- |
|
$ |
- |
|
$ |
16,188 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Money
market funds and US government agency securities, included in cash and
cash equivalents in the accompanying balance sheet, are valued at quoted
market prices for identical instruments in active markets. |
(b) |
|
The
fair value of our contingent consideration arrangement is determined based
on the Company’s evaluation as to the probability and amount of any
earn-out that will be achieved based on expected future performance by the
acquired entity, as well as the fair value of fixed purchase
price. |
There have been no
transfers between Level 1 and Level 2. The only transfer into or out of Level 3
has been the addition of VividLogic, Inc. The following table sets forth a
reconciliation of assets measured at fair value on a recurring basis with the
use of significant unobservable inputs (Level 3) for the three months ended
April 30, 2010 (in thousands):
|
|
Level 3 |
|
|
Accrued Contingent |
|
|
Consideration |
|
Beginning balance January 31,
2010 |
$
|
9,514 |
|
|
Addition of VividLogic,
Inc. |
|
7,415 |
|
|
Contingency payment |
|
(311 |
) |
|
Translation
adjustment |
|
(430 |
) |
|
Ending balance April 30, 2010 |
$ |
16,188 |
|
|
|
|
|
|
7
The following is a
summary of available for sale securities.
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Estimated |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
(in thousands) |
April 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
Cash |
$ |
66,065 |
|
$ |
- |
|
$ |
- |
|
$ |
66,065 |
Cash equivalents |
|
3,409 |
|
|
- |
|
|
- |
|
|
3,409 |
Cash and cash
equivalents |
|
69,474 |
|
|
- |
|
|
- |
|
|
69,474 |
US government agency issues |
|
6,497 |
|
|
110 |
|
|
- |
|
|
6,607 |
Marketable
securities—short-term |
|
6,497 |
|
|
110 |
|
|
- |
|
|
6,607 |
US government agency issues |
|
7,843 |
|
|
120 |
|
|
- |
|
|
7,963 |
Corporate debt securities |
|
250 |
|
|
1 |
|
|
- |
|
|
251 |
Marketable securities—long-term |
|
8,093 |
|
|
121 |
|
|
- |
|
|
8,214 |
Total cash equivalents and
marketable securities |
$ |
84,064 |
|
$ |
231 |
|
$ |
- |
|
$ |
84,295 |
January 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
Cash |
$ |
32,725 |
|
$ |
- |
|
$ |
- |
|
$ |
32,725 |
Cash equivalents |
|
4,922 |
|
|
- |
|
|
- |
|
|
4,922 |
Cash and cash
equivalents |
|
37,647 |
|
|
- |
|
|
- |
|
|
37,647 |
US government agency issues |
|
2,023 |
|
|
91 |
|
|
- |
|
|
2,114 |
Marketable
securities—short-term |
|
2,023 |
|
|
91 |
|
|
- |
|
|
2,114 |
US government agency issues |
|
8,276 |
|
|
161 |
|
|
- |
|
|
8,437 |
Corporate debt securities |
|
250 |
|
|
1 |
|
|
- |
|
|
251 |
Marketable securities—long-term |
|
8,526 |
|
|
162 |
|
|
- |
|
|
8,688 |
Total cash equivalents and
marketable securities |
$ |
48,196 |
|
$ |
253 |
|
$ |
- |
|
$ |
48,449 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange Risk
The Company entered into
a foreign exchange forward contract denominated in Euros to hedge against a
portion of the foreign currency exchange risk associated with the acquisition of
eventIS Group B.V. for the fixed deferred purchase price. The purpose of the
Company’s foreign currency risk management program is to reduce volatility in
earnings caused by exchange rate fluctuations. FASB ASC Topic 815, Derivatives and Hedging, requires companies to recognize all of the derivative financial
instruments as either assets or liabilities at fair value in the consolidated
balance sheets based upon quoted market prices for comparable instruments. The
Company’s derivative instrument did not meet the criteria for hedge accounting
within FASB ASC Topic 815. Therefore, the foreign currency forward contracts are
recorded at fair value, with the gain or loss on these transactions recorded in
the unaudited consolidated statements of operations within “other (expense)
income, net” in the period in which they occur. The Company does not use
derivative financial instruments for trading or speculative purposes. As of
April 30, 2010, the Company had one outstanding foreign currency exchange
forward contract to buy Euros totaling €1.2 million that settles on September 1,
2010. During the three months ended April 30, 2010, the Company recorded
approximately $75,000 of losses related to its foreign currency exchange forward
contract. The Company’s foreign currency exchange contract is an
over-the-counter instrument. There is an active market for this instrument, and
therefore, it is classified as Level 1 in the fair value hierarchy.
3. Inventories
Inventory consists
primarily of hardware and related component parts and is stated at the lower of
cost (on a first-in, first-out basis) or market. Inventories consist of the
following:
|
|
April 30, |
|
January 31, |
|
|
2010 |
|
2010 |
|
|
(in thousands) |
|
Components and assemblies |
$
|
12,006 |
|
$
|
11,316 |
|
Finished products |
|
5,868 |
|
|
6,514 |
|
Total inventory, net |
$ |
17,874 |
|
$ |
17,830 |
|
|
|
|
|
|
|
8
4. Investments in Affiliates
On Demand Deutschland GmbH & Co. KG
On February 27, 2007,
the On Demand Group Limited (“ODG”), a wholly-owned U.K. subsidiary of
SeaChange, entered into an agreement with Tele-Munchen Fernseh GmbH & Co.
Produktionsgesellschaft (TMG) to create a joint venture named On Demand
Deutschland GmbH & Co. KG. On Demand Deutschland specializes in establishing
on-demand and pay-per-view services on multiple platforms in German-speaking
Europe. ODG contributed $2.8 million to acquire its 50% ownership interest in
the joint venture of which $2.6 million consisted of the fair value of customer
contracts and content license agreements contributed by ODG and $154,000
represented a cash contribution. The customer contracts and licensed content had
no book value. SeaChange determined that this investment is an operating joint
venture and does not require consolidation. Consequently, SeaChange accounts for
this investment under the equity method of accounting.
ODG’s original
investment in the joint venture was recorded at $154,000 representing the US
dollar equivalent of the initial cash contribution. The difference between the
book and fair value of the customer contracts and content license agreements is
being accreted over the expected five year life of the contracts and recorded as
a gain and an increase in the investment. This gain will be partially offset by
ODG’s 50% share of the joint venture’s amortization expense over the same period
related to the acquired contracts and content license agreements. ODG also
recorded a net payable amount to the joint venture of $337,000 as of the joint
venture formation date reflecting the transfer of net liabilities incurred by
ODG related to the joint venture as well as the joint venture’s reimbursement of
previously incurred costs by ODG of $787,000 related to joint venture activities
prior to its formation. Consistent with authoritative guidance regarding
non-monetary transactions, ODG did not record other income in connection with
the reimbursement of these costs or any other gains as ODG is deemed to have a
commitment to support the operations of the joint venture. ODG treated the
reimbursement and other gain for a total of $869,000 as a capital distribution
in excess of the carrying value of its investment in the joint venture. This
capital distribution is being accreted over the expected five year life of the
customer contracts and recorded as a gain and an increase in the investment in
the joint venture.
ODG entered into a
Service Agreement with the joint venture whereby ODG provides content
aggregation, distribution, marketing and administration services to the joint
venture under an arm’s length fee structure. In the three months ended April 30,
2010 and 2009, ODG recorded revenues of $396,000 and $344,000, respectively,
related to the Service Agreement. ODG’s share of profits from this agreement in
proportion to its equity ownership interest is eliminated in
consolidation.
The Shareholder’s
Agreement requires both ODG and TMG to provide cash contributions up to $4.2
million upon the request of the joint venture’s management and approval by the
shareholders of the joint venture. To date the Company has contributed $1.2
million as required per the shareholders agreement.
ODG recorded its
proportionate share of the joint venture’s losses for the three months ending
April 30, 2010 and 2009 of $112,000 and $197,000, respectively. Due to the
capital distribution and ODG’s share of the joint venture’s net loss exceeding
the book value of its investment in the joint venture, the investment is
recorded as a long-term liability of $1.5 million at April 30, 2010 and January
31, 2010, respectively.
5. Acquisitions and Dispositions
eventIS Group B.V.
On September 1, 2009,
the Company acquired the entire share capital (the “eventIS Shares”) of eventIS
Group B.V. (“eventIS”) pursuant to the Agreement for the Acquisition of the
Entire Share Capital of eventIS Group B.V. (the “eventIS Share Purchase
Agreement”). eventIS, based in Eindhoven, the Netherlands, provides video on
demand and linear broadcast software and related services to cable television
and telecommunications companies primarily in Europe. The results of eventIS’s
operations have been included in the consolidated financial statements since the
acquisition date. The Company acquired eventIS to expand its VOD solutions into
the European market.
Fair Value of Consideration
Transferred
At the closing, the
Company made a cash payment to the former shareholder of eventIS equal to the
sum of the initial purchase price under the eventIS Share Purchase Agreement of
approximately $34.4 million plus $2.2 million based on an estimated working
capital adjustment in accordance with the eventIS Share Purchase Agreement. The
final working capital adjustment was settled during the fourth quarter of fiscal
2010 for an additional payment of $395,000.
9
On each of the first,
second and third anniversaries of the closing date, the Company is obligated to
make additional fixed payments of deferred purchase price under the eventIS
Share Purchase Agreement (the “Deferred Fixed Purchase Price Payments”), each such payment to be in an
aggregate amount of $2.8 million with $1.7 million payable in cash and $1.1
million payable by the issuance of restricted shares of SeaChange common stock,
which will vest in equal installments over three years starting on the first
anniversary of the date of issuance (“Restricted Stock”). At the option of the
former shareholder of eventIS, up to forty percent of this payment in Restricted
Stock may be payable in cash. Under the earnout provisions of the eventIS Share
Purchase Agreement, if certain performance goals are met over each of the three
annual periods ending January 31, 2013, the Company will be obligated to make
additional cash payments to the former shareholder of eventIS (each, an “Earnout
Payment”).
Allocation of Consideration
Transferred
The identifiable assets
acquired and liabilities assumed in the eventIS acquisition were recognized and
measured as of the acquisition date, September 1, 2009, based on their estimated
fair values. The excess of the acquisition date fair value of consideration
transferred over the fair value of the net tangible assets and intangible assets
acquired was recorded as goodwill.
