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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3197974
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
124 Acton Street, Maynard, MA 01754
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 897-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
The number of shares outstanding of the registrant's Common Stock on September
12, 2002 was 26,644,079.
SEACHANGE INTERNATIONAL, INC.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements..............
Condensed Consolidated Balance Sheet
at July 31, 2002 (unaudited) and January 31, 2002............... 3
Condensed Consolidated Statement of Operations
Three and six months ended July 31, 2002 and
July 31, 2001 (unaudited)....................................... 4
Condensed Consolidated Statement of Cash Flows
Six months ended July 31, 2002 and
July 31, 2001 (unaudited)....................................... 5
Notes to Condensed Consolidated Financial Statements.............. 6-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......... 13-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 22
Item 2. Changes in Securities and Use of Proceeds................ 23
Item 4. Submission of Matters to a Vote of Security Holders...... 23
Item 6. Exhibits and Reports on Form 8-K......................... 24
SIGNATURES.................................................................. 25
CERTIFICATIONS.............................................................. 25
2
ITEM I. Financial Statements
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31, January 31,
2002 2002
---- ----
(unaudited)
Assets
Current assets
Cash and cash equivalents................................................... $ 92,953 $ 103,898
Accounts receivable, net of allowance for doubtful accounts
of $1,236 at July 31, 2002 and $859 at January 31, 2002................... 26,487 29,916
Inventories................................................................. 28,145 23,990
Income tax receivable....................................................... 1,528 118
Prepaid expenses and other current assets................................... 3,243 2,193
Deferred income taxes....................................................... -- 7,294
--------- ---------
Total current assets........................................................ 152,356 167,409
Property and equipment, net...................................................... 16,767 17,652
Deferred income taxes............................................................ -- 1,481
Other assets..................................................................... 901 2,252
Goodwill, net.................................................................... 253 253
Intangibles, net................................................................. 3,314 3,930
--------- ---------
$ 173,591 $ 192,977
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of line of credit
and obligations under capital leases...................................... $ 247 $ 291
Accounts payable............................................................ 13,135 14,735
Accrued litigation reserve.................................................. 10,864 --
Other accrued expenses...................................................... 1,504 1,837
Customer deposits........................................................... 141 2,484
Deferred revenue............................................................ 13,122 13,071
Income taxes payable........................................................ 53 70
--------- ---------
Total current liabilities................................................... 39,066 32,488
--------- ---------
Long-term line of credit and
obligations under capital leases............................................ 846 6,363
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' Equity
Convertible preferred stock, 5,000,000 shares authorized,
none outstanding............................................................ -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 26,634,077 and 26,532,671 shares issued and outstanding
at July 31, 2002 and January 31, 2002, respectively......................... 266 265
Additional paid-in capital....................................................... 160,573 159,914
Deferred equity discount......................................................... -- (1,164)
Due from stockholders............................................................ -- (122)
Accumulated deficit.............................................................. (26,994) (4,524)
Accumulated other comprehensive loss............................................. (166) (243)
--------- ---------
Total stockholders' equity....................................................... 133,679 154,126
--------- ---------
$ 173,591 $ 192,977
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Systems..................................... $25,900 $19,776 $ 52,416 $ 43,053
Services.................................... 7,390 7,248 14,617 14,127
------- ------- -------- --------
33,290 27,024 67,033 57,180
Cost of revenues:
Systems..................................... 15,032 11,050 31,355 24,526
Services.................................... 5,511 5,223 10,771 10,443
------- ------- -------- --------
20,543 16,273 42,126 34,969
------- ------- -------- --------
Gross profit................................... 12,747 10,751 24,907 22,211
------- ------- -------- --------
Operating expenses:
Research and development.................... 6,457 6,093 12,667 11,677
Selling and marketing....................... 4,112 3,583 8,018 7,189
General and administrative.................. 3,166 1,993 20,048 3,831
------- ------- -------- --------
13,735 11,669 40,733 22,697
------- ------- -------- --------
Loss from operations........................... (988) (918) (15,826) (486)
Interest income (expense), net................. 353 (88) 720 (252)
------- ------- -------- --------
Loss before income taxes.................... (635) (1,006) (15,106) (738)
Income tax expense (benefit)................... - (322) 7,364 (236)
------- ------- -------- --------
Net loss....................................... $ (635) $ (684) $(22,470) $ (502)
======= ======= ======== ========
Basic and diluted loss per share............... $ (0.02) $ (0.03) $ (0.85) $ (0.02)
======= ======= ======== ========
Weighted average common shares outstanding:
Basic................................... 26,604 22,895 26,571 22,725
======= ======= ======== ========
Diluted................................. 26,604 22,895 26,571 22,725
======= ======= ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
SEACHANGE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
(unaudited)
Six months ended
----------------
July 31, July 31,
2002 2001
---- ----
Cash flows from operating activities:
Net loss............................................................................ $ (22,470) $ (502)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................................................. 4,208 3,217
Amortization of deferred equity discount...................................... 1,290 1,124
Valuation allowance on net deferred income tax assets......................... 7,364 --
Changes in operating assets and liabilities:
Accounts receivable....................................................... 3,429 664
Inventories............................................................... (4,781) 1,952
Prepaid expenses and other current assets and other assets................ 378 (343)
Accounts payable.......................................................... (1,600) (644)
Accrued litigation reserve................................................ 10,864 --
Other accrued expenses.................................................... (333) (381)
Customer deposits......................................................... (2,343) (1,263)
Deferred revenue.......................................................... 51 1,557
Income taxes payable...................................................... (17) (869)
--------- --------
Net cash provided by (used in) operating activities................... (3,960) 4,512
--------- --------
Cash flows from investing activities:
Purchases of property and equipment................................................. (1,949) (4,613)
Increase in intangible assets....................................................... (133) (2,709)
--------- --------
Net cash used in investing activities................................. (2,082) (7,322)
--------- --------
Cash flows from financing activities:
Repayment of borrowings under revolving line of credit.............................. -- (4,000)
Repayment of borrowings under construction loan and equipment line of credit........ (5,468) (1,147)
Repayment of obligations under capital lease........................................ (93) (102)
Net proceeds from issuance of common stock.......................................... 536 10,908
Collection of notes receivable from stockholders.................................... 122 --
--------- --------
Net cash provided by (used in) financing activities................... (4,903) 5,659
--------- --------
Net increase (decrease) in cash and cash equivalents................................... (10,945) 2,849
Cash and cash equivalents, beginning of period......................................... 103,898 6,145
--------- --------
Cash and cash equivalents, end of period............................................... $ 92,953 $ 8,994
========= ========
Supplemental disclosure of noncash activities
Transfer of items originally classified as fixed assets to inventories.............. $ 339 $ 141
Transfer of items originally classified as inventories to fixed assets.............. $ 965 $ 687
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the accounts of SeaChange International, Inc. and its subsidiaries. SeaChange
believes that the unaudited condensed consolidated financial statements reflect
all adjustments (consisting of only normal recurring adjustments), necessary for
a fair statement of SeaChange's financial position, results of operations and
cash flows at the dates and for the periods indicated. The results of operations
for the periods presented are not necessarily indicative of results expected for
the full fiscal year or any other future periods. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes for the year ended January
31, 2002, included in SeaChange's Annual Report on Form 10-K for such fiscal
year. The balance sheet at January 31, 2002 was derived from audited financial
information.
2. Revenue Recognition
Revenues from sales of systems are recognized upon shipment provided title and
risk of loss have passed to the customer, there is evidence of an arrangement,
fees are fixed or determinable and collection of the related receivable is
reasonably assured. Installation, project management and training revenue is
deferred and recognized as these services are performed. Revenue from technical
support and maintenance is deferred and recognized ratably over the period of
the related agreements, generally one year. Customers are billed for
installation, project management, training and maintenance at the time of the
product sale. If a portion of the sales price is not due until installation of
the system is complete, that portion of the sales price is deferred until
installation is complete. Revenue from content fees, primarily movies, is
recognized based on the volume of monthly purchases that are made by hotel
guests. Revenue from product development contract services is recognized based
on the time and materials incurred to complete the work. Shipping and handling
costs are included in revenue and cost of revenues.
SeaChange's transactions frequently involve the sales of systems and services
under multiple element arrangements. Systems sales always include at least one
year of free technical support and maintenance services. Revenue under multiple
element arrangements is allocated to all elements except systems based upon the
fair value of those elements. The amounts allocated to training, project
management, technical support and maintenance and content fees is based upon the
price charged when these elements are sold separately and unaccompanied by the
other elements. The amount allocated to installation revenue is based upon
hourly rates and the estimated time required to complete the service. The amount
allocated to systems is done on a residual method basis. Under this method, the
total arrangement value is allocated first to undelivered elements, based on
their fair values, with the remainder being allocated to systems revenue.
Installation, training and project management services are not essential to the
functionality of systems as these services do not alter the equipment's
capabilities and are available from other vendors, and the systems are standard
products. For transactions in which consideration, including equity instruments,
is given to a customer, SeaChange accounts for the value of this consideration
as a reduction in revenue in its statement of operations (see Note 9 to the
condensed consolidated financial statements for further discussion).
3. Earnings Per Share
For the three and six months ended July 31, 2002 and July 31, 2001, common
shares of 3,948,000 and 3,496,000 respectively, issuable upon the exercise of
stock options, are antidilutive because SeaChange recorded a net loss for the
period, and therefore, have been excluded from the diluted earnings per share
computation.
6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Below is a summary of the shares used in calculating basic and diluted earnings
per share for the periods indicated:
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares used in calculating
earnings per share--
Basic............................................ 26,604 22,895 26,571 22,725
Dilutive common stock equivalents................ -- -- -- --
------ ------ ------ ------
Weighted average shares used in calculating
earnings per share-
Diluted.......................................... 26,604 22,895 26,571 22,725
====== ====== ====== ======
4. Inventories
Inventories consist of the following:
July 31, January 31,
2002 2002
---- ----
Components and assemblies......................... $19,790 $17,046
Finished products................................. 8,355 6,944
------- -------
$28,145 $23,990
======= =======
5. Comprehensive Loss
SeaChange's comprehensive loss was as follows:
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
Net loss................................................ $(635) $(684) $ (22,470) $ (502)
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment, net of
tax of $-, $(8), $- and $(14), respectively........ 61 16 77 (30)
----- ----- --------- ------
Other comprehensive income (expense).................... 61 16 77 (30)
----- ----- --------- ------
Comprehensive loss...................................... $(574) $(668) $ (22,393) $ (532)
===== ===== ========= ======
7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
6. Segment Information
SeaChange has three reportable segments: broadband systems, broadcast systems
and services. The broadband systems segment provides products to digitally
manage, store and distribute digital video for cable system operators and
telecommunications companies. The broadcast systems segment provides products
for the storage, archival, on-air playback of advertising and other video
programming for the broadcast television industry. The service segment provides
installation, training, product maintenance and technical support for all of the
above systems and content which is distributed by the broadband product segment.
SeaChange does not measure the assets allocated to the segments. SeaChange
measures results of the segments based on their respective gross profits. There
were no inter-segment sales or transfers. Long-lived assets are principally
located in the United States. The following summarizes the revenues and cost of
revenues by reportable segment:
Three months ended Six months ended
------------------ ----------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
Broadband........................... $20,483 $15,678 $40,775 $34,529
Broadcast........................... 5,417 4,098 11,641 8,524
Services............................ 7,390 7,248 14,617 14,127
------- ------- ------- -------
Total............................... $33,290 $27,024 $67,033 $57,180
======= ======= ======= =======
Costs of revenues
Broadband........................... $12,113 $8,726 $25,120 $19,700
Broadcast........................... 2,919 2,324 6,235 4,826
Services............................ 5,511 5,223 10,771 10,443
------- ------- ------- -------
Total............................... $20,543 $16,273 $42,126 $34,969
======= ======= ======= =======
The following summarizes revenues by geographic locations:
Revenues
United States $29,291 $23,480 $57,864 $49,678
Canada and South America 242 274 1,648 534
Europe 1,735 1,729 3,530 3,893
Asia Pacific and rest of world 2,022 1,541 3,991 3,075
------- ------- ------- -------
Total $33,290 $27,024 $67,033 $57,180
======= ======= ======= =======
For the three and six month periods ended July 31, 2002 and July 31, 2001, a
limited number of our customers each accounted for more than 10% of SeaChange's
total revenues. Three single customers accounted for 37%, 12% and 11% of total
revenues in the three months ended July 31, 2002 and a single customer accounted
for 32% of total revenues in the three months ended July 31, 2001. Three single
customers accounted for 23%, 19% and 10% of total revenues in the six months
ended July 31, 2002 and two single customers accounted for 26% and 11% of total
revenues in the six months ended July 31, 2001. Revenue from these customers was
primarily in the broadband segment. SeaChange believes that revenues from
current and future large customers will continue to represent a significant
proportion of total revenues.
8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
7. Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," which was effective for SeaChange on February 1, 2002. SFAS
142 requires, among other things, the discontinuance of goodwill amortization
and includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, and reclassification of certain intangibles from previously
reported goodwill. This analysis, which was completed during the quarter ended
April 30, 2002 resulted in $253,000 being identified as goodwill and the
remaining gross carrying value of $5.4 million with an accumulated amortization
balance of $2.1 million being identified as patent related intangibles.
SeaChange reassessed the useful lives of the intangible assets and determined
that the lives were appropriate. For the three and six months ended July 31,
2002, SeaChange amortized $378,000 and $744,000, respectively, of the patent
intangibles as general and administrative expenses and estimates annual
amortization expense to be $1.5 million for each of the fiscal years ending
January 31, 2003 and 2004, and $1.0 million for the fiscal year ending January
31, 2005. In accordance with SFAS 142, SeaChange completed the transitional
impairment test of its goodwill as of July 31, 2002 and no adjustment to
goodwill was necessary. As of February 1, 2002, SeaChange ceased the
amortization of goodwill. The following is the effect on net loss and net loss
per share had SFAS 142 been in effect for the three and six months ended July
31, 2001 (in thousands, except per share amounts):
Three months ended Six months ended
July 31, 2001 July 31, 2001
------------- -------------
Net loss ......................................... $ (684) $ (502)
Add back: Impact of goodwill amortization,
net of tax of $10 and $20 ........................ 22 44
------- -------
Adjusted net loss ................................ $ (662) $ (458)
======= =======
Net loss per share- basic and diluted ............ $ (0.03) $ (0.02)
Add back: Impact of goodwill amortization,
net of taxes ..................................... (0.00) (0.00)
------- -------
Adjusted net loss per share- basic and diluted ... $ (0.03) $ (0.02)
======= =======
8. Legal Proceedings
On June 13, 2000, SeaChange filed in the United States District Court for the
District of Delaware a lawsuit against one of SeaChange's competitors, nCube
Corp., whereby SeaChange alleged that nCube's MediaCube-4 product infringed a
patent held by SeaChange (Patent No. 5,862,312) relating to SeaChange's
MediaCluster technology. In instituting the claim, SeaChange sought both a
permanent injunction and damages in an unspecified amount. nCube made a
counterclaim against SeaChange that SeaChange's patent was invalid and that
nCube's MediaCube-4 product did not infringe SeaChange's patent. On September 6,
2000, nCube conceded that, based on a claim construction ruling issued by the
District Court on August 2000, nCube's MediaCube-4 product infringed SeaChange's
patent. On September 25, 2000, a jury upheld the validity of SeaChange's patent.
On March 28, 2002, the Court denied nCube's motion for a new trial. nCube's
motions for judgment as a matter of law are still pending. Any damages and
injunctive relief against nCube will not be awarded until after appeal.
On January 8, 2001, nCube Corp. filed a complaint against SeaChange in the
United States District Court for the District of Delaware alleging that
SeaChange's use of SeaChange's MediaCluster, MediaExpress and Media Server
technology each infringe Patent No. 5,805,804 held by nCube ("`804"). In
instituting the claim, nCube sought both an injunction and monetary damages. On
May 29, 2002, the jury rendered a verdict that SeaChange infringed the nCube
`804 patent. Based on a reasonable royalty rate of 7%, the jury determined that
damages through January 31, 2002 amounted to $2,035,829 and that SeaChange owes
a 7% royalty on subsequent sales of the accused video-on-demand products. The
jury also found that SeaChange's infringement was willful and the court will
determine whether to enhance the damages in a later proceeding. In accordance
with SFAS No. 5, "Accounting for Contingencies", SeaChange recorded certain
one-time charges to reflect this unfavorable jury verdict against SeaChange in
the first quarter of fiscal 2003. The charges recorded totaled $14.4 million and
included provisions for estimated damages and treble damages relating to the
shipments of the accused video-on-demand ("VOD") systems through April 30, 2002,
legal expenses including $1.5 million of SeaChange legal expense that had been
included in other assets as of January 31, 2002, and accrued interest on total
damages. The legal expenses paid through July 31, 2002 of $3.6 million includes
$1.5 million of SeaChange legal expense that had been included in other assets
as of July 31, 2002 and SeaChange litigation expenses paid in the first and
second quarters of fiscal 2003 related to pre-verdict legal services.