The following table
summarizes the fair values of the assets acquired and liabilities assumed at the
eventIS acquisition date.
|
|
(in thousands) |
|
Payment of cash to eventIS
shareholders |
$ |
36,631 |
|
|
Acquisition-related deferred consideration |
|
10,098 |
|
|
Total acquisition-date fair value |
$ |
46,729 |
|
|
|
|
|
(in
thousands) |
|
Cash and cash equivalents |
$ |
4,374 |
|
|
Accounts receivable |
|
4,237 |
|
|
Inventory |
|
98 |
|
|
Other tangible assets |
|
695 |
|
|
Intangible assets |
|
23,833 |
|
|
Total identifiable assets
acquired |
|
33,237 |
|
|
|
|
Accounts payable and other
liabilities |
|
(2,069 |
) |
|
Deferred taxes |
|
(4,495 |
) |
|
Deferred revenue |
|
(6,207 |
) |
|
Total liabilities
assumed |
|
(12,771 |
) |
|
|
|
Goodwill |
|
26,263 |
|
|
|
|
Net assets acquired |
$ |
46,729 |
|
|
|
|
|
|
Intangible Assets
In determining the fair
value of the intangible assets, the Company considered, among other factors, the
intended use of acquired assets, analyses of historical financial performance
and estimates of future performance of eventIS’s products. The fair values of
identified intangible assets were calculated based on estimates and assumptions
provided by eventIS’s and the Company’s management. The rates utilized to
discount net cash flows to their present values were based on a weighted average
cost of capital of 17%. This discount rate was determined after consideration of
the rate of return on debt capital and equity that typical investors would
require in an investment in companies similar in size and operating in similar
markets as eventIS. The following table sets forth the components of identified
intangible assets associated with the eventIS acquisition and their estimated
useful lives:
|
|
Useful life |
|
Fair Value |
|
|
|
|
(in thousands) |
|
Existing technology |
3-9 years |
|
$
|
6,748 |
|
In process research and development |
indefinite |
|
|
574 |
|
Non-compete agreements |
3 years |
|
|
2,153 |
|
Customer contracts |
10 years |
|
|
13,927 |
|
Trademarks |
4 years |
|
|
431 |
|
Total intangible assets |
|
|
$ |
23,833 |
|
|
|
|
|
|
10
SeaChange determined the useful
life of intangible assets based on the expected future cash flows associated
with the respective asset. Existing technology is comprised of products that
have reached technological feasibility and are part of eventIS’s product line.
In-process research and development assets as of the acquisition date of
$574,000 were recorded as indefinite-lived intangible assets and will be subject
to impairment testing at least annually. The useful life of the intangible asset
recognized will be reconsidered if and when in-process research and development
projects are completed or abandoned. Customer contracts represent the underlying
relationships and agreements with eventIS’s installed customer base.
Trademarks represent the fair
value of the brand and name recognition associated with the marketing of
eventIS’s products and services. Non-compete agreements represent the fair value
of the non-compete with the former shareholders and key employees and will be
amortized over the term of the agreement. Amortization of existing technology is
included in cost of product revenue, and amortization expense for customer
relationships and trademarks is included in operating expenses.
Goodwill
Of the total eventIS
purchase price of $46.7 million, $26.3 million was allocated to goodwill.
Goodwill represents the excess of the purchase price of an acquired business
over the fair value of the underlying net tangible and intangible assets.
SeaChange determined that the goodwill included the value of the eventIS work
force and expected synergies in global sales and marketing, especially within
the European market, and in the deployment of VOD systems. SeaChange considers
the acquired business an addition to the Company’s Software reporting segment.
The Company made this determination based upon the financial information
provided and reviewed by our Chief Executive Officer (the chief operating
decision maker) and the similar economic characteristics to our other products
in our Software segment. None of the goodwill associated with the eventIS
acquisition is deductible for income tax purposes.
Deferred Revenue
In connection with the
allocation of consideration transferred, SeaChange recorded the fair value of
the customer contract obligations assumed from eventIS. The fair value of the
customer contract obligations was determined using a cost build-up approach. The
cost build-up approach determines fair value by estimating the costs relating to
fulfilling the obligations plus a normal profit margin. The sum of the costs and
operating profit approximates, in theory, the amount that SeaChange would be
required to pay a third party to assume the service obligations. The costs to
fulfill the service obligations were based on the historical direct costs and
indirect costs related to eventIS’s contracts with its customers. Direct costs
include personnel directly engaged in providing service and support activities,
while indirect costs consist of estimated general and administrative expenses
based on normalized levels as a percentage of revenue. Profit associated with
selling efforts was excluded because eventIS had concluded the selling efforts
on the service contracts prior to the date of the Company’s acquisition. The
research and development costs associated with the customer contracts have been
included in the fair value determination, as these costs were deemed to
represent a legal obligation to the customers at the time of acquisition.
SeaChange recorded $6.2 million
of deferred revenue to reflect the fair value of eventIS’s service obligations
assumed.
Acquisition-related
Consideration
A liability was
recognized for the acquisition date fair value of the acquisition-related
consideration for the deferred fixed purchase price, and the estimated earnout
payments and working capital adjustments. Any change in the fair value of the
acquisition-related consideration subsequent to the acquisition date, including
changes from events after the acquisition date, such as changes in our estimate
of the meeting of performance goals, will be recognized in earnings in the
period the estimated fair value changes. The fair value estimate is based on the
probability weighted bookings to be achieved over the earnout period. A change
in fair value of the acquisition-related consideration could have a material
effect on the statement of operations and financial position in the period of
the change in estimate. The fair value of the acquisition-related consideration
to be distributed directly to the eventIS selling shareholder was estimated by
the Company at the acquisition date to be $10.1 million on September 1, 2009 and
$8.8 million as of April 30, 2010.
11
VividLogic, Inc.
On February 1, 2010, the
Company completed its acquisition of all the outstanding capital stock of
VividLogic, Inc. (“VividLogic”). VividLogic, based in Fremont, California
provides in-home infrastructure software for high definition televisions, home
gateways, and set-top boxes to cable television service providers, set-top box
manufacturers and consumer electronics (CE) suppliers. The Company acquired
VividLogic to expand its in-home solutions. The results of VividLogic’s
operations have been included in the consolidated financial statements since the
acquisition date. The Company has engaged a third-party valuation firm to assist
in the determination of the fair value of the VividLogic intangible assets,
deferred revenues, and contingent consideration with such determination expected
to be finalized by the end of the second quarter of fiscal 2011. The Company is
currently undergoing a valuation of the assets and liabilities acquired. The
fair value and allocation of the purchase price is preliminary based on the
Company’s best estimates as of February 1, 2010.
Fair Value of Consideration
Transferred
At the closing, the
Company made a cash payment of $12.0 million. In addition, the VividLogic
shareholders are entitled to $8.5 million in cash from available working capital
of which $3.5 million was paid at the closing and $1.5 million was paid on June
1, 2010. Of the remaining $3.5 million of estimated working capital adjustment
to be paid in cash, $1.5 million will be paid on August 1, 2010, and $2.0
million will be paid on February 1, 2011. In addition, on each of the first,
second and third anniversaries of the closing date, the Company is obligated to
make additional fixed payments of deferred purchase price of $1.0 million in
cash. The Company may also be obligated to make earnout payments if certain
performance goals are met over each of the three annual periods ending February
1, 2011, 2012 and 2013. The purchase price allocated to current assets included
an indemnification asset held in escrow for $1.2 million representing an
estimate of the selling shareholders obligation to indemnify the Company for the
outcome of a potential contingent liability relating to an uncertain tax
position. The indemnification asset was measured on the same basis as the
liability for the uncertain tax position. VividLogic has been under tax
examination by the State of California since January 2009 for the tax years 2006
and 2007. As of April 30, 2010, The Company has not received nor agreed upon any
final adjustments. The indemnification asset will be settled once the results of
the audit by the State of California are complete.
Allocation of Consideration
Transferred
The identifiable assets
acquired and liabilities assumed in the VividLogic acquisition were recognized
and measured as of the acquisition date, February 1, 2010, based on their
estimated fair values. The excess of the acquisition date fair value of
consideration transferred over the estimated fair value of the net tangible
assets and intangible assets acquired was recorded as goodwill.
12
The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the VividLogic acquisition date.
|
|
(in thousands) |
|
Payment of cash to VividLogic
shareholders |
$ |
14,270 |
|
|
Indemnification held in escrow |
|
1,200 |
|
|
Acquisition-related deferred
consideration |
|
7,415 |
|
|
Total acquisition-date fair
value |
$ |
22,885 |
|
|
|
|
|
(in thousands) |
|
Cash and cash equivalents |
$ |
5,932 |
|
|
Accounts receivable |
|
2,917 |
|
|
Other tangible assets |
|
539 |
|
|
Deferred tax assets |
|
170 |
|
|
Intangible assets |
|
7,700 |
|
|
Total identifiable assets
acquired |
|
17,258 |
|
|
|
|
Accounts payable and other
liabilities |
|
(1,740 |
) |
|
Deferred taxes |
|
(2,526 |
) |
|
Deferred revenue |
|
(1,489 |
) |
|
Total liabilities
assumed |
|
(5,755 |
) |
|
|
|
Goodwill |
|
11,382 |
|
|
|
|
Net assets acquired |
$ |
22,885 |
|
|
|
|
|
|
Intangible Assets
In determining the
estimated fair value of the intangible assets, the Company is considering, among
other factors, the intended use of acquired assets, analyses of historical
financial performance and estimates of future performance of VividLogic’s
products. The estimated fair values of identified intangible assets were
calculated using an income approach based on estimates and assumptions provided
by VividLogic’s and the Company’s management. The following table sets forth the
components of estimated identified intangible assets associated with the
VividLogic acquisition and their estimated useful lives:
|
|
Useful life |
|
Fair Value |
|
|
|
|
(in thousands) |
|
Existing technology |
7 years |
|
$
|
2,310 |
|
Non-compete agreements |
3 years |
|
|
770 |
|
Customer contracts |
10 years |
|
|
4,620 |
|
Total intangible assets |
|
|
$ |
7,700 |
|
|
|
|
|
|
SeaChange determined the
useful life of estimated intangible assets based on the expected future cash
flows associated with the respective asset. Existing technology is comprised of
products that have reached technological feasibility and are part of
VividLogic’s product line. Non-compete agreements represent the fair value of
the non-compete with the former shareholders and key employees and will be
amortized over the term of the agreements. Customer contracts represent the
underlying relationships and agreements with VividLogic’s installed customer
base. Amortization of existing technology is included in cost of product
revenue, and amortization expense for customer relationships and trademarks is
included in operating expenses.
Goodwill
Of the total VividLogic
purchase price of $23.0 million, $11.4 million was allocated to goodwill.
Goodwill represents the excess of the purchase price of an acquired business
over the fair value of the underlying net tangible and intangible assets.
SeaChange determined that the estimated goodwill included the value of
VividLogic’s work force and expected synergies in global sales and marketing.
SeaChange considers the acquired business an addition to the Company’s Software
reporting segment. The Company made this determination based upon the financial
information provided and reviewed by our Chief Executive Officer (the chief
operating decision maker) and the similar economic characteristics to our other
products in our Software segment. None of the goodwill associated with the
VividLogic acquisition is deductible for income tax purposes.
13
Deferred
Revenue
In connection with the
allocation of consideration transferred, SeaChange recorded the estimated fair
value of the customer contract obligations assumed from VividLogic. The
estimated fair value of the customer contract obligations was determined using a
cost build-up approach. The cost build-up approach determines fair value by
estimating the costs relating to fulfilling the obligations plus a normal profit
margin. The sum of the costs and operating profit approximates, in theory, the
amount that SeaChange would be required to pay a third party to assume the
service obligations. The estimated costs to fulfill the service obligations were
based on the historical direct costs and indirect costs related to VividLogic’s
contracts with its customers. Direct costs include personnel directly engaged in
providing service and support activities, while indirect costs consist of
estimated general and administrative expenses based on normalized levels as a
percentage of revenue. Profit associated with selling efforts was excluded
because VividLogic had concluded the selling efforts on the service contracts
prior to the date of the Company’s acquisition. The research and development
costs associated with the customer contracts have been included in the fair
value determination, as these costs were deemed to represent a legal obligation
to the customers at the time of acquisition. SeaChange estimated $1.5 million of
deferred revenue as of the acquisition date to reflect the fair value of
VividLogic’s service obligations assumed.
Acquisition-related
Consideration
A liability was
recognized for the acquisition date estimated fair value of the
acquisition-related consideration for the deferred fixed purchase price, the
estimated earnout payments and working capital adjustments. Any change in the
fair value of the acquisition-related consideration subsequent to the
acquisition date, including changes from events after the acquisition date, such
as changes in our estimate of the meeting of performance goals, will be
recognized in earnings in the period the estimated fair value changes. The fair
value estimate for the earnout payment was insignificant and is based on
the probability weighted bookings to be achieved over the earnout period. A
change in fair value of the acquisition-related consideration could have a
material effect on the statement of operations and financial position in the
period of the change in estimate. The fair value of the acquisition-related
consideration to be distributed directly to the VividLogic selling shareholders
was estimated by the Company at the acquisition date to be $7.4
million.
Acquisition-related Costs
Acquisition-related
costs recognized for the three months ended April 30, 2010 include transaction
costs. SeaChange recorded transaction costs such as legal, accounting, valuation
and other professional services of $800,000 for the three months ended April 30,
2010. The transaction costs were expensed and recorded in general and
administrative expenses in the Consolidated Statement of Operations. During the
quarter ended April 30, 2010, the Company recorded a charge of $20,000 which is
included as interest expense in the Consolidated Statement of Operations for the
change in fair value of the deferred fixed purchase price.
Casa Systems, Inc
On April 26, 2010, the
Company sold its entire 19.8% ownership interest in Casa Systems, Inc.(“Casa”)
back to Casa, a Massachusetts development stage company that specializes in
video-on-demand products with the telecommunications and television markets, for
$34.1 million realizing a pre-tax profit of $25.2 million which was included in
the Consolidated Statement of Operations.
14
6. Goodwill and Intangible
Assets
Goodwill
Goodwill allocated to
the Company’s reportable segments and changes in the carrying amount of goodwill
for the first three months of fiscal 2011 were as follows:
|
Goodwill |
|
Software |
|
Servers & Storage |
|
Media Services |
|
Total |
|
(in thousands) |
Balance at January 31, 2010 |
$ |
35,536 |
|
|
$ |
754 |
|
$ |
19,586 |
|
|
$ |
55,876 |
|
Acquisition of VividLogic |
|
11,382 |
|
|
|
- |
|
|
- |
|
|
|
11,382 |
|
Cumulative translation adjustment
|
|
(1,521 |
) |
|
|
- |
|
|
(901 |
) |
|
|
(2,422 |
) |
Balance at April 30, 2010 |
$ |
45,397 |
|
|
$ |
754 |
|
$ |
18,685 |
|
|
$ |
64,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performed
its annual impairment testing of goodwill on August 1, 2009 associated with its
three reporting units and determined there was no goodwill impairment.
Intangible Assets
Intangible assets
consisted of the following:
|
|
|
April 30, 2010 |
|
Useful Life |
|
Gross |
|
Accumulated Amortization |
|
Net |
|
|
|
|
|
|
(in thousands) |
|
|
|
Customer contracts |
1- 10 years |
|
$ |
32,544 |
|
$ |
(12,396 |
) |
|
$ |
20,148 |
Non-compete agreements |
2-3 years |
|
|
2,756 |
|
|
(441 |
) |
|
|
2,315 |
Completed technology |
4 - 9 years |
|
|
11,871 |
|
|
(3,821 |
) |
|
|
8,050 |
Trademarks and other |
5 years |
|
|
1,748 |
|
|
(1,234 |
) |
|
|
514 |
In-process research and
development |
4 - 6 years |
|
|
528 |
|
|
- |
|
|
|
528 |
Total intangible
assets |
|
|
$ |
49,447 |
|
$ |
(17,892 |
) |
|
$ |
31,555 |
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future
amortization expenses related to the above intangible assets at April 30, 2010
are as follows:
Fiscal Year |
|
(in thousands) |
2011 (for the remaining nine months
ending January 31,
2011) |
|
$ |
3,823 |
2012 |
|
|
5,165 |
2013 |
|
|
5,047 |
2014 |
|
|
3,785 |
2015 and thereafter |
|
|
13,207 |
Total |
|
$ |
31,027 |
|
|
|
|
7. Commitments and Contingencies
ARRIS Litigation
On July 31, 2009, Arris
Corporation (“Arris”) filed a contempt motion in the U.S. District Court for the
District of Delaware against SeaChange International relating to U.S. Patent No
5,805,804 (the “804 patent”), a patent owned by Arris. In its motion, Arris is
seeking further patent royalties and the enforcement of the permanent injunction
entered by the Court on April 6, 2006 against certain SeaChange products. On
August 3, 2009, SeaChange filed a complaint seeking a declaratory judgment from
the Court that its products do not infringe the ‘804 patent and asserting
certain equitable defenses. SeaChange also filed a motion to consolidate the
Arris contempt motion with the declaratory judgment action and requested a
status conference on SeaChange’s declaratory judgment action. On August 25,
2009, Arris filed 1) an answer to SeaChange’s complaint that included a
counterclaim of patent infringement under the ‘804 patent; and 2) a motion to
stay the declaratory judgment action until the resolution of the contempt
motion. On June 4, 2010, the Court entered an order granting Arris’ motion to stay
the declaratory judgment action pending resolution of the contempt proceeding
and denied SeaChange’s motion to
consolidate and request for status conference. SeaChange is currently preparing
for the Court its response to the contempt motion. SeaChange believes that
Arris’
contempt motion is without merit, and that SeaChange products do not infringe
the remaining claims under the ‘804
patent.
15
Indemnification and Warranties
SeaChange provides
indemnification, to the extent permitted by law, to its officers, directors,
employees and agents for liabilities arising from certain events or occurrences
while the officer, director, employee, or agent is or was serving at SeaChange’s
request in such capacity. With respect to acquisitions, SeaChange provides
indemnification to or assumes indemnification obligations for the current and
former directors, officers and employees of the acquired companies in accordance
with the acquired companies’ bylaws and charter. As a matter of practice,
SeaChange has maintained directors' and officers’ liability insurance including
coverage for directors and officers of acquired companies.
SeaChange enters into
agreements in the ordinary course of business with customers, resellers,
distributors, integrators and suppliers. Most of these agreements require
SeaChange to defend and/or indemnify the other party against intellectual
property infringement claims brought by a third party with respect to
SeaChange’s products. From time to time, SeaChange also indemnifies customers
and business partners for damages, losses and liabilities they may suffer or
incur relating to personal injury, personal property damage, product liability,
and environmental claims relating to the use of SeaChange’s products and
services or resulting from the acts or omissions of SeaChange, its employees,
authorized agents or subcontractors. For example, SeaChange has received
requests from several of its customers for indemnification of patent litigation
claims asserted by Acacia Media Technologies, USA Video Technology Corporation,
Multimedia Patent Trust, Microsoft Corporation and VTran Media Technologies.
Management performed an analysis of these requests, evaluating whether any
potential losses were probable and estimable.
SeaChange warrants that
its products, including software products, will substantially perform in
accordance with its standard published specifications in effect at the time of
delivery. Most warranties have at least a one year duration that generally
commence upon installation. In addition, SeaChange provides maintenance support
to customers and therefore allocates a portion of the product purchase price to
the initial warranty period and recognizes revenue on a straight line basis over
that warranty period related to both the warranty obligation and the maintenance
support agreement. When SeaChange receives revenue for extended warranties
beyond the standard duration, it is deferred and recognized on a straight line
basis over the contract period. Related costs are expensed as incurred.
In the ordinary course
of business, SeaChange provides minimum purchase guarantees to certain of its
vendors to ensure continuity of supply against the market demand. Although some
of these guarantees provide penalties for cancellations and/or modifications to
the purchase commitments as the market demand decreases, most of the guarantees
do not. Therefore, as the market demand decreases, SeaChange re-evaluates the
accounting implications of guarantees and determines what charges, if any,
should be recorded.
With respect to its
agreements covering product, business or entity divestitures and acquisitions,
SeaChange provides certain representations and warranties and agrees to
indemnify and hold such purchasers harmless against breaches of such
representations, warranties and covenants. With respect to its acquisitions,
SeaChange may, from time to time, assume the liability for certain events or
occurrences that took place prior to the date of acquisition.
SeaChange provides such
guarantees and indemnification obligations after considering the economics of
the transaction and other factors including but not limited to the liquidity and
credit risk of the other party in the transaction. SeaChange believes that the
likelihood is remote that any such arrangement could have a material adverse
effect on its financial position, results of operation or liquidity. SeaChange
records liabilities, as disclosed above, for such guarantees based on the
Company’s best estimate of probable losses which considers amounts recoverable
under any recourse provisions.
8. Restructuring
During the three months
ended April 30, 2010, the Company initiated and completed actions to lower its
cost structure as it strives to improve its financial performance. The first
quarter of fiscal 2011 included restructuring charges to its income statement
totaling $1.8 million for severance costs related to the termination of
approximately 64 employees and a write down of inventory of approximately $2.5
million related to the decision in the first quarter to discontinue certain
products within the Servers and Storage segment.
The amounts reported as
accrued liabilities as of April 30, 2010 were as follows:
|
(in thousands) |
|
Severance |
|
Accrual at beginning of period |
|
$ |
- |
|
|
Amount charged to expense |
|
|
1,838 |
|
|
Severance costs paid |
|
|
(962 |
) |
|
Accrual at end of period |
|
$ |
876 |
|
|
|
|
|
|
|
16
9. Segment Information
The Company is managed
and operated as three segments, Software, Servers and Storage, and Media
Services. A description of the three reporting segments is as follows:
- Software segment includes product revenues from the Company’s
Advertising, VOD, Middleware and Broadcast software, related services such as
professional services, installation, training, project management, product
maintenance, technical support and software development for those software
products, and operating expenses relating to the Software segment such as
research and development, selling and marketing and amortization of
intangibles. The Software segment includes the results of eventIS from the
date of the acquisition on September 1, 2009 and the results of VividLogic
from the date of acquisition on February 1, 2010.
- Servers and Storage
segment includes product revenues from the VOD and Broadcast server product
lines and related services such as professional services, installation,
training, project management, product maintenance, and technical support for
those products and operating expenses relating to the Servers and Storage
segment, such as research and development and selling and
marketing.
- Media Services
segment includes the operations of ODG, including Mobix Interactive,
activities which include content acquisition and preparation services for
television and wireless service providers and related operating
expenses.
Under this reporting
structure, the Company further determined that there are significant functions,
and therefore costs, that are considered corporate expenses and are not
allocated to the reportable segments for the purposes of assessing performance
and making operating decisions. These unallocated costs include general and
administrative expenses, other than direct general and administrative expenses
related to Media Services and Software, other income (expense), net, taxes and
equity losses in earnings of affiliates, which are managed separately at the
corporate level.