9
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Estimated damages on the accused VOD shipments through April 30, 2002........................... $ 2,787,000
Estimated treble damages on the accused VOD shipments
through April 30, 2002...................................................................... 5,574,000
Estimated legal fees (including write-off of capitalized legal costs and nCube legal
fees)........................................................................................... 5,621,000
Accrued interest on estimated damages and treble damages
through April 30, 2002...................................................................... 418,000
-----------
14,400,000
Additional accrued interest on estimated damages and treble damages through
July 31, 2002............................................................................... 85,000
Legal expenses paid through July 31, 2002....................................................... (3,621,000)
-----------
Accrued litigation reserve as of July 31, 2002.................................................. $10,864,000
===========
These estimates reflect SeaChanges's best estimate of its exposure based on
information currently available. However, SeaChange believes that any liability
ultimately incurred after pursuing all legal options will not likely exceed the
provision recorded in the first quarter, except for on-going legal fees
associated with the dispute and additional accrued interest. Other than the
payment of SeaChange's legal fees, any payment of the other amounts recorded as
one-time charges will only occur in the event that the jury verdict is upheld
and treble damages are awarded. SeaChange is contesting both the jury's verdict
and the Court's underlying patent claim construction in post-trial motions and,
if necessary, expects to contest the verdict and claim construction by appeal to
the United States Court of Appeals for the Federal Circuit. Any injunctive
relief against SeaChange will not be determined until after appeal. Even in the
event that the Court issues an injunction against SeaChange prohibiting
SeaChange from selling the accused video-on-demand products, SeaChange believes
that such injunction would have a minimal impact on its ability to ship products
and meet customer demands because SeaChange has implemented a revised version of
the software which SeaChange believes does not infringe.
SeaChange and nCube have made a submission to the Court requesting that the
Court decide post-trial motions in these two cases at the same time, thereby
aligning these two cases for simultaneous appeal.
On March 26, 2002, nCube Corp. filed a complaint against SeaChange in the United
States District Court for the District of Delaware seeking a declaratory
judgment that its redesigned MediaCube-4 product does not infringe U.S. Patent
No. 5,862,312 held by SeaChange. The complaint also alleges that nCube has been
damaged by a certain statement made by SeaChange's Chief Executive Officer
during a public conference call to discuss SeaChange's earnings on March 5,
2002. nCube is seeking a public retraction of the statement and is seeking
damages in an unspecified amount. On April 15, 2002, SeaChange moved to dismiss
all claims on the grounds that the patent-related issues are currently pending
before the Court in the lawsuit previously filed by SeaChange, and the Court
lacks jurisdiction over the remaining claims. That motion is still pending.
In addition, nCube has asserted that SeaChange infringes several other patents
and that it may take legal action in the future. SeaChange believes that it does
not infringe these other patents.
SeaChange cannot be certain of the outcome of the foregoing current or potential
litigation, but plans to oppose allegations against SeaChange and oppose
allegations that may be bought against SeaChange in the future. Accordingly,
SeaChange is unable to determine the impact to SeaChange's business, financial
condition and results of operations or cash flows.
On June 14, 1999, SeaChange filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure SeaChange's business and reputation in the
marketplace. The complaint further alleges that Mr. Putterman and Lathrop
Investment Management, Inc. defamed SeaChange through false postings on an
Internet message board. The complaint seeks unspecified amounts of compensatory
and punitive damages. On June 14, 2000, Concurrent filed a counterclaim under
seal against SeaChange seeking unspecified damages. On July 28, 2000, Concurrent
filed a motion for summary judgment on the claim of civil conspiracy and on
January 4, 2001, the trial court entered an order granting summary judgment for
Concurrent on that claim. SeaChange immediately requested reconsideration of
this order or, in the alternative, recertification for immediate appeal. On June
12, 2001, the trial court denied the motion for reconsideration but made
findings which permitted an immediate
10
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
appeal and on July 11, 2001 SeaChange filed an appeal. All appellate briefs have
been submitted and the parties have requested oral arguments which have since
been scheduled for September 18, 2002. The claims against other defendants and
counterclaims are currently pending and no trial date has been set. SeaChange
cannot be certain of the outcome of the foregoing litigation, but plans to
vigorously oppose allegations against SeaChange and assert SeaChange's claims
against other parties. In addition, as these claims are subject to additional
discovery and certain claims for damages are as yet unspecified, SeaChange is
unable to estimate the impact to SeaChange's business, financial condition and
results of operations or cash flows.
9. Comcast Equity Investment and Video-on-Demand Purchase Agreements
On December 1, 2000, SeaChange and Comcast Cable Communications, Inc. entered
into a video-on-demand purchase agreement for SeaChange's video-on-demand
servers and related services. Under the terms of the video-on-demand purchase
agreement, Comcast has committed to purchase SeaChange's equipment capable of
serving a minimum of one million cable subscribers by approximately December
2002. In addition, Comcast may earn up to an additional 450,000 incentive common
stock purchase warrants through December 2003 based on the number of cable
subscribers in excess of one million who are served by SeaChange's equipment
which has been purchased by Comcast. In connection with the execution of this
commercial agreement, SeaChange entered into a common stock and warrant purchase
agreement, dated as of December 1, 2000, with Comcast SC Investment, Inc.,
whereby Comcast SC agreed to purchase, subject to certain closing conditions
including registration of the shares purchased thereby, 466,255 shares of
SeaChange's common stock for approximately $10 million and Comcast SC would
receive a warrant to purchase 100,000 shares, exercisable at $21.445 per share,
of SeaChange's common stock. This stock and warrant purchase agreement was
terminated by SeaChange and Comcast SC on February 28, 2001. The terms and
conditions of the video-on-demand purchase agreement have not been modified.
On February 28, 2001, SeaChange and Comcast SC signed and closed a new common
stock and warrant purchase agreement on terms similar to the prior agreement.
Under the terms of this new agreement, SeaChange sold in a private placement to
Comcast SC for approximately $10.0 million an aggregate of 756,144 shares of
SeaChange's common stock and a warrant to purchase 100,000 shares of SeaChange's
common stock with an exercise price of $13.225 per share. Under certain
conditions determined upon the effectiveness of the registration of the shares,
the number of common shares purchased and the number of common stock purchase
warrants and related exercise price are subject to adjustment. An additional
number of shares of common stock would be issued to Comcast SC without any
additional consideration as is equal to the difference between 756,144, the
number of shares of common stock issued on February 28, 2001, and the number of
shares obtained by dividing $10.0 million by the lower of 1) 92% of the closing
market price of SeaChange's common stock on the date of effectiveness of the
registration statement, and 2) the average of the closing market price of
SeaChange's common stock for the five trading days ending on the effective date
of the registration statement, if either of such prices is lower than $13.225.
The warrant agreement contains an adjustment mechanism such that the warrant
would be exercisable for an additional 25,000 shares of SeaChange's common stock
if the registration statement has not been declared effective on or before March
31, 2001 and an additional 333.33 shares of SeaChange's common stock per day
beginning on and including May 1, 2001 for each day up to and including the day
the registration statement is declared effective. The warrant agreement also
provides that the exercise price of the warrant would be reduced on the
effective date of the registration statement to the lower of 1) 92% of the
closing market price of SeaChange's common stock on the effective date of the
registration statement, and 2) the average of the closing market prices of
SeaChange's common stock for the five trading days ending on the date of
effectiveness of the registration statement, if either of such prices is lower
than $13.225, the exercise price as of the closing date.
SeaChange determined the intrinsic value of $586,000 related to the 756,144
shares of common stock purchased on February 28, 2001 and measured the fair
value of $1.1 million related to the 100,000 common stock purchase warrants as
of the closing date and recorded these amounts as contra-equity. On April 30,
2001, SeaChange recorded an additional contra-equity amount of $325,000 for the
fair value of the additional 25,000 common stock purchase warrants of SeaChange
common stock as the registration statement had not been declared effective on or
before March 31, 2001. On June 13, 2001, the effective date of the registration
statement, SeaChange issued an additional 14,667 common stock purchase warrants
in accordance with the agreement, and recorded an additional contra-equity
amount of $335,000, representing the incremental fair value of the total
warrants issued. Based on the closing market price on the date of effectiveness
of the registration statement and the five trading days preceding the date of
effectiveness of the registration statement, no additional common shares were
issued to Comcast SC pursuant to the terms of the purchase agreement and Comcast
is not entitled to the issuance in the future of additional shares pursuant to
the terms of the purchase agreement. Also, based on the then prevailing market
prices of SeaChange's common stock, the exercise price of the warrant was not
reduced and is not subject to reduction in the future, other than equitable
adjustment in connection with a stock split or other comparable event and future
dilutive issuances.
11
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The contra-equity amount was amortized as an offset to gross revenue in
proportion to the revenue recognized from the sale of equipment with respect to
the first one million subscribers Comcast has committed to under the
video-on-demand purchase agreement. SeaChange had originally estimated that the
equipment value with respect to the first one million subscribers to be $30
million. In April 2002, SeaChange revised this estimate to $25 million based on
price decreases within the video-on-demand equipment market. For the three
months ended July 31, 2002, SeaChange amortized $925,000 of the deferred equity
discount, which represented the remainder of the deferred equity discount
related to the first one million subscribers.