17
The basis of the assumptions for all such revenues, costs and
expenses includes significant judgments and estimations. There are no
inter-segment revenues for the periods shown below. The Company does not
separately track all assets by operating segments nor are the segments evaluated
under this criterion. The following summarizes the revenues, gross profit,
operating expenses and income from operations by reportable
segment:
|
|
Three Months
Ended |
|
|
April
30, |
|
|
2010 |
|
2009 |
|
|
|
(in thousands) |
|
Software |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
Products |
|
$ |
21,132 |
|
|
$ |
16,285 |
|
Services |
|
|
19,816 |
|
|
|
14,333 |
|
Total revenue |
|
|
40,948 |
|
|
|
30,618 |
|
Gross profit |
|
|
22,084 |
|
|
|
17,730 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
10,417 |
|
|
|
9,478 |
|
Selling and marketing |
|
|
4,650 |
|
|
|
3,678 |
|
General and administrative |
174 |
|
|
|
- |
|
Amortization of intangibles |
|
|
827 |
|
|
|
385 |
|
Restructuring |
|
|
344 |
|
|
|
- |
|
|
|
|
16,412 |
|
|
|
13,541 |
|
Income from operations |
|
$ |
5,672 |
|
|
$ |
4,189 |
|
|
Servers and Storage |
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
Products |
|
$ |
3,502 |
|
|
$ |
10,085 |
|
Services |
|
|
3,248 |
|
|
|
3,968 |
|
Total revenue |
|
|
6,750 |
|
|
|
14,053 |
|
Gross profit |
|
|
3,198 |
|
|
|
6,898 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
3,147 |
|
|
|
2,626 |
|
Selling and marketing |
|
|
1,734 |
|
|
|
2,586 |
|
Restructuring |
|
|
3,056 |
|
|
|
- |
|
|
|
|
7,937 |
|
|
|
5,212 |
|
(Loss) income from operations
|
|
$ |
(4,739 |
) |
|
$ |
1,686 |
|
|
Media Services |
|
|
|
|
|
|
|
|
Service revenue |
|
$ |
6,368 |
|
|
$ |
4,205 |
|
Gross profit |
|
|
1,608 |
|
|
|
390 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative |
879 |
|
|
|
819 |
|
Amortization of intangibles |
|
|
71 |
|
|
|
94 |
|
|
|
|
950 |
|
|
|
913 |
|
Income (loss) from operations
|
|
$ |
658 |
|
|
$ |
(523 |
) |
|
Unallocated Corporate |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
5,748 |
|
|
$ |
4,048 |
|
Restructuring |
|
$ |
911 |
|
|
$ |
- |
|
Total unallocated corporate expenses
|
|
$ |
6,659 |
|
|
$ |
4,048 |
|
|
|
|
|
|
|
|
|
|
Consolidated (loss) income from
operations |
|
$ |
(5,068 |
) |
|
$ |
1,304 |
|
|
|
|
|
|
|
|
|
|
18
The following table summarizes revenues by geographic
locations:
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
|
Amount |
|
% |
|
Amount |
|
% |
|
(in thousands, except
percentages) |
Revenues by
customers' geographic locations: |
|
North America |
$ |
33,874 |
|
62 |
% |
|
$ |
37,124 |
|
76 |
% |
Europe and Middle East |
|
14,064 |
|
26 |
% |
|
|
9,061 |
|
19 |
% |
Latin America |
|
3,692 |
|
7 |
% |
|
|
1,572 |
|
3 |
% |
Asia Pacific and other international
locations |
|
2,436 |
|
5 |
% |
|
|
1,119 |
|
2 |
% |
Total |
$ |
54,066 |
|
|
|
|
$ |
48,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes
revenues by significant customer where such revenue exceeded 10% of total
revenues for the indicated period:
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
Customer A |
35 |
% |
|
24 |
% |
Customer B |
12 |
% |
|
10 |
% |
Customer C |
* |
|
|
18 |
% |
|
|
|
|
|
|
* Denotes a percentage less than 10% |
|
|
|
|
|
At April 30, 2010, two
different customers accounted for approximately 35% and 14%, respectively, of
the accounts receivable and unbilled receivables balances, and at April 30,
2009, three customers accounted for 25%, 23% and 12%, respectively, of
SeaChange’s accounts receivable and unbilled receivables balances.
10. Income Taxes
Our effective tax rate
was a provision of 3% and 17% for the three months ended April 30, 2010 and
2009, respectively. Our income tax provision consists of federal, foreign, and
state income taxes.
The difference in the
fiscal 2011 period between our effective tax rate and the federal statutory rate
of 35% is primarily due to the differential in foreign tax rates. In addition
there were two discrete items which included the tax expense associated with the
gain on the sale of Casa Systems, Inc and the benefit from the decrease of a
portion of the valuation allowance against its deferred tax asset due to the
Company having met the “more likely than not” realization criteria on its U.S.
deferred tax asset as of April 30, 2010. Previously, the Company maintained a
full valuation allowance and will continue to monitor available information in
determining whether there is sufficient evidence to consider releasing some or
all of the remaining valuation allowance. Should the Company determine any
portion of the valuation allowance is no longer required; a tax benefit would be
recorded in the financial period of the change in determination.
In conjunction with the
purchase price allocation for the acquisition of VividLogic, we recorded a
liability for uncertain tax position in the amount of $1.2 million. Tax years
2006 to 2009 of VividLogic are currently open for examination. An
indemnification asset held in escrow of $1.2 million has also been recorded,
which represents the selling shareholders’ obligation to indemnify the Company
for uncertain tax positions taken by the former shareholders of VividLogic.
The difference in the
fiscal 2010 periods between our effective tax rate and the federal statutory
rate of 35% was primarily due to the differential in foreign tax rates and the
utilization of foreign tax credits.
11. Comprehensive Income
During the first quarter
of fiscal year 2011, the U.S. dollar strengthened in value against foreign
currencies held by our subsidiaries. As a result, the Company’s Media Services
operations in the U.K. and the eventIS operations in the Netherlands generated a
foreign currency translation loss of $3.0 million, which was recorded
as accumulated other comprehensive income, decreasing the Company’s equity
section of the balance sheet over the prior period.
19
The components of
comprehensive income consisted of the following:
|
Three Months
Ended |
|
April 30, |
|
2010 |
|
2009 |
|
|
(in thousands) |
|
Net income |
$ |
18,872 |
|
|
$ |
998 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
(3,049 |
) |
|
|
835 |
|
Unrealized loss on marketable securities, net
of tax |
|
(48 |
) |
|
|
(41 |
) |
Other comprehensive income (loss), net
of tax |
|
(3,097 |
) |
|
|
794 |
|
Comprehensive income |
$ |
15,775 |
|
|
$ |
1,792 |
|
|
|
|
|
|
|
|
|
12. Earnings Per Share
Earnings per share
present both “basic” earnings per share and “diluted” earnings per share. Basic
earnings per share are computed by dividing earnings available to common
shareholders by the weighted-average shares of common stock outstanding during
the period. For the purposes of calculating diluted earnings per share, the
denominator includes both the weighted average number of shares of common stock
outstanding during the period and the weighted average number of shares of
potential common stock, such as stock options and restricted stock units and
warrants, calculated using the treasury stock method.
For the three months
ended April 30, 2010 and 2009, 3,012,600 and 4,405,291 of common stock
equivalents, respectively, were anti-dilutive based on the Company’s stock price
being lower than the option exercise price.
Below is a summary of
the shares used in calculating basic and diluted income per share for the
periods indicated:
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
|
(in thousands) |
Weighted average shares used in
calculating |
|
|
|
earnings per share—Basic |
31,270 |
|
30,847 |
Dilutive common stock equivalents |
462 |
|
373 |
|
Weighted average shares used in
calculating |
|
|
|
earnings per share—Diluted |
31,732 |
|
31,220 |
|
|
|
|
13. Related Party
ReiJane Huai, a director
of the Company elected on August 28, 2009, is the Chairman and CEO of FalconStor
Software Inc., from whom the Company purchases products used in the manufacture
of SeaChange products. There were no product purchases from FalconStor Software
for the three months ended April 30, 2010, and the Company had no liability to
FalconStor Software as of April 30, 2010.
On September 1, 2009,
SeaChange completed its acquisition of eventIS from a holding company in which
Erwin van Dommelen, elected President of SeaChange Software in March 2010, has a
31.5% interest. At the closing, SeaChange made a cash payment to the holding
company of $34.4 million plus $2.2 million based on an estimated working capital
adjustment in accordance with the eventIS Share Purchase Agreement. In January
2010, SeaChange made a cash payment to the holding company of $395,000 for final
settlement of the working capital adjustment. On each of the first, second and
third anniversaries of the closing date, SeaChange is obligated to make
additional fixed payments to the holding company of deferred purchase price
under the eventIS share purchase agreement, each such payment to be in an
aggregate amount of $2.8 million with $1.7 million payable in cash and $1.1
million payable by the issuance of restricted shares of SeaChange common stock,
which will vest in equal installments over three years starting on the first
anniversary of the date of issuance. Under the earnout provisions of the eventIS
share purchase agreement, if certain performance goals are met over each of the
three periods ending January 31, 2013,
SeaChange will be obligated to make additional cash payments to the holding
company.
20
14. Recently Issued Accounting Standard
Updates
New Accounting Guidance Recently
Adopted
In June 2009, the FASB
issued an authoritative update to address the elimination of the concept of a
qualifying special purpose entity and to replace the quantitative-based risks
and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity. Also, the new guidance
requires an ongoing assessment of whether an entity is the primary beneficiary
of a variable interest entity. The amended approach focuses on identifying which
enterprise has the power to direct the activities of a variable interest entity
and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, the update provides more timely and
useful information about an enterprise’s involvement with a variable interest
entity. The Company adopted this new guidance in the first quarter of fiscal
year 2011. The adoption of this guidance did not have a material impact on our
financial position or results of operations.
In January 2010, the
FASB issued new guidance on the disclosures of fair value measurements. This new
guidance amends the authoritative guidance for fair value measurements and
disclosures by adding new disclosure requirements with respect to transfers in
and out of Levels 1 and 2 fair value measurements, as well as by requiring gross
basis disclosures for purchases, sales, issuances, and settlements included in
the reconciliation of Level 3 fair value measurements. This new guidance also
amends the authoritative guidance by providing clarifications to existing
disclosure requirements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements which are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. We adopted this new
guidance, including the guidance related to the disclosures about purchases,
sales, issuances, and settlements in the roll forwards of activity in Level 3
fair value measurements, beginning in the first quarter of fiscal year 2011. The
adoption of this guidance did not have a material impact on our financial
position or results of operations.
Recent Accounting Guidance Not Yet
Effective
Revenue Recognition for Arrangements with
Multiple Deliverables
In September 2009, the
FASB amended the guidance for revenue recognition in multiple-element
arrangements. It has been amended to remove from the scope of industry specific
revenue accounting guidance for software and software related transactions,
tangible products containing software components and non-software components
that function together to deliver the product’s essential functionality. The
guidance now requires an entity to provide updated guidance on whether multiple
deliverables exist, how the deliverables in an arrangement should be separated,
and the consideration allocated; and allocates revenue in an arrangement using
estimated selling prices of deliverables for these products if a vendor does not
have vendor-specific objective evidence (“VSOE”) or third-party evidence of
selling price. The guidance also eliminates the use of the residual method and
requires an entity to allocate revenue using the relative selling price method
for these products. The accounting changes summarized are effective for fiscal
years beginning on or after June 15, 2010, with early adoption permitted.
Adoption may either be on a prospective basis or by retrospective application.