In May 2002, SeaChange issued Comcast 15,235 incentive common stock purchase
warrants based on the number of cable subscribers in excess of the first one
million subscribers that will be served by SeaChange equipment. The exercise
price of the common stock warrants of $11.94 was based on the average closing
market price of SeaChange's common stock for the fifteen trading days prior to
the agreed upon determination date of April 26, 2002. SeaChange recorded a
contra-equity amount of $125,000 representing the fair value of the additional
incentive common stock warrants issued. During the three months ended July 31,
2002, SeaChange has amortized the $125,000 of the deferred equity discount as an
offset to gross revenue because the warrants were earned by Comcast.
10. New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. SeaChange believes the adoption of SFAS 143
will not have a material impact on its current financial position and results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," ("SFAS 146") which will become effective for
exit or disposal activities initiated after January 31, 2003. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SeaChange
expects that adoption of SFAS 146 will not have a material impact on its
financial position and results of operations.
11. Income Taxes
SeaChange has deferred tax assets that have arisen primarily as a result of
operating losses incurred and other temporary differences between book and tax
accounting. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," requires the establishment of a valuation allowance when, based
on an evaluation of objective evidence, there is a likelihood that some portion
or all of the deferred tax assets will not be realized. SeaChange continually
reviews the adequacy of the valuation allowance for deferred tax assets. As a
result of recognizing a $14.8 million operating loss during the quarter ended
April 30, 2002, the Company has determined that it is more likely than not that
its deferred tax assets will not be realized and accordingly has recorded income
tax expense and valuation allowance against the net deferred tax assets of $7.4
million. If the Company generates future taxable income against which these tax
attributes may be applied, some portion or all of the valuation allowance would
be reversed and a corresponding increase in net income would be reported in
future periods.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Factors That May Affect Future Results
Any statements contained in this Form 10-Q that do not describe historical
facts, including without limitation statements concerning expected revenues,
earnings, product introductions and general market conditions, may constitute
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements contained
herein are based on current expectations, but are subject to a number of risks
and uncertainties that may cause actual results to differ materially from
expectations. The factors that could cause actual future results to differ
materially from current expectations include the following: the emergence and
acceptance of the video-on-demand market; the loss of one of the Company's large
customers; the cancellation or deferral of purchases of the Company's products;
a decline in demand or average selling price for the Company's broadband
products; the Company's ability to manage its growth; content providers limiting
the scope of content licensed for use in the video-on-demand market; the
Company's ability to introduce new products or enhancements to existing
products; the Company's dependence on certain sole source suppliers and
third-party manufacturers; the Company's ability to compete in its marketplace;
the Company's ability to respond to changing technologies; the Company's ability
to protect its intellectual property rights and the expenses that may be
incurred by the Company to protect its intellectual property rights; an
unfavorable result of current or future litigation, including our current patent
litigation with nCube Corp.; the risks associated with international sales; the
Company's ability to integrate the operations of acquired subsidiaries; changes
in the regulatory environment; the Company's ability to hire and retain highly
skilled employees; and increasing social and political turmoil. Further
information on factors that could cause actual results to differ from those
anticipated is detailed in various filings made by us from time to time with the
Securities and Exchange Commission, including but not limited to, those
appearing under the caption "Certain Risk Factors" in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on April 30, 2002. Any
forward-looking statements should be considered in light of those factors.
Overview
We are a leading developer, manufacturer, and marketer of systems, known as
video-storage servers, that automate the management and distribution of both
long-form video streams, such as movies or other feature presentations, and
short-form video streams, such as advertisements.
We have three reportable segments: broadband systems, broadcast systems and
services. The broadband systems segment includes products, such as digital
advertising and video-on-demand products, that digitally manage, store and
distribute digital video for cable system operators and telecommunications
companies. The broadcast systems segment includes products for the storage,
archival and on-air playback of advertising and other video programming for the
broadcast television industry. Systems revenues are comprised of sales of our
broadband and broadcast systems. The service segment is comprised of revenue
related to product development contracts, installation, training, product
maintenance and technical support for all of the above systems, and content
which is distributed by the broadband product segment.
We have experienced fluctuations in our systems revenues from quarter to quarter
due to the timing of receipt of customer orders and the shipment of those
orders. The factors that impact the timing of receipt of customer orders include
among other factors: (1) the customer's obtaining authorized signatures on their
purchase orders, (2) budgetary approvals within the customer's company for
capital purchases and (3) the ability to process the purchase order within the
customer's organization in a timely manner. Factors that may impact the shipment
of customer orders include: (1) the availability of material to produce the
product, and (2) the time required to produce and test the system before
delivery. Because the average sales price of our system is high, the delay in
the timing of receipt and shipment of any one customer order can result in
quarterly fluctuations in our revenue.
Our results are significantly influenced by a number of factors, including our
pricing, the costs of materials used in our products and the expansion of our
operations. We price our products and services based upon our costs as well as
in consideration of the prices of competitive products and services in the
marketplace. The costs of our products primarily consist of the costs of
components and subassemblies that have generally declined over time. As a result
of the growth of our business, operating expenses have increased in the areas of
research and development, selling and marketing, customer service and support
and administration. We expect that the soft economy will continue to influence
our operating results during fiscal 2003. This impact is likely to be most
significant in the capital spending budgets of some of our cable and broadcast
customers whom we believe depend on advertising revenues to fund their capital
equipment purchases.
13
Summary of Critical Accounting Policies; Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in the period in
which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates if past experience
or other assumptions do not turn out to be substantially accurate.
A summary of those accounting policies that we believe are most critical to
fully understand and evaluate our financial results is set forth in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on April
30, 2002. In addition, as a result of changes in facts and circumstances
relating to certain litigation and income tax matters and the adoption of SFAS
142, "Goodwill and Other Intangible Assets," we have updated those accounting
policies that we believe are most critical to fully understand and evaluate our
financial results, and these policies should be read in conjunction with our
Consolidated Financial Statements and the related Notes included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on April
30, 2002.
Accounting for Contingencies. During the quarter ended April 30, 2002, we
recorded a $14.4 million charge to operations in connection with the unfavorable
jury verdict received against SeaChange related to the patent infringement claim
filed by nCube Corp. on January 8, 2001. In accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," and
related guidance, we determined that based upon the unfavorable jury verdict
stating that SeaChange's infringement was willful, we determined that it was
probable that certain deferred legal costs previously incurred in connection
with defending an existing patent had become impaired and that liabilities for
damages, treble damages, legal fees, including estimated nCube legal fees, and
related accrued interest had been incurred as of April 30, 2002. We also were
able to develop reasonable estimates of our loss based on information then
currently available about the jury's verdict concerning willful infringement and
related damages and the likelihood of treble damages. Other than the payment of
SeaChange's legal fees, any payment of the other amounts recorded as one-time
charges will only occur in the event that the jury verdict is upheld and treble
damages are awarded. We believe that any liability ultimately incurred after
pursuing all legal options will not likely exceed the provision recorded in the
quarter ended April 30, 2002 except for the continuation of accrued interest.
However, the Company expects to incur on-going legal fees and will continue to
accrue interest on the potential damages award of approximately $650,000 to
$750,000 per fiscal quarter until the matter is resolved. For the three months
ended July 31, 2002, approximately $900,000 in legal fees and accrued interest
on the potential damages award related to this litigation were recorded as
general and administrative expenses.
Valuation of Long-Lived Assets. At July 31, 2002, goodwill, net consisted of
$253,000 which ceased to be amortized beginning February 1, 2002 upon adoption
of Statement of Financial Accounting Standards Board No. 142, "Goodwill and
Other Intangible Assets." Intangible assets, net consisted of capitalized patent
defense costs of $3.3 million which are being amortized to general and
administrative expenses over their four year estimated useful life. In
connection with the above patent infringement jury verdict in May 2002, we
wrote-off $1.5 million of certain deferred legal costs that had become impaired.
In accordance with Statement of Financial Accounting Standards Board No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which was
adopted by SeaChange on February 1, 2002, the carrying value of intangible
assets and other long-lived assets is reviewed on a regular basis for the
existence of facts or circumstances, both internal and external, that may
suggest an asset is not recoverable - that is if the carrying amount exceeds the
sum of the undiscounted cash flows expected to result from the assets use and
eventual disposition. Factors we consider important that could trigger the
impairment review include:
.. significant underperformance relative to historical or projected future
operating results;
.. significant negative industry or economic trends;
.. significant decrease in the market value of the long-lived asset;
.. significant adverse change to the extent or manner in which a long-lived
asset is being used or in its physical condition;
.. significant adverse change in legal factors or in the business climate that
could affect the value of a long-lived asset;
.. significant decline in our stock price for a sustained period;
.. significant decline in our technological value as compared to the market;
and
.. our market capitalization relative to net book value.
If such circumstances exist, we evaluate the carrying value of long-lived assets
to determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and comparing that value to
the carrying value of the assets. If the carrying value of the asset is greater
than the estimated future cash flows, the asset is written down to the estimated
fair value. We determine the estimated fair value of the assets on a projected
discounted cash flow method using a
14
discount rate determined by management to be commensurate with the risk inherent
in the current business model. In determining expected future cash flows, assets
are grouped at the lowest level for which cash flows are identifiable and
independent of cash flows from other asset groups. Our cash flow estimates
contain management's best estimates, using appropriate and customary assumptions
and projections at the time.
Accounting for Income Taxes. We record income taxes using the asset and
liability method. Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and operating loss and tax credit carryforwards.
Our financial statements contain certain deferred tax assets which have arisen
primarily as a result of operating losses, as well as other temporary
differences between financial and tax accounting. We are required to establish a
valuation allowance if the likelihood of realization of the deferred tax assets
is reduced based on an evaluation of objective verifiable evidence. Significant
management judgment is required in determining our income tax expense (benefit),
our deferred tax assets and liabilities and any valuation allowance recorded
against our deferred tax assets. We evaluate the weight of all available
evidence to determine whether it is more likely than not that some portion or
all of the deferred income tax assets will not be realized. As a result of
recognizing a $14.8 million operating loss during the quarter ended April 30,
2002, we determined that it is more likely than not that our deferred tax assets
will not be realized and accordingly we recorded income tax expense and
valuation allowance against the net deferred tax assets of $7.4 million. The
amount of the deferred tax asset considered realizable is subject to change
based on future events, including generating taxable income in future periods.
We will continue to assess the need for the valuation allowance at each balance
sheet date based on all available evidence. If we generate future taxable income
against which these tax attributes may be applied, some portion or all of the
valuation allowance would be reversed and a corresponding increase in net income
would be reported in the future.
15
Three Months Ended July 31, 2002 Compared to the Three Months Ended July
31, 2001
Revenues
Systems. Our systems revenues consist of sales within our broadband segment
(primarily digital advertising and video-on-demand systems) and its broadcast
segment. Systems revenues increased 31% to $25.9 million in the three months
ended July 31, 2002 from $19.8 million in the three months ended July 31, 2001.
Revenues from the broadband segment, which accounted for 62% and 58% of total
revenues in the three months ended July 31, 2002 and 2001, respectively,
increased to $20.5 million in 2002 as compared to $15.7 million in 2001.
Video-on-demand system revenues were $15.1 million for the three months ended
July 31, 2002 as compared to $10.9 million in the prior year primarily due to
increased deployments of residential video-on-demand systems in the United
States for U.S. cable operators. Included as a reduction in the video-on-demand
systems revenue was the amortization of $1.1 million related to the deferred
equity discount associated with the Comcast equity investment. Digital
advertising system revenues were $5.4 million for the three months ended July
31, 2002 as compared to $4.8 million in the prior year. Broadcast system segment
revenues were $5.4 million in the three months ended July 31, 2002 as compared
to $4.1 million in the three months ended July 31, 2001. The increase in
broadcast system revenues was a result of increased market penetration in the
U.S. and Asia Pacific. We expect future revenue growth, if any, to come
principally from our video-on-demand and broadcast system products as cable and
telecommunications companies continue to offer new video-on-demand applications
for their customers and the market for digital video servers within the
broadcast industry continues to expand. As revenues from broadcast and
video-on-demand products increase, the digital advertising products will become
a smaller portion of total system revenues. However, SeaChange believes that
there will be a continued demand for expansions to existing digital advertising
insertion systems within the U.S. and growth potential for new interactive
advertising systems in the future.
Services. Our services revenues consist of fees for installation, training,
product maintenance, technical support services and movie content fees. Our
services revenues increased 2% to $7.4 million in the three months ended July
31, 2002 from $7.2 million in the three months ended July 31, 2001. This
increase in services revenues primarily resulted from the renewals of technical
support and maintenance services and the impact of a growing installed base of
systems offset in part by lower product development services.
For the three month period ended July 31, 2002 and July 31, 2001, a limited
number of our customers each accounted for more than 10% of our total revenues.
Three single customers accounted for 37%, 12% and 11% of total revenues in the
three months ended July 31, 2002 and a single customer accounted for 32% of
total revenues in the three months ended July 31, 2001. Revenue from these
customers was primarily in the broadband segment. We believe that revenues from
current and future large customers will continue to represent a significant
proportion of total revenues.
International sales accounted for approximately 12% and 13% of total revenues in
the three-month periods ended July 31, 2002 and July 31, 2001, respectively. We
expect that international sales will remain a significant portion of our
business in the future. As of July 31, 2002, substantially all sales of our
products were made in United States dollars. Therefore, we have not experienced,
nor do we expect to experience in the near term, any material impact from
fluctuations in foreign currency exchange rates on our results of operations or
liquidity. If this practice changes in the future, we will reevaluate our
foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of purchased
components and subassemblies, labor and overhead relating to the final assembly
and testing of complete systems and related expenses. Costs of systems revenues
increased 36% to $15.0 million in the three months ended July 31, 2002 as
compared to $11.1 million in the three months ended July 31, 2001. In the three
months ended July 31, 2002, the increase in costs of systems revenues reflects
higher systems revenue and higher material costs within the video-on-demand
products. We expect cost of systems revenues as a percentage of revenues for the
video-on-demand products within the broadband segment to remain at high levels
as the products are first deployed and to decrease as the revenue level
increases and we improve our manufacturing and material purchasing efficiencies
through fiscal 2004.
Systems gross profit as a percentage of systems revenues was 42% and 44% in the
three months ended July 31, 2002 and July 31, 2001, respectively. The decrease
in systems gross profit in the three month ended July 31, 2002 was primarily due
to the shift within broadband products sales from higher gross profit
advertising systems to lower gross profit video-on-demand systems resulting from
competitive price decreases on our products. Gross profit for the broadband
segment decreased to 41% for the three months ended July 31, 2002 as compared to
44% for the three months ended July 31, 2001 while gross profit for the
broadcast segment increased to 46% for the three months ended July 31, 2002
compared to 43% for the three months ended July 31, 2001.
16
Services. Costs of services revenues consist primarily of labor, materials and
overhead relating to the installation, training, product maintenance and
technical support services provided by us and costs associated with providing
movie content. Costs of services revenues increased slightly to $5.5 million in
the three months ended July 31, 2002 from $5.2 million in the three months ended
July 31, 2001. Services gross profit as a percentage of services revenue was 25%
in the three months ended July 31, 2002 and 28% in the three months ended July
31, 2001. We expect that we will continue to experience fluctuations in gross
profit as a percentage of services revenue as a result of the timing of revenues
from technical support and other services to support the growing installed base
of systems and the timing of costs associated with our ongoing investment
required to build a service organization to support the installed base of
systems and new products.
Research and Development. Research and development expenses consist primarily of
compensation of development personnel, depreciation of equipment and an
allocation of related facilities expenses. Research and development expenses
increased 6% to $6.5 million in the three months ended July 31, 2002 as compared
to $6.1 million in the three months ended July 31, 2001. The increase in the
three months ended July 31, 2002 was primarily attributable to the hiring and
contracting of additional development personnel which reflects our continuing
investment in new products. We expect that research and development expenses
will continue to increase in dollar amount in comparison to similar periods in
prior years as we continue to develop and support our new and existing products.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation expenses, including sales commissions, travel expenses and certain
promotional expenses. Selling and marketing expenses increased 15% to $4.1
million in the three months ended July 31, 2002 from $3.6 million in the three
months ended July 31, 2001. The increase was primarily due to the hiring of
additional sales personnel for our video-on-demand and broadcast products,
higher commissions on increased revenues and higher travel and other promotional
related costs.
General and Administrative. General and administrative expenses consist
primarily of provision for litigation and related expenses resulting from the
nCube jury verdict, compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facilities expenses. General and administrative expenses increased to
$3.2 million in the three-month period ended July 31, 2002, as compared to $2.0
million in the three-month period ended July 31, 2001. This increase is
primarily due to legal expenses and accrued interest on awarded damages of
approximately $900,000 associated with the unfavorable jury verdict in
connection with the litigation with nCube. We expect to incur on-going legal
fees and accrued interest on awarded damages of approximately $650,000 to
$750,000 per fiscal quarter until the matter is resolved. We intend to
vigorously contest both the jury's verdict and the U.S. District Court's
underlying patent claim construction both in post-trial motions and, if
necessary, by way of an appeal to the United States Court of Appeals for the
Federal Circuit. We have filed counter claims in connection with the above nCube
`804 patent litigation.
Interest Income (Expense), net. Interest expense, net was $88,000 for the three
months ended July 31, 2001 and interest income, net was $353,000 for the three
months ended July 31, 2002. The increase in interest income, net in the three
months ended July 31, 2002 primarily resulted from interest on invested cash
balances resulting from our public stock offering which closed on January 31,
2002.