The Company is currently assessing the impact of these amendments on its
accounting and reporting systems and processes; however, at this time the
Company is unable to quantify the impact of their adoption on its financial
statements or determine the timing and method of its adoption.
ITEM 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following
information should be read in conjunction with the unaudited consolidated
financial information and the notes thereto included in this Quarterly Report on
Form 10-Q. In addition to historical information, the following discussion and
other parts of this Quarterly Report contain forward-looking statements, as that
term is defined in the Private Securities Litigation Reform Act of 1995, that
involve risks and uncertainties. You should not place undue reliance on these
forward-looking statements. Actual events or results may differ materially due
to competitive factors and other factors referred to in Part I, Item 1A. Risk
Factors in our Annual Report on Form 10-K and Form 10-K/A for our fiscal year
ended January 31, 2010 and elsewhere in this Quarterly Report. These factors may
cause our actual results to differ materially from any forward-looking
statement.
Overview
We are a leading
developer, manufacturer and marketer of digital video systems and services
including the management, aggregation, licensing, storage, and distribution of
video, television, gaming and advertisement content to cable system operators,
telecommunications companies and broadcast television companies.
21
On September 1, 2009,
the Company acquired the entire share capital of eventIS Group B.V. (“eventIS”).
Based in Eindhoven, the Netherlands, eventIS provides video on demand and linear
broadcast software and related services to cable television and
telecommunications companies primarily in Europe. The results of eventIS’s
operations have been included in the consolidated financial statements since the
acquisition date. The Company acquired eventIS, among other reasons, to expand
its video on demand solutions into the European market.
On February 1, 2010, the
Company completed its acquisition of all the outstanding capital stock of
VividLogic, Inc. (“VividLogic”). VividLogic, based in Fremont, California,
provides in-home infrastructure software for high definition televisions, home
gateways, and set-top boxes to cable television service providers, set-top box
manufacturers and consumer electronics (CE) suppliers. The results of
VividLogic’s
operations have been included in the consolidated financial statements since the
acquisition date. The Company acquired VividLogic to expand its in-home
solutions.
On April 26, 2010, the
Company sold its entire 19.8% ownership interest in Casa Systems, Inc. (“Casa”)
back to Casa, a Massachusetts development stage company that specializes in
video-on-demand products with the telecommunications and television markets, for
$34.1 million realizing a pre-tax profit of $25.2 million which was included in
the Consolidated Statement of Operations.
The Company’s previously
reported unaudited first quarter fiscal 2011 financial results included in the
Company’s
earnings release issued May 27, 2010 understated income tax expense by $5.8
million related principally to the accounting for income taxes resulting from
the sale of the Company’s entire ownership interest in Casa. As a result, the
financial results contained in this report with respect to the three months
ended April 30, 2010 differ from the Company’s previously
issued financial results in that the Company realized an income tax provision of
$594,000 and not an income tax benefit of $5.2 million, the Company realized net
income of $18.9 million and not net income of $24.6 million, the Company
realized basic earnings per share of $0.60 and not $0.79, and the Company
realized diluted earnings per share of $0.59 and not $0.78. This revision of
previously reported tax expense did not change the Company’s previously
reported non-GAAP financial results for the three months ended April 30,
2010.
The Company is managed
and operated as three segments, Software, Servers and Storage, and Media
Services. A description of the three reporting segments is as follows:
- Software segment includes product
revenues from the Company’s Advertising, VOD, Middleware and Broadcast
software, related services such as professional services, installation,
training, project management, product maintenance, technical support and
software development for those software products, and operating expenses
relating to the Software segment such as research and development, selling and
marketing and amortization of intangibles. The Software segment includes the
results of eventIS from the date of the acquisition on September 1, 2009 and
the results of VividLogic from the date of acquisition on February 1,
2010.
- Servers and Storage segment
includes product revenues from the VOD and Broadcast server product lines and
related services such as professional services, installation, training,
project management, product maintenance, and technical support for those
products and operating expenses relating to the Servers and Storage segment,
such as research and development and selling and marketing.
- Media Services segment includes
the operations of ODG, including Mobix Interactive, activities which include
content acquisition and preparation services for television and wireless
service providers and related operating expenses.
The Company determined
there are significant functions, and therefore costs, that are considered
corporate expenses and are not allocated to the reportable segments for the
purposes of assessing performance and making operating decisions. These
unallocated costs include general and administrative expenses, other than direct
general and administrative expenses related to the Software and Media Services
segments, other income (expense), net, taxes and equity losses in earnings of
affiliates, which are managed separately at the corporate level.
The basis of the
assumptions for all such revenues, costs and expenses includes significant
judgments and estimations. There are no inter-segment revenues for the periods
shown below. The Company does not separately track all assets by operating
segments nor are the segments evaluated under this criterion.
We have experienced
fluctuations in our product revenues from quarter to quarter due to the timing
of the receipt of customer orders and the shipment of those orders. The factors
that impact the timing of the receipt of customer orders include among other
factors:
- the customer’s receipt of
authorized signatures on their purchase orders;
- the budgetary approvals within the
customer’s company for capital purchases; and
- 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:
- the availability of material to
produce the product;
- the time required to produce and
test the product before delivery; and
- the customer’s required delivery
date.
22
The delay in the timing
of receipt and shipment of any one customer order can result in significant
fluctuations in our revenue reported on a quarterly basis.
Our operating results
are significantly influenced by a number of factors, including the mix of
products sold and services provided, pricing, costs of materials used in our
products and the expansion of our operations during the fiscal year. We price
our products and services based upon our costs and consideration of the prices
of competitive products and services in the marketplace. The costs of our
products primarily consist of the costs of components and subassemblies that
have generally declined from product introduction to product maturity. As a
result of the growth of our business, our operating expenses have historically
increased in the areas of research and development, selling and marketing and
administration. In the current state of the economy, we currently expect that
customers may still have limited capital spending budgets as we believe they are
dependent on advertising revenues to fund their capital equipment purchases.
Accordingly, we expect our financial results to vary from quarter to quarter and
our historical financial results are not necessarily indicative of future
performance. In light of the higher proportion of our international business, we
expect movements in foreign exchange rates to have a greater impact on our
operating results and the equity section of our balance sheet in the future.
Our ability to continue
to generate revenues within the markets that our products are sold and to
generate cash from operations and net income is dependent on several factors
which include:
- market acceptance of the products
and services offered by our customers and increased subscriber usage
and demand for these products
and services;
- selection by our customers of our
products and services versus the products and services being offered by
our competitors;
- our ability to introduce new
products to the market in a timely manner and to meet the demands of the
market for new products and
product enhancements;
- our ability to maintain gross
margins from the sale of our products and services at a level that will
provide us with cash to fund
our operations given the pricing pressures within the market and the costs of
materials to manufacture our
products;
- our ability to control operating
costs given the fluctuations that we have experienced with revenues from
quarter to quarter, and
- our ability to successfully
integrate businesses acquired by us, including eventIS, Mobix Interactive,
and VividLogic.
23
Three Months ended April 30, 2010 Compared to
the Three Months Ended April 30, 2009
The following table sets
forth statement of operations data for the three months ended April 30, 2010
compared to the three months ended April 30, 2009.
|
Three Months Ended |
|
April 30, |
|
2010 |
|
2009 |
|
(in thousands) |
Revenues: |
|
|
|
|
|
|
|
Products |
$ |
24,634 |
|
|
$ |
26,370 |
|
Services |
|
29,432 |
|
|
|
22,506 |
|
Total Revenues |
|
54,066 |
|
|
|
48,876 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of product revenues |
|
9,644 |
|
|
|
9,969 |
|
Cost of services revenues |
|
17,532 |
|
|
|
13,889 |
|
Research and development |
|
13,564 |
|
|
|
12,104 |
|
Selling and marketing |
|
6,384 |
|
|
|
6,264 |
|
General and administrative |
|
6,801 |
|
|
|
4,867 |
|
Amortization of intangibles |
|
898 |
|
|
|
479 |
|
Restructuring |
|
4,311 |
|
|
|
- |
|
(Loss) income from operations |
|
(5,068 |
) |
|
|
1,304 |
|
Gain on sale of investment in
affiliate |
|
25,188 |
|
|
|
- |
|
Other (expense) income, net |
|
(542 |
) |
|
|
135 |
|
Income before income taxes and equity loss in earnings of
affiliates |
|
19,578 |
|
|
|
1,439 |
|
Income tax provision |
|
594 |
|
|
|
244 |
|
Equity loss in earnings of affiliates, net of tax |
|
(112 |
) |
|
|
(197 |
) |
Net income |
$ |
18,872 |
|
|
$ |
998 |
|
|
|
|
|
|
|
|
|
24
Revenues
The following table
summarizes information about the Company’s reportable segment revenues for the
three months ended April 30, 2010 and 2009.
|
Three Months Ended |
|
|
|
|
April 30, |
|
|
|
|
2010 |
|
2009 |
|
% |
|
(in thousands, except for percentage
data) |
Software revenues: |
|
|
|
|
|
|
|
|
Products |
$ |
21,132 |
|
$ |
16,285 |
|
30 |
% |
Services |
|
19,816 |
|
|
14,333 |
|
38 |
% |
Total Software revenues |
|
40,948 |
|
|
30,618 |
|
34 |
% |
|
Servers and Storage revenues: |
|
|
|
|
|
|
|
|
Products |
|
3,502 |
|
|
10,085 |
|
-65 |
% |
Services |
|
3,248 |
|
|
3,968 |
|
-18 |
% |
Total Servers and Storage revenues |
|
6,750 |
|
|
14,053 |
|
-52 |
% |
|
Media Services: |
|
|
|
|
|
|
|
|
Services |
|
6,368 |
|
|
4,205 |
|
51 |
% |
|
Total consolidated revenue: |
|
|
|
|
|
|
|
|
Products |
24,634 |
|
|
26,370 |
|
-7 |
% |
Services |
|
29,432 |
|
|
22,506 |
|
31 |
% |
Total consolidated revenues |
$ |
54,066 |
|
$ |
48,876 |
|
11 |
% |
|
|
|
|
|
|
|
|
|
Product Revenues. Product revenues decreased 7% to $24.6
million in the three months ended April 30, 2010 from $26.4 million in the three
months ended April 30, 2009. Product revenues from the Software segment
accounted for 86% and 62% of the total product revenue for the three months
ended April 30, 2010 and 2009, respectively. The Servers and Storage segment
accounted for 14% and 38% of total product revenues in the three months ended
April 30, 2010 and 2009, respectively. The decrease in Product revenues was due
to a decrease in VOD server revenues year over year due to lower shipments of
VOD servers to North American service providers when compared to an unusually
high level of shipments in last year’s first quarter. This decrease was
partially offset by higher Axiom software revenues from one of our large North
American customers and higher Advertising product revenues.