Income Tax Expense. Primarily as a result of the $14.4 million charge to
operations related to the unfavorable jury's verdict in the nCube litigation in
the first quarter of fiscal 2003, we have determined that it is more likely than
not that our deferred tax assets as of July 31, 2002 will not be realized.
Accordingly, we recorded income tax expense of $7.4 million in the three months
ended April, 30, 2002 for a valuation allowance against all net deferred tax
assets and we have not recorded any income tax expense (benefit) in the three
months ended July 31, 2002. We will continue to assess the need for the
valuation allowance at each balance sheet date based on all available evidence,
including generating sufficient taxable income in future periods. Our effective
tax rate of 32% for the quarter ended July 31, 2001 was favorably impacted by
the utilization of research and development tax credits.
17
Six Months Ended July 31, 2002 Compared to the Six Months Ended July
31, 2001
Revenues
Systems. Systems revenues increased 22% to $52.4 million in the six months ended
July 31, 2002 from $43.1 million in the six months ended July 31, 2001. Revenues
from the broadband segment, which accounted for 61% and 60% of total revenues in
the six months ended July 31, 2002 and 2001, respectively, increased to $40.8
million in 2002 as compared to $34.5 million in 2001. Video-on-demand system
revenues were $31.2 million for the six months ended July 31, 2002 as compared
to $22.7 million in the prior year primarily due to increased deployments of
residential video-on-demand systems in the United States for U.S. cable
operators. Included as a reduction in the video-on-demand systems revenue was
the amortization of $1.3 million related to the deferred equity discount
associated with the Comcast equity investment. During the six months ended July
31, 2002, there were overall price decreases within the video-on-demand
equipment market due to competitive pressures and the Company believes there may
be future price decreases for these products as well. Digital advertising system
revenues were $9.6 million for the six months ended July 31, 2002 as compared to
$11.9 million in the prior year. The decrease resulted primarily from the
decline in the number of expansion systems purchased by U.S. cable operators in
the first quarter of fiscal 2003. Broadcast system segment revenues were $11.6
million in the six months ended July 31, 2002 as compared to $8.5 million in the
six months ended July 31, 2001. The increase in broadcast system revenues was a
result of increased market penetration in the U.S. and Asia Pacific. We expect
future revenue growth, if any, to come principally from our video-on-demand and
broadcast system products as cable and telecommunications companies continue to
offer new video-on-demand applications for their customers and the market for
digital video servers within the broadcast industry continues to expand. As
revenues from broadcast and video-on-demand products increase, the digital
advertising products will become a smaller portion of total system revenues.
However, SeaChange believes that there will be a continued demand for expansions
to existing digital advertising insertion systems within the U.S. and growth
potential for new interactive advertising systems in the future.
Services. Our services revenues increased 3% to $14.6 million in the six months
ended July 31, 2002 from $14.1 million in the six months ended July 31, 2001.
This increase in services revenues primarily resulted from the renewals of
technical support and maintenance services and the impact of a growing installed
base of systems offset in part by a lower level of product development services.
For the six-month periods ended July 31, 2002 and July 31, 2001, a limited
number of our customers each accounted for more than 10% of our total revenues.
Three single customers accounted for 23% 19% and 10% of total revenues in the
six months ended July 31, 2002 and two single customers accounted for 26% and
11% of total revenues in the six months ended July 31, 2001. Revenue from these
customers was primarily in the broadband segment. We believe that revenues from
current and future large customers will continue to represent a significant
proportion of total revenues.
International sales accounted for approximately 14% and 13% of total revenues in
the six-month periods ended July 31, 2002 and July 31, 2001, respectively. We
expect that international sales will remain a significant portion of our
business in the future. As of July 31, 2002, substantially all sales of our
products were made in United States dollars. Therefore, we have not experienced,
nor do we expect to experience in the near term, any material impact from
fluctuations in foreign currency exchange rates on our results of operations or
liquidity. If this practice changes in the future, we will reevaluate our
foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues increased 28% to $31.4 million in the six
months ended July 31, 2002 as compared to $24.5 million in the six months ended
July 31, 2001. In the six months ended July 31, 2002, the increase in costs of
systems revenues reflects higher systems revenue and higher material costs
within the video-on-demand products. We expect cost of systems revenues as a
percentage of revenues for the video-on-demand products within the broadband
segment to remain at high levels as the products are first deployed and to
decrease as the revenue level increases and we improve our manufacturing and
material purchasing efficiencies.
Systems gross profit as a percentage of systems revenues was 40% and 43% in the
six months ended July 31, 2002 and July 31, 2001, respectively. The decrease in
systems gross profit in the six months ended July 31, 2002 was primarily due to
the shift within broadband products sales from higher gross profit advertising
systems to lower gross profit video-on-demand systems resulting from competitive
price decreases on our products. Gross profit for the broadband segment
decreased to 38% for the six months ended July 31, 2002 as compared to 43% for
the six months ended July 31, 2001 while gross profit for the broadcast segment
increased to 46% for the six months ended July 31, 2002 compared to 43% for the
six months ended July 31, 2001.
Services. Costs of services revenues increased slightly to $10.8 million in the
six months ended July 31, 2002 from $10.4 million in the six months ended July
31, 2001. Services gross profit as a percentage of services revenue was 26% in
the six months ended July 31, 2002 and the six months ended July 31, 2001. We
expect that we will continue to experience fluctuations in gross profit
18
as a percentage of services revenue as a result of the timing of revenues from
technical support and other services to support the growing installed base of
systems and the timing of costs associated with our ongoing investment required
to build a service organization to support the installed base of systems and new
products.
Research and Development. Research and development expenses increased 8% to
$12.7 million in the six months ended July 31, 2002 as compared to $11.7 million
in the six months ended July 31, 2001. The increase in the six months ended July
31, 2002 was primarily attributable to the hiring and contracting of additional
development personnel which reflects our continuing investment in new products.
We expect that research and development expenses will continue to increase in
dollar amount in comparison to similar periods in prior years as we continue to
develop and support our new and existing products.
Selling and Marketing. Selling and marketing expenses increased 12% to $8.0
million in the six months ended July 31, 2002 from $7.2 million in the six
months ended July 31, 2001. The increase was primarily due to the hiring of
additional sales personnel for our video-on-demand and broadcast products,
higher commissions on increased revenues, higher travel and other promotional
related costs.
General and Administrative. General and administrative expenses increased to
$20.0 million in the six-month period ended July 31, 2002, as compared to $3.8
million in the six-month period ended July 31, 2001. This increase is primarily
due to the recording of one-time charges of $14.4 million in the first quarter
of fiscal 2003 associated with an unfavorable jury verdict in connection with
the litigation with nCube, additional $900,000 in on-going legal and accrued
interest related to the above litigation and the increase in accounts receivable
reserves, principally a $500,000 provision against outstanding amounts owed by
Adelphia Communications Corp. which filed for bankruptcy in June 2002. We expect
to incur on-going legal fees and accrued interest on awarded damages of
approximately $650,000 to $750,000 per fiscal quarter until the matter is
resolved. The charges recorded for the nCube jury verdict totaled $14.4 million
and included provisions for estimated damages and treble damages relating to the
shipments of the accused video-on-demand ("VOD") systems through April 30, 2002,
legal expenses, including estimated nCube legal fees and $1.5 million of our
legal costs that had been included in other assets as of January 31, 2002, and
accrued interest on total damages. The legal expenses paid through July 31, 2002
of $3.6 million include $1.5 million of SeaChange legal expense that had been
included in other assets as of January 31, 2002 and litigation expenses paid in
the first and second quarters of fiscal 2003 related to pre-verdict legal
services.
Estimated damages on the accused VOD shipments through April 30, 2002 ................................. $ 2,787,000
Estimated treble damages on the accused VOD shipments
through April 30, 2002 ............................................................................ 5,574,000
Estimated legal fees (including the write-off of capitalized legal costs and nCube
legal fees) ........................................................................................... 5,621,000
Accrued interest on estimated damages and treble damages
through April 30, 2002 ............................................................................ 418,000
-----------
14,400,000
Additional accrued interest on estimated damages and treble damages through
July 31, 2002 ..................................................................................... 85,000
Legal expenses paid through July 31, 2002 ............................................................. (3,621,000)
-----------
Accrued litigation reserve as of July 31, 2002 ........................................................ $10,864,000
===========
These estimates reflect our best estimate of our exposure based on information
currently available. However, we believe that any liability ultimately incurred
after pursuing all legal options will not likely exceed the provision recorded
in the first quarter, except for on-going legal fees associated with this
dispute and additional accrued interest. Other than the payment of our legal
fees, any payment of the other amounts recorded as one-time charges will only
occur in the event that the jury verdict is upheld and treble damages are
awarded. We are contesting both the jury's verdict and the Court's underlying
patent claim construction in post-trial motions and, if necessary, expect to
contest the verdict and claim construction by appeal to the United States Court
of Appeals for the Federal Circuit. Any injunctive relief against us will not be
determined until after appeal. Even in the event that the Court issues an
injunction against us prohibiting us from selling the accused video-on-demand
products, we believe that such injunction would have a minimal impact on our
ability to ship products and meet customer demands because we have implemented a
revised version of the software which we believe does not infringe.