Services Revenues. Services revenues increased 31% year over
year to $29.4 million in the three months ended April 30, 2010 from $22.5
million in the three months ended April 30, 2009. For the three months ended
April 30, 2010 and 2009, services revenues for the Software segment accounted
for 67% and 64% of the total services revenue, respectively. Servers and Storage
services revenue accounted for 11% and 18% of total services revenue and Media
Services revenue accounted for 22% and 18% of total services revenues in three
months ended April 30, 2010 and 2009, respectively. The increase in Services
revenues compared to the three months ended April 30, 2009 was due to increased
revenues from Media Services resulting from recent contract wins late in the
third quarter of fiscal 2010 and VOD services revenues from the Comcast software
subscription agreement extensions during the first quarter of fiscal 2011, which
were classified as services revenues. Unlike in prior periods, where software
subscription agreements with Comcast provided for specified enhancements and
therefore were classified as product revenues, the agreement extension in the
first quarter of fiscal 2011 contained no specified enhancements. During the
previous year, the subscription agreement was accounted for under the percentage
of completion accounting basis and recorded as product revenues. The Company
expects to finalize a new software subscription agreement with Comcast during
the second quarter of fiscal 2011.
For the three months
ended April 30, 2010, two customers accounted for more than 47% of our total
revenues, and three customers accounted for more than 52% of our total revenues
for the three months ended April 30, 2009. Revenue from each of these customers
was included in revenue from the Software and the Servers and Storage segments.
We believe that a significant amount of our revenues will continue to be derived
from a limited number of customers.
International sales
accounted for approximately 39% and 26% of total revenues in the three months
ended April 30, 2010 and 2009, respectively. With the acquisition of eventIS,
headquartered in the Netherlands, we expect that international products and
services revenues will be a significant portion of our business in the future.
Software Revenues. Revenues from our Software segment for the
three months ended April 30, 2010 increased $10.3 million, or a 34% increase
compared to the three months ended April 30, 2009. The $4.8 million or 30%
increase in the software products
revenues was due to higher software licensing revenue from our VOD software
products primarily from a large North American customer, and higher Advertising
products revenues.
25
The $5.5 million or 38%
increase in services revenue compared to the three months ended April 30, 2009
was due to the Comcast software subscription agreement which was accounted for
as services revenues, as noted above, and the inclusion of service revenues from
the recent acquisitions of eventIS and VividLogic.
Servers and Storage Revenues.
Revenues from the Servers
and Storage segment for the three months ended April 30, 2010 decreased $7.3
million or 52% compared to the three months ended April 30, 2009. The decrease
in product revenues in the three months ended April 30, 2010 of $6.6 million
compared to the same quarter in the previous year was primarily due to decreased
shipments of VOD servers when compared to the first quarter of last year which
included large shipments of VOD servers to two large North American customers.
The decrease was partially offset by shipments of VOD servers to a customer in
Latin America.
The 18% decrease in
service revenues compared to the three months ended April 30, 2009 was due to
lower VOD server installation revenues resulting from a decrease in VOD server
revenues year over year and lower Broadcast technical support revenues.
Media Services. Revenues from Media Services increased by
approximately $2.2 million or 51% in the three months ended April 30, 2010
compared to the three months ended April 30, 2009. The increase in revenue was
due primarily to recent contract wins in Dubai and France and increased content
processing revenues from customers in Greece and Turkey.
Product Gross Profit. Costs of product revenues consist primarily of
the cost of purchased material components and subassemblies, labor and overhead
relating to the final assembly and testing of complete systems and related
expenses. The gross profit percentage for products was relatively flat at 61%
and 62% for the three months ended April 30, 2010 and 2009,
respectively.
Services Gross Profit. Cost of services revenues consist primarily
of labor, materials and overhead relating to the installation, training, product
maintenance and technical support, software development, and project management
provided by us and costs associated with providing video content services. The
gross profit percentage for services increased from 38% to 41% for the three
months ended April 30, 2010 compared to the same quarter in the previous year
primarily due to increased margins from the Media Services segment and the
inclusion of the Comcast software subscription agreement extensions which carry
higher margins than typical service revenues.
Software Revenues Gross Profit.
Software segment gross
margin of 54% for the three months ended April 30, 2010 was four percentage
points lower compared to the three months ended April 30, 2009. The decrease in
software gross margins was primarily due to lower than normal margins for our
VOD software products resulting from a significant product shipment during this
year’s first quarter resulting in a competitor displacement at a large North
American customer.
Servers and Storage Gross Profit.
Servers and Storage
segment gross margin of 47% in the three months ended April 30, 2010 was two
percentage points lower than in the three months ended April 30, 2009 due mainly
to lower Broadcast server technical support revenue.
Media Services Gross Profit.
Media Services segment
gross margin of 25% for the three months ended April 30, 2010 was sixteen
percentage points higher than the gross margin for the three months ended April
30, 2009 due to the inclusion in the first quarter of last year of additional
headcount related costs of bringing in-house all content processing and the
continued third party costs during that related transition last
year.
Research and Development. Research and development expenses consist
primarily of the compensation of development personnel, depreciation of
development and test equipment and an allocation of related facilities expenses.
Research and development expenses increased from $12.1 million, or 25% of total
revenues, in the three months ended April 30, 2009, to $13.6 million, or 25% of
total revenues, in the three months ended April 30, 2010. The increase year over
year is primarily due to the inclusion of eventIS and higher headcount costs
related to the VOD software and middleware product lines.
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 from
$6.3 million, or 13% of total revenues, in the three months ended April 30,
2009, to $6.4 million, or 12% of total revenues, in the three months ended April
30, 2010. The increase compared to the three months ended April 30, 2009 was
primarily due to the inclusion of eventIS.
26
General and
Administrative. General and
administrative expenses consist primarily of the compensation of executive,
finance, human resource and administrative personnel, legal and accounting
services and an allocation of related facilities expenses. In the three
months ended April 30, 2010, general and administrative expenses increased to
$6.8 million, or 13% of total revenues, from $4.9 million, or 10% of total
revenues, in the three months ended April 30, 2009. The increase was primarily
due to transaction costs related to the VividLogic acquisition and higher legal
and professional fees.
Amortization of intangible
assets. Amortization
expense consists of the amortization of acquired intangible assets which are
operating expenses and not considered costs of revenues. In the three months
ended April 30, 2010 and 2009, amortization expense was $898,000 and $479,000,
respectively. An additional $445,000 and $51,000 of amortization expense related
to acquired technology was charged to cost of sales for the three months ended
April 30, 2010 and 2009, respectively, with the increase in the three months
ended April 30, 2010 being due to amortization expense of the intangible assets
related to the acquisition of eventIS and VividLogic.
Restructuring. During the first quarter of fiscal 2011, the
Company initiated actions to lower its cost structure as it strives to improve
its financial performance. The first quarter of fiscal 2011 included
restructuring charges to its income statement totaling $1.8 million for
severance costs related to the termination of approximately 64 employees and a
write down of inventory of approximately $2.5 million related to the decision in
the first quarter to discontinue certain products within the Servers and Storage
segment.
Gain on sale of investment in affiliate.
On April 26, 2010, the
Company sold its entire 19.8% ownership interest in Casa Systems, Inc. (“Casa”)
back to Casa, a Massachusetts development stage company that specializes in
video-on-demand products with the telecommunications and television markets, for
$34.1 million realizing a pre-tax profit of $25.2 million which was included in
the Consolidated Statement of Operations.
Other(expense) income, net. Other (expense) income, net was a $542,000
expense in the three months ended April 30, 2010, compared to $135,000 of income
in the three months ended April 30, 2009. The $542,000 of expense for the three
months ended April 30, 2010 was comprised of $54,000 of interest expense and
$480,000 of foreign exchange losses. The $135,000 of income for the three months
ended April 30, 2009, was comprised of $209,000 of net interest income and
$74,000 of translation loss. Translation gains and losses at our various foreign
subsidiaries (where the functional currency is the US Dollar) are derived from
fluctuations in exchange rates between the various currencies and the U.S
dollar.
Equity Loss in Earnings of Affiliates.
Equity loss in earnings of
affiliates was $112,000 and $197,000 in the three months ended April 30, 2010
and 2009, respectively. For the three months ended April 30, 2010, $250,000 of
equity loss was recognized from On Demand Deutschland, net of $138,000 in
accreted gains related to customer contracts and content licensing agreements
and a capital distribution related to reimbursement of previously incurred
costs. For the three months ended April 30, 2009, the On Demand Deutschland loss
was $328,000 net of $131,000 in accreted gains related to customer contracts and
content licensing agreements and a capital distribution related to reimbursement
of previously incurred costs.
Income Tax Provision. Our effective tax rate was a provision of 3%
and 17% for the three months ended April 30, 2010 and 2009, respectively. Our
income tax provision consists of federal, foreign, and state income taxes. As
disclosed above in the overview, the Company’s previously reported unaudited
first quarter fiscal 2011 financial results included in the Company’s earnings
release issued May 27, 2010 understated income tax expense by $5.8 million
related principally to the accounting for income taxes resulting from the sale
of the Company’s entire ownership interest in Casa. As a result, the financial
results contained in this report with respect to the three months ended April
30, 2010 differ from the Company’s previously issued financial results in that
the Company realized an income tax provision of $594,000 and not an income tax
benefit of $5.2 million, the Company realized net income of $18.9 million and
not net income of $24.6 million, the Company realized basic earnings per share
of $0.60 and not $0.79, and the Company realized diluted earnings per share of
$0.59 and not $0.78. This revision of previously reported tax expense did not
change the Company’s previously reported non-GAAP financial results for the
three months ended April 30, 2010.
The difference in the
fiscal 2011 period between our effective tax rate and the federal statutory rate
of 35% is primarily due to the differential in foreign tax rates. In addition
there were two discrete items which included the tax expense associated with the
gain on the sale of Casa Systems, Inc. and the benefit from the decrease of a
portion of the valuation allowance against its deferred tax asset due to the
Company having met the “more likely than not” realization criteria on its U.S.
deferred tax asset as of April 30, 2010. Previously, the Company maintained a
full valuation allowance and will continue to monitor available information in
determining whether there is sufficient evidence to consider releasing some or
all of the remaining valuation allowance. Should the Company determine any
portion of the valuation allowance is no longer required, a tax benefit would be
recorded in the financial period of the change in determination.
In conjunction with the
purchase price allocation for the acquisition of VividLogic, we recorded a
liability for uncertain tax position in the amount of $1.2 million. Tax years
2006 to 2009 of VividLogic are currently open for examination. An
indemnification asset held in escrow of $1.2 million has also been recorded,
which represents the selling shareholders’ obligation to indemnify the Company
for uncertain tax positions taken by the former shareholders of
VividLogic.
27
The difference in the
fiscal 2010 periods between our effective tax rate and the federal statutory
rate of 35% was primarily due to the differential in foreign tax rates and the
utilization of foreign tax credits.
Non GAAP Measures. As part of our ongoing review of financial
information related to our business, we regularly use non-GAAP measures, in
particular adjusted non-GAAP earnings per share, as we believe they provide a
meaningful insight into our business and trends. We also believe that these
adjusted non-GAAP measures provide readers of our financial statements with
useful information and insight with respect to the results of our business.