Interest Income (Expense), net. Interest expense, net was $252,000 for the six
months ended July 31, 2001 and interest income, net was $720,000 for the six
months ended July 31, 2002. The increase in interest income, net in the six
months ended July 31, 2002 primarily resulted from interest on invested cash
balances resulting from our public stock offering which closed on January 31,
2002.
Income Tax Expense. Primarily as a result of the $14.4 million charge to
operations related to the unfavorable jury's verdict in the nCube litigation in
the first quarter of fiscal 2003, we have determined that it is more likely than
not that our deferred tax assets as of July 31, 2002 will not be realized.
Accordingly, we recorded income tax expense of $7.4 million for a valuation
allowance
19
against all net deferred tax assets. We will continue to assess the
need for the valuation allowance at each balance sheet date based on all
available evidence, including generating sufficient taxable income in future
periods. Our effective tax rate of 32% for the six months ended July 31, 2001
was favorably impacted by the utilization of research and development tax
credits.
Liquidity and Capital Resources
We have financed our operations and capital expenditures primarily with the
proceeds of sales of our common stock, borrowings and cash flows generated from
operations. Cash and cash equivalents decreased $10.9 million from $103.9
million at January 31, 2002 to $93.0 million at July 31, 2002. Working capital
(consisting of current assets less current liabilities) decreased from
approximately $134.9 million at January 31, 2002 to approximately $113.3 million
at July 31, 2002.
Net cash used in operating activities was approximately $4.0 million for the six
months ended July 31, 2002. Net cash provided by operating activities was $4.5
million for the six months ended July 31, 2001. The net cash used in operating
activities for the six months ended July 31, 2002 was the result of the net loss
of $22.5 million adjusted for non-cash expenses including depreciation and
amortization of $5.5 million and the changes in certain operating assets and
liabilities. The significant net changes in operating assets and liabilities
that provided cash from operations included the increase in accrued litigation
expenses of $10.9 million related primarily to the provision recorded in
connection with the nCube jury verdict in the first quarter of fiscal 2003, and
a decrease in accounts receivable of $3.4 million. Those items that generated
cash from operations were offset by an increase in inventories of approximately
$4.8 million, a decrease in accounts payable of $1.6 million and a decrease in
customer deposits of $2.3 million. We expect that the broadcast segment and the
video-on-demand products within the broadband segment will continue to require a
significant amount of cash to fund future product development, to manufacture
and deploy customer test and demonstration equipment and to meet higher revenue
levels in both product segments.
Net cash used in investing activities was approximately $2.1 million and $7.3
million for the six months ended July 31, 2002, and July 31, 2001, respectively.
Investment activity consisted primarily of expenditures for capital equipment
required to support the expansion and growth of the business.
Net cash used in financing activities was approximately $4.9 million and net
cash provided by financing activities was approximately $5.7 million for the six
months ended July 31, 2002, and July 31, 2001, respectively. In the six months
ended July 31, 2002, the cash used in financing activities included
approximately, $5.6 million in principal repayments of outstanding loans under
the equipment line of credit and capital lease obligations.
In October 2001, we entered into a $10.0 million revolving line of credit with a
bank that expires in October 2003. Loans made under this revolving line of
credit will bear interest at a rate per annum equal to the bank's prime rate,
4.75% at July 31, 2002. Borrowings under this line of credit are collateralized
by substantially all of our assets. The loan agreement requires that we provide
the bank with certain periodic financial reports and comply with certain
financial ratios including a minimum level of earnings before interest, taxes
and depreciation and amortization on a trailing twelve month basis. As of July
31, 2002, the Company was in compliance with the financial covenants. The
verdict in the nCube litigation as described in Note 8 to the condensed
consolidated financial statements would have caused us to be out of compliance
with such covenants, however, in June 2002 the Bank amended the loan agreement
so that the effects of the jury's verdict does not cause us to be out of
compliance. In March 2002, we repaid the outstanding balance under the current
line of credit of $5.4 million plus accrued interest to the bank. As of July 31,
2002, we had no borrowings under this revolving line of credit.
In October 2000, we entered into an agreement with a bank to finance $1.2
million of the construction costs related to the purchase and renovation of a
manufacturing mill in New Hampshire that we previously purchased in February
2000. During the construction period, interest accrued and was paid at a per
annum rate of 8.875%. Upon occupancy of the building in November 2000, the loan
converted into two promissory notes whereby we will pay principal and interest
based upon a fixed interest rate per annum over a five and ten year period,
respectively, of 8.875% at July 31, 2002. Borrowings under the loan are
collaterized by the land and buildings of the renovated mill. The loan agreement
requires that we provide the bank with certain periodic financial reports and
comply with certain annual financial ratios. We were in compliance with the
financial covenants as of July 31, 2002. As of July 31, 2002, borrowings
outstanding under the loan were $1.0 million.
It is typical for us to experience fluctuations in our monthly operating results
primarily due to the timing of receiving customer orders and the related
shipment of these customer orders. As a result of these monthly fluctuations, we
may experience fluctuations in our inventories as a result of procurement of
both short and long lead components for anticipated orders for both our product
segments, in our accounts payable balance primarily due to the timing of
payments for materials purchased for prior month shipments, in accounts
receivable amounts as a result of the timing of customer payments without
corresponding customer shipments and in cash and cash equivalents.
20
We believe that existing funds together with available borrowings under the
revolving line of credit and the proceeds from our public stock offering are
adequate to satisfy our working capital and capital expenditure requirements for
the foreseeable future.
We had no material capital expenditure commitments as of July 31, 2002.
Effects of Inflation
Management believes that financial results have not been significantly impacted
by inflation and price changes.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. We believe the adoption of SFAS 143 will
not have a material impact on our current financial position and results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," ("SFAS 146") which will become effective for
exit or disposal activities initiated after January 31, 2003. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." We expect that
adoption of SFAS 146 will not have a material impact on our financial position
and results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
SeaChange faces exposure to financial market risks, including adverse movements
in foreign currency exchange rates and changes in interest rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on our financial results. Our primary exposure has been
related to local currency revenue and operating expenses in Europe and Asia.
Historically, SeaChange has not hedged specific currency exposures as gains and
losses on foreign currency transactions have not been material to date. At July
31, 2002, SeaChange had approximately $1,000,000 outstanding related to variable
rate U.S. dollar denominated debt. The carrying value of these short-term
borrowings approximates fair value due to the short maturities of these
instruments. Assuming a hypothetical 10% adverse change in the interest rate,
interest expense on these short-term borrowings would increase by approximately
$5,000. The carrying amounts reflected in the consolidated balance sheet of cash
and cash equivalents, trade receivables, and trade payables approximates fair
value at July 31, 2002 due to the short maturities of these instruments.
SeaChange maintains investment portfolio holdings of various issuers, types, and
maturities. Our cash and marketable securities include cash equivalents, which
SeaChange considers investments to be purchased with original maturities of
three months or less given the short maturities and investment grade quality of
the portfolio holdings at July 31, 2002, a sharp rise in interest rates should
not have a material adverse impact on the fair value of our investment
portfolio. As a result, SeaChange does not currently hedge these interest rate
exposures.
21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 13, 2000, SeaChange filed in the United States District Court for the
District of Delaware a lawsuit against one of SeaChange's competitors, nCube
Corp., whereby SeaChange alleged that nCube's MediaCube-4 product infringed a
patent held by SeaChange (Patent No. 5,862,312) relating to SeaChange's
MediaCluster technology. In instituting the claim, SeaChange sought both a
permanent injunction and damages in an unspecified amount. nCube made a
counterclaim against SeaChange that SeaChange's patent was invalid and that
nCube's MediaCube-4 product did not infringe SeaChange's patent. On September 6,
2000, nCube conceded that, based on a claim construction ruling issued by the
District Court on August 2000, nCube's MediaCube-4 product infringed SeaChange's
patent. On September 25, 2000, a jury upheld the validity of SeaChange's patent.
On March 28, 2002, the Court denied nCube's motion for a new trial. nCube's
motions for judgment as a matter of law are still pending. Any damages and
injunctive relief against nCube will not be awarded until after appeal.