However, the presentation of adjusted non-GAAP information is not intended to be
considered in isolation or as a substitute for results prepared in accordance
with GAAP. Below are tables for the three months ended April 30, 2010 and 2009,
respectively:
|
|
Three months Ended |
|
Three months Ended |
|
|
April 30, 2010 |
|
April 30, 2009 |
|
|
GAAP |
|
Adjustment |
|
Non-GAAP |
|
GAAP |
|
Adjustment |
|
Non-GAAP |
Revenues |
|
$ |
54,066 |
|
|
$
|
2,339 |
|
|
$
|
56,405 |
|
|
$ |
48,876 |
|
|
$
|
- |
|
|
$
|
48,876 |
|
|
Operating expenses |
|
|
31,958 |
|
|
|
|
|
|
|
31,958 |
|
|
|
23,714 |
|
|
|
|
|
|
|
23,714 |
|
Stock-based
compensation |
|
|
- |
|
|
|
498 |
|
|
|
498 |
|
|
|
- |
|
|
|
761 |
|
|
|
761 |
|
Amortization of intangible assets |
|
|
- |
|
|
|
1,343 |
|
|
|
1,343 |
|
|
|
- |
|
|
|
530 |
|
|
|
530 |
|
Restructuring |
|
|
- |
|
|
|
4,311 |
|
|
|
4,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition related costs |
|
|
- |
|
|
|
800 |
|
|
|
800 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
31,958 |
|
|
|
6,952 |
|
|
|
25,006 |
|
|
|
23,714 |
|
|
|
1,291 |
|
|
|
22,423 |
|
|
(Loss) income from
operations |
|
|
(5,068 |
) |
|
|
9,291 |
|
|
|
4,223 |
|
|
|
1,304 |
|
|
|
1,291 |
|
|
|
2,595 |
|
|
Income from sale of investment in
affiliate |
|
|
25,188 |
|
|
|
(25,188 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision)
impact |
|
|
(594 |
) |
|
|
134 |
|
|
|
(460 |
) |
|
|
(244 |
) |
|
|
(74 |
) |
|
|
(318 |
) |
|
Net income |
|
$ |
18,872 |
|
|
$ |
(15,763 |
) |
|
$ |
3,109 |
|
|
$ |
998 |
|
|
$ |
1,217 |
|
|
$ |
2,215 |
|
Diluted income per
share |
|
$ |
0.59 |
|
|
$ |
(0.50 |
) |
|
$ |
0.10 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
Diluted weighted average common shares outstanding |
|
|
31,732 |
|
|
|
31,732 |
|
|
|
31,732 |
|
|
|
31,220 |
|
|
|
31,220 |
|
|
|
31,220 |
|
In managing and reviewing our
business performance, we exclude a number of items required by GAAP. Management
believes that excluding these items, mentioned below, is useful in understanding
trends and managing our operations. We believe it is useful for investors to
understand the effects of these items on our total operating expenses. Our
non-GAAP financial measures include adjustments based on the following items, as
well as the related income tax effects and adjustments to the valuation
allowance.
Deferred software revenue: Business combination accounting rules require us to account for the
fair value of customer contracts assumed in connection with our acquisitions. In
connection with the acquisition of eventIS Group B.V. on September 1, 2009 and
VividLogic, Inc on February 1, 2010, the book value of our deferred software
revenue was reduced by approximately $2.3 million in the adjustment to fair
value. Because these customer contracts may take up to 18 months to complete,
our GAAP revenues subsequent to this acquisition do not reflect the full amount
of software revenues on assumed customer contracts that would have otherwise
been recorded by eventIS Group B.V. and Vividlogic, Inc. We believe this
adjustment is useful to investors as a measure of the ongoing performance of our
business because we have historically experienced high renewal rates on similar
customer contracts, although we cannot be certain that customers will renew
these contracts.
28
Stock-based compensation expenses: We have excluded the effect of stock-based
compensation and stock-based payroll expenses from our non-GAAP operating
expenses and net income measures. Although stock-based compensation is a key
incentive offered to our employees, we continue to evaluate our business
performance excluding stock-based compensation expenses. Stock-based
compensation expenses will recur in future periods.
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
April 30, |
|
|
|
2010 |
|
2009 |
|
Cost of revenues |
|
$ |
67 |
|
$ |
158 |
|
Research and development |
|
|
135 |
|
|
215 |
|
Selling and marketing |
|
|
105 |
|
|
98 |
|
General and administrative |
|
|
191 |
|
|
290 |
|
Total stock-based compensation |
|
$ |
498 |
|
$ |
761 |
|
|
|
|
|
|
|
|
Amortization of intangible assets: We have excluded the effect of amortization
of intangible assets from our non-GAAP operating expenses and net income
measures. Amortization of intangibles is inconsistent in amount and frequency
and is significantly affected by the timing and size of our
acquisitions.
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
April 30, |
|
|
|
2010 |
|
2009 |
|
Cost of revenues: |
|
|
445 |
|
|
51 |
|
Operating expenses: |
|
|
898 |
|
|
479 |
|
Total amortization of
intangibles |
|
$ |
1,343 |
|
$ |
530 |
|
|
|
|
|
|
|
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Restructuring: We
incurred charges due to the restructuring of our business including severance
charges and write down of inventory to net realizable value, which we generally
would not have otherwise incurred in the periods presented as part of our
continuing operations.
Acquisition related and other expenses: We incurred significant expenses in
connection with our acquisitions of eventIS Group B.V. and VividLogic, Inc. and
also incurred certain other operating expenses, which we generally would not
have otherwise incurred in the periods presented as a part of our continuing
operations. Acquisition related and other expenses consist of transaction costs,
costs for transitional employees, other acquired employee related costs, and
integration related professional services.
Income from sale of investment in affiliate: We generated income due to the sale of our
investment in Casa Systems, Inc. We excluded the income generated by this
investment due to its non recurring nature.
Off-Balance Sheet Arrangements
We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such
relationships.
Liquidity and Capital Resources
Historically, we have
financed our operations and capital expenditures primarily with cash on-hand.
Cash and marketable securities increased $37.1 million from $48.5 million at
January 31, 2010 to $85.6 million at April 30, 2010. Working
capital, increased from $60.9 million at January 31, 2010 to $81.1 million
at April 30, 2010. The increase was primarily the result of the sale of our
equity investment in Casa Systems, Inc.
Net cash provided by
operating activities was $12.2 million for the three months ended April 30, 2010
compared to net cash provided by operating activities of $9.9 million for the
three months ended April 30, 2009. The net cash provided by operating activities
for the three months ended April 30, 2010 was primarily the result of net income
and non-cash expenses using $8.2 million and a decrease of working capital of
$20.4 million. The primary reason for the decrease in working capital was the
decrease of $9.4 million in accounts receivable due to strong collection efforts
and increases in accounts payable and accrued expenses of $5.0 million due to
the timing of vendor payments and an increase of $6.0 million in income taxes
payable due to the tax related to the sale of the Company’s equity investment in
Casa Systems, Inc.
29
Net cash provided by
investing activities was $18.9 million for the three months ended April 30, 2010
compared to net cash used by investing activities of $3.9 million for the three
months ended April 30, 2009. Investment activity for the three months ended April 30, 2010 consisted of the
acquisition of VividLogic for $9.5 million, net of cash acquired, capital
additions of $1.5 million and net purchases of marketable securities of $4.1
million, offset by the proceeds of $34.1 million from the sale of the Company’s
equity investment in Casa Systems, Inc.
Net cash provided by
financing activities was $931,000 for the three months ended April 30, 2010 and
net cash used by financing activities was $1.7 million for the three months
ended April 30, 2009. In the three months ended April 30, 2010, the cash
provided by financing activities was $931,000 from the issuance of common stock
in connection with stock option exercises.
Effect of exchange rates
on cash and cash equivalents of $246,000 was the result of the translation of
ODG’s and eventIS’s cash balances, which use the British pound and the Euro,
respectively, as their functional currencies, to U.S. dollars at April 30,
2010.
Under the share purchase
agreement with the former shareholder of eventIS, on each of the first, second
and third anniversaries of the closing date, the Company is obligated to make
additional fixed payments of deferred purchase price, each such payment to be in
an aggregate amount of $2.8 million with $1.7 million payable in cash and $1.1
million payable by the issuance of restricted shares of SeaChange common stock,
which will vest in equal installments over three years starting on the first
anniversary of the date of issuance. At the option of the former shareholder of
eventIS, up to forty percent of this payment in restricted stock may be payable
in cash. Under the earnout provisions of the share purchase agreement if certain
performance goals are met over each of the three annual periods ending January
31, 2013, the Company will be obligated to make additional cash payments to the
former shareholder of eventIS.
Under the share purchase
agreement with the former shareholders of VividLogic, the Company is obligated
to pay $1.5 million on August 1, 2010 and $2 million will be paid on February 1,
2011. On each of the first, second and third anniversaries of the closing date,
the Company is also obligated to make additional fixed payments of deferred
purchase price of $1.0 million in cash. In addition, the Company may also be
obligated to make earnout payments if certain performance goals are met over
each of the three annual periods ending February 1, 2013. On June 1, 2010, the
Company made its obligated payment of $1.5 million due to the former
shareholders of VividLogic, Inc. The purchase price allocated to current assets
included an indemnification asset held in escrow for $1.2 million representing
an estimate of the selling shareholders obligation to indemnify the Company for
the outcome of a potential contingent liability relating to an uncertain tax
position. The indemnification asset was measured on the same basis as the
liability for the uncertain tax position. VividLogic has been under tax
examination by the State of California since January 2009 for the tax years 2006
and 2007. As of April 30, 2010, the Company has not received nor agreed upon any
final adjustments. The indemnification asset will be settled once the results of
the audit by the State of California are complete.
The Company maintains a
revolving line of credit with RBS Citizens (a subsidiary of the Royal Bank of
Scotland Group plc) for $15.0 million which expires on October 31, 2010. Loans
made under this revolving line of credit bear interest at a rate per annum equal
to the bank’s prime rate. Borrowings under this line of credit are
collateralized by substantially all of our assets. The loan agreement requires
SeaChange to comply with certain financial covenants. As of January 31, 2010, we
were in compliance with the financial covenants and there were no amounts
outstanding under the revolving line of credit.
We are occasionally
required to post letters of credit, issued by a financial institution, to secure
certain sales contracts. Letters of credit generally authorize the financial
institution to make a payment to the beneficiary upon the satisfaction of a
certain event or the failure to satisfy an obligation. The letters of credit are
generally posted for one-year terms and are usually automatically renewed upon
maturity until such time as we have satisfied the commitment secured by the
letter of credit. We are obligated to reimburse the issuer only if the
beneficiary collects on the letter of credit. We believe that it is unlikely we
will be required to fund a claim under our outstanding letters of credit. As of
April 30, 2010, the full amount of the letters of credit of $676,000 was
supported by our credit facility.
On February 27, 2007,
ODG, a wholly-owned subsidiary of SeaChange, entered into an agreement with
Tele-Munchen Fernseh GmbH & Co. Produktionsgesellschaft (TMG) to create a
joint venture named On Demand Deutschland GmbH & Co. KG. The related
shareholder’s agreement requires ODG and TMG to provide cash contributions up to
$4.2 million upon the request of the joint venture’s management and approval by
the shareholders of the joint venture. To date the Company has contributed $1.2
million as required per the shareholders agreement.
We believe that existing
funds combined with available borrowings under the revolving line of credit and
cash provided by future operating activities are adequate to satisfy our working
capital, potential acquisitions and capital expenditure requirements and other
contractual obligations for the foreseeable future, including at least the next
12 months. However, if our expectations are incorrect, we may need to raise
additional funds to fund our operations, to take advantage of unanticipated
strategic opportunities or to strengthen our financial position.