On January 8, 2001, nCube Corp. filed a complaint against SeaChange in the
United States District Court for the District of Delaware alleging that
SeaChange's use of SeaChange's MediaCluster, MediaExpress and Media Server
technology each infringe Patent No. 5,805,804 held by nCube ("`804"). In
instituting the claim, nCube sought both an injunction and monetary damages. On
May 29, 2002, the jury rendered a verdict that SeaChange infringed the nCube
`804 patent. Based on a reasonable royalty rate of 7%, the jury determined that
damages through January 31, 2002 amounted to $2,035,829 and that SeaChange owes
a 7% royalty on subsequent sales of the accused video-on-demand products. The
jury also found that SeaChange's infringement was willful and the court will
determine whether to enhance the damages in a later proceeding. In accordance
with SFAS No. 5, "Accounting for Contingencies", SeaChange recorded certain
one-time charges to reflect this unfavorable jury verdict against SeaChange in
the first quarter of fiscal 2003. The charges recorded totaled $14.4 million and
included provisions for estimated damages and treble damages relating to the
shipments of the accused video-on-demand ("VOD") systems through April 30, 2002,
legal expenses including $1.5 million of SeaChange legal expense that had been
included in other assets as of January 31, 2002, and accrued interest on total
damages. The legal expenses paid through July 31, 2002 of $3.6 million include
$1.5 million of SeaChange legal expense that had been included in other assets
as of January 31, 2002 and litigation expenses paid in the first and second
quarters of fiscal 2003 related to pre-verdict legal services.
Estimated damages on the accused VOD shipments through April 30, 2002 ................................. $ 2,787,000
Estimated treble damages on the accused VOD shipments
through April 30, 2002 ............................................................................ 5,574,000
Estimated legal fees (including write-off of capitalized legal costs and nCube legal
fees) ................................................................................................. 5,621,000
Accrued interest on estimated damages and treble damages
through April 30, 2002 ............................................................................ 418,000
-----------
14,400,000
Additional accrued interest on estimated damages and treble damages through
July 31, 2002 ..................................................................................... 85,000
Legal expenses paid through July 31, 2002 ............................................................. (3,621,000)
-----------
Accrued litigation reserve as of July 31, 2002 ........................................................ $10,864,000
===========
These estimates reflect SeaChanges's best estimate of its exposure based on
information currently available. However, SeaChange believes that any liability
ultimately incurred after pursuing all legal options will not likely exceed the
provision recorded in the first quarter, except for on-going legal fees
associated with this dispute and additional accrued interest. Other than the
payment of SeaChange's legal fees, any payment of the other amounts recorded as
one-time charges will only occur in the event that the jury verdict is upheld
and treble damages are awarded. SeaChange is contesting both the jury's verdict
and the Court's underlying patent claim construction in post-trial motions and,
if necessary, expects to contest the verdict and claim construction by appeal to
the United States Court of Appeals for the Federal Circuit. Any injunctive
relief against SeaChange will not be determined until after appeal. Even in the
event that the Court issues an injunction against SeaChange prohibiting
SeaChange from selling the accused video-on-demand products, SeaChange believes
that such injunction would have a minimal impact on its ability to ship products
and meet customer demands because SeaChange has implemented a revised version of
the software which SeaChange believes does not infringe.
SeaChange and nCube have made a submission to the Court requesting that the
Court decide post-trial motions in these two cases at the same time, thereby
aligning these two cases for simultaneous appeal.
22
On March 26, 2002, nCube Corp. filed a complaint against SeaChange in the United
States District Court for the District of Delaware seeking a declaratory
judgment that its redesigned MediaCube-4 product does not infringe U.S. Patent
No. 5,862,312 held by SeaChange. The complaint also alleges that nCube has been
damaged by a certain statement made by SeaChange's Chief Executive Officer
during a public conference call to discuss SeaChange's earnings on March 5,
2002. nCube is seeking a public retraction of the statement and is seeking
damages in an unspecified amount. On April 15, 2002, SeaChange moved to dismiss
all claims on the grounds that the patent-related issues are currently pending
before the Court in the lawsuit previously filed by SeaChange, and the Court
lacks jurisdiction over the remaining claims. That motion is still pending.
In addition, nCube has asserted that SeaChange infringes several other patents
and that it may take legal action in the future. SeaChange believes that it does
not infringe these other patents.
SeaChange cannot be certain of the outcome of the foregoing current or potential
litigation, but plans to oppose allegations against SeaChange and oppose
allegations that may be bought against SeaChange in the future. Accordingly,
SeaChange is unable to determine the impact to SeaChange's business, financial
condition and results of operations or cash flows.
On June 14, 1999, SeaChange filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure SeaChange's business and reputation in the
marketplace. The complaint further alleges that Mr. Putterman and Lathrop
Investment Management, Inc. defamed SeaChange through false postings on an
Internet message board. The complaint seeks unspecified amounts of compensatory
and punitive damages. On June 14, 2000, Concurrent filed a counterclaim under
seal against SeaChange seeking unspecified damages. On July 28, 2000, Concurrent
filed a motion for summary judgment on the claim of civil conspiracy and on
January 4, 2001, the trial court entered an order granting summary judgment for
Concurrent on that claim. SeaChange immediately requested reconsideration of
this order or, in the alternative, recertification for immediate appeal. On June
12, 2001, the trial court denied the motion for reconsideration but made
findings which permitted an immediate appeal and on July 11, 2001 SeaChange
filed an appeal. All appellate briefs have been submitted and the parties have
requested oral arguments which have since been scheduled for September 18, 2002.
The claims against other defendants and counterclaims are currently pending and
no trial date has been set. SeaChange cannot be certain of the outcome of the
foregoing litigation, but plans to vigorously oppose allegations against
SeaChange and assert SeaChange's claims against other parties. In addition, as
these claims are subject to additional discovery and certain claims for damages
are as yet unspecified, SeaChange is unable to estimate the impact to
SeaChange's business, financial condition and results of operations or cash
flows.
Item 2. Changes in Securities and Use of Proceeds
In May 2002, pursuant to the terms of that certain Video-on-Demand Purchase
Agreement, dated as of December 1, 2000, by and between SeaChange and Comcast
Cable Communications of Pennsylvania, Inc., SeaChange issued to Comcast Cable SC
Investment, Inc. ("Comcast SC") a warrant exercisable for fifteen thousand two
hundred thirty-five (15,235) shares of SeaChange's common stock. The exercise
price of the common stock warrants of $11.94 was based on the average closing
market price of SeaChange's common stock for the fifteen trading days prior to
the agreed upon determination date, April 26, 2002. This issuance was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof, as SeaChange did not make any general
solicitation relating to the issuance of these warrants. No underwriter was used
in connection with this transaction.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the security holders of SeaChange was held on July 17,
2002. Matters considered and acted upon the meeting included the election of one
(1) member to the SeaChange's Board of Directors to serve for a three-year term
as a Class III Director, and the approval of an amendment to SeaChange's Second
Amended and Restated 1996 Employee Stock Purchase Plan to increase the number of
shares of SeaChange's common stock available for issuance thereunder from
450,000 to 700,000 shares.
Carmine Vona was elected as a Class III Director of the Company with 20,678,085
shares of SeaChange's common stock voted for and 472,906 shares of SeaChange's
common stock withheld from the election of Mr. Vona. In addition, after the
annual meeting, the following persons continued to serve as directors of the
Company: William C. Styslinger, III, Thomas Olson and Martin Hoffmann.
With respect to the approval of the amendment to SeaChange's Second Amended and
Restated 1996 Employee Stock Purchase Plan to increase the number of shares of
SeaChange's common stock available for issuance thereunder from 450,000 to
700,000
23
shares, 22,476,310 shares of SeaChange's common stock voted for, 475,181 shares
of SeaChange's common stock voted against, and 13,083 shares of SeaChange's
common stock abstained from such vote.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Amendment No.1, dated as of June 14, 2002, by and between
SeaChange International, Inc. and Citizen's Bank of
Massachusetts, to that certain Loan and Security Agreement,
dated as of October 22, 2001, by and between SeaChange
International, Inc. and Citizen's Bank of Massachusetts.
(b) Reports on From 8-K.
Not applicable.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, SeaChange International, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 13, 2002
SEACHANGE INTERNATIONAL, INC.
by: /s/ William L. Fiedler
William L. Fiedler
Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer;
Authorized Officer)
CERTIFICATIONS
Each of the undersigned, in his capacity as an officer of SeaChange
International, Inc., provides the following certifications required by 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, and 17 C.F.R. (S)240.13a-14.
I, William C. Styslinger, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SeaChange
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002
By: /s/ William C. Styslinger, III
---------------------------------------
William C. Styslinger, III
President, Chief Executive Officer and
Chairman
I, William L. Fiedler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SeaChange
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 13, 2002
By: /s/ William L. Fiedler
---------------------------------------
William L. Fiedler
Chief Financial Officer, Treasurer,
Secretary and Vice President, Finance
and Administration
Index to Exhibits
Exhibit 10.1 Amendment No.1, dated as of June 14, 2002, by and between
SeaChange International, Inc. and Citizen's Bank of Massachusetts,
to that certain Loan and Security Agreement, dated as of October
22, 2001, by and between SeaChange International, Inc. and
Citizen's Bank of Massachusetts.