30
In addition, we actively
review potential acquisitions that would complement our existing product
offerings, enhance our technical capabilities or expand our marketing and sales
presence. Any future transaction of this nature could require potentially
significant amounts of capital or could require us to issue our stock and dilute
existing stockholders. If adequate funds are not available, or are not available
on acceptable terms, we may not be able to take advantage of market
opportunities, to develop new products or to otherwise respond to competitive
pressures.
Effects of Inflation
Management believes that
financial results have not been significantly impacted by inflation and price
changes in materials we use in manufacturing our products.
Recently Issued Accounting Standard
Updates
New Accounting Guidance Recently
Adopted
In June 2009, the FASB
issued an authoritative update to address the elimination of the concept of a
qualifying special purpose entity and to replace the quantitative-based risks
and rewards calculation for determining which enterprise has a controlling
financial interest in a variable interest entity. Also, the new guidance
requires an ongoing assessment of whether an entity is the primary beneficiary
of a variable interest entity. The amended approach focuses on identifying which
enterprise has the power to direct the activities of a variable interest entity
and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, the update provides more timely and
useful information about an enterprise’s involvement with a variable interest
entity. The Company adopted this new guidance in the first quarter of fiscal
year 2011. The adoption of this guidance did not have a material impact on our
financial position or results of operations.
In January 2010, the
FASB issued new guidance on the disclosures of fair value measurements. This new
guidance amends the authoritative guidance for fair value measurements and
disclosures by adding new disclosure requirements with respect to transfers in
and out of Levels 1 and 2 fair value measurements, as well as by requiring gross
basis disclosures for purchases, sales, issuances, and settlements included in
the reconciliation of Level 3 fair value measurements. This new guidance also
amends the authoritative guidance by providing clarifications to existing
disclosure requirements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements which are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. We adopted this new
guidance, including the guidance related to the disclosures about purchases,
sales, issuances, and settlements in the roll forwards of activity in Level 3
fair value measurements, beginning in the first quarter of fiscal year 2011. The
adoption of this guidance did not have a material impact on our financial
position or results of operations.
Recent Accounting Guidance Not Yet
Effective
Revenue Recognition for Arrangements with
Multiple Deliverables
In September 2009, the
FASB amended the guidance for revenue recognition in multiple-element
arrangements. It has been amended to remove from the scope of industry specific
revenue accounting guidance for software and software related transactions,
tangible products containing software components and non-software components
that function together to deliver the product’s essential functionality. The
guidance now requires an entity to provide updated guidance on whether multiple
deliverables exist, how the deliverables in an arrangement should be separated,
and the consideration allocated; and allocates revenue in an arrangement using
estimated selling prices of deliverables for these products if a vendor does not
have vendor-specific objective evidence (“VSOE”) or third-party evidence of
selling price. The guidance also eliminates the use of the residual method and
requires an entity to allocate revenue using the relative selling price method
for these products. The accounting changes summarized are effective for fiscal
years beginning on or after June 15, 2010, with early adoption permitted.
Adoption may either be on a prospective basis or by retrospective application.
The Company is currently assessing the impact of these amendments on its
accounting and reporting systems and processes; however, at this time the
Company is unable to quantify the impact of their adoption on its financial
statements or determine the timing and method of its adoption.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
Foreign Currency Exchange
Risk
We face exposure to
financial market risks, including adverse movements in foreign currency exchange
rates and changes in interest rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on our
financial results. Our foreign currency exchange exposure is primarily
associated with product sales arrangements or settlement of intercompany
payables and receivables among subsidiaries and its parent company, and/or
investment/equity contingency considerations denominated in the local currency
where the functional currency of the foreign subsidiary is the U.S.
dollar.
31
Substantially all of our
international product sales are payable in United States Dollars (USD). In the
case of our Media Services operations in the United Kingdom and eventIS in the
Netherlands, product sales are generally payable in local currencies, providing
a natural hedge for receipts and local payments. In light of the high proportion
of our international businesses, we expect the risk of any adverse movements in
foreign currency exchange rates could have an impact on our translated results
within the Consolidated Statements of Operations and Balance Sheets. For the
three months ended April 30, 2010 the Company generated a foreign currency
translation loss of $3.0 million which was recorded as accumulated other
comprehensive loss decreasing the Company’s equity section of the balance sheet
over the prior year.
The Company has entered
into a forward foreign currency exchange contract to manage exposure related to
liabilities denominated in Euros. SeaChange does not enter into derivative
financial instruments for trading purposes. At April 30, 2010, we had one
forward contract to buy Euros totaling €1.2 million that settles on September 1,
2010. While SeaChange does not anticipate that near-term changes in exchange
rates will have a material impact on its operating results, financial position
and liquidity, a sudden and significant change in the value of foreign
currencies could harm the Company’s operating results, financial position and
liquidity.
The U.S. Dollar is the
functional currency for our international subsidiaries, except for ODG, Mobix,
eventIS and SeaChange B.V. All foreign currency gains and losses are included in
interest and other income, net, in the accompanying Consolidated Statements of
Operations. In the first quarter of fiscal year 2011, the Company recorded
approximately $480,000 in losses due to international subsidiary translations
and cash settlements of revenues and expenses.
Interest Rate Risk
Exposure to market risk
for changes in interest rates relates primarily to the Company’s investment
portfolio of marketable debt securities of various issuers, types and maturities
and to SeaChange’s borrowings under its bank line of credit facility. The
Company does not use interest rate related derivative instruments in its
investment portfolio, and its investment portfolio only includes highly liquid
instruments. Our cash and marketable securities include cash equivalents, which
we consider to be investments purchased with original maturities of three months
or less. There is risk that losses could be incurred if the Company were to sell
any of its securities prior to stated maturity. Given the short maturities and
investment grade quality of the portfolio holdings at April 30, 2010, a sharp
change in interest rates should not have a material adverse impact on the fair
value of our investment portfolio. Additionally, our long term marketable
investments, which are carried at the lower of cost or market, have fixed
interest rates, and therefore are subject to changes in fair value.
ITEM 4. Controls and
Procedures
(a) Evaluation of disclosure controls and procedures. The Company evaluated the effectiveness of
its disclosure controls and procedures, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end
of the period covered by this quarterly report on Form 10-Q. William C.
Styslinger, III, our Chief Executive Officer, and Kevin M. Bisson, our Chief
Financial Officer, reviewed and participated in this evaluation. Based upon that
evaluation, Messrs. Styslinger and Bisson concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by this report and as of the date of the evaluation.
(b) Changes in internal controls over financial reporting As a result of the evaluation completed by
the Company, and in which Messrs. Styslinger and Bisson participated, the
Company has concluded that there were no changes during the fiscal quarter ended
April 30, 2010 in its internal controls over financial reporting, which have
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
32
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 31, 2009, Arris
Corporation (“Arris”) filed a contempt motion in the U.S. District Court for the
District of Delaware against SeaChange International relating to U.S. Patent No
5,805,804 (the “804 patent”), a patent owned by Arris. In its motion, Arris is
seeking further patent royalties and the enforcement of the permanent injunction
entered by the Court on April 6, 2006 against certain SeaChange products. On
August 3, 2009, SeaChange filed a complaint seeking a declaratory judgment from
the Court that its products do not infringe the ‘804 patent and asserting
certain equitable defenses. SeaChange also filed a motion to consolidate the
Arris contempt motion with the declaratory judgment action and requested a
status conference on SeaChange’s declaratory judgment action. On August 25,
2009, Arris filed 1) an answer to SeaChange’s complaint that included a
counterclaim of patent infringement under the ‘804 patent; and 2) a motion to
stay the declaratory judgment action until the resolution of the contempt
motion. On June 4, 2010, the Court entered an order granting Arris’ motion to
stay the declaratory judgment action pending resolution of the contempt
proceeding and denied SeaChange’s motion to consolidate and request for status
conference. SeaChange is currently preparing for the Court its response to the
contempt motion. SeaChange believes that Arris’ contempt motion is without
merit, and that SeaChange products do not infringe the remaining claims under
the ‘804 patent.
SeaChange enters into
agreements in the ordinary course of business with customers, resellers,
distributors, integrators and suppliers. Most of these agreements require
SeaChange to defend and/or indemnify the other party against intellectual
property infringement claims brought by a third party with respect to
SeaChange’s products. From time to time, SeaChange also indemnifies customers
and business partners for damages, losses and liabilities they may suffer or
incur relating to personal injury, personal property damage, product liability,
and environmental claims relating to the use of SeaChange’s products and
services or resulting from the acts or omissions of SeaChange, its employees,
authorized agents or subcontractors. For example, SeaChange has received
requests from several of its customers for indemnification of patent litigation
claims asserted by Acacia Media Technologies, USA Video Technology Corporation,
Multimedia Patent Trust, Microsoft Corporation and VTran Media Technologies.
Management performed an analysis of these requests, evaluating whether any
potential losses were probable and estimable.
ITEM 1A. Risk Factors
In addition to the other
information set forth in this Form 10-Q, you should carefully consider the risk
factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on
Form 10-K for the year ended January 31, 2010, which could materially affect our
business, financial condition or future results. The risks described in our
Annual Report on Form 10-K are not the only risks that we face. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition or future results.
ITEM 6. Exhibits
(a) Exhibits
10.1 |
|
Amendment, dated as of June 1, 2010, by and between SeaChange
International, Inc. and William C. Styslinger, III to the Amended and
Restated Change-in-Control Severance Agreement, dated as of December 21,
2009, by and between SeaChange International, Inc. and William C.
Styslinger, III (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K previously filed on June 1, 2010 with the Commission (File No.
000-21393) and incorporated herein by reference). |
|
10.2 |
|
Settlement Agreement, dated as of June 3, 2010, by and among
SeaChange International, Inc., Ramius Value and Opportunity Master Fund
Ltd. and the other parties set forth on the signature pages thereto (filed
as Exhibit 10.1 to the Company’s Current Report on Form 8-K previously
filed on June 3, 2010 with the Commission (File No. 000-21393) and
incorporated herein by reference). |
|
31.1 |
|
Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith). |
|
31.2 |
|
Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith). |
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith). |
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith). |
33
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, SeaChange International,
Inc. has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: June 9,
2010
SEACHANGE INTERNATIONAL,
INC. |
|
by: |
/S/ KEVIN M.
BISSON |
|
Kevin M. Bisson |
|
Chief Financial
Officer, |
|
Senior Vice President, Finance
and |
|
Administration, Treasurer and
Secretary |
Index to Exhibits
No. |
|
Description |
10.1 |
|
Amendment, dated as of June 1, 2010, by
and between SeaChange International, Inc. and William C. Styslinger, III
to the Amended and Restated Change-in-Control Severance Agreement, dated
as of December 21, 2009, by and between SeaChange International, Inc. and
William C. Styslinger, III (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K previously filed on June 1, 2010 with the Commission
(File No. 000-21393) and incorporated herein by reference). |
|
10.2 |
|
Settlement Agreement, dated as of June
3, 2010, by and among SeaChange International, Inc., Ramius Value and
Opportunity Master Fund Ltd. and the other parties set forth on the
signature pages thereto (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K previously filed on June 3, 2010 with the Commission
(File No. 000-21393) and incorporated herein by reference). |
|
31.1 |
|
Certification Pursuant to Rule 13a-14(a)
of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
|
31.2 |
|
Certification Pursuant to Rule 13a-14(a)
of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith). |
|
32.1 |
|
Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith). |
|
32.2 |
|
Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith). |
34