<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-12233
PROSPECTUS
2,000,000 Shares
LOGO
COMMON STOCK
----------------
OF THE 2,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 1,715,000
SHARES ARE BEING SOLD BY THE COMPANY AND 285,000 SHARES ARE BEING SOLD BY
THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES
BY THE SELLING STOCKHOLDERS. PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
----------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIESAND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $15 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................... $15.00 $1.05 $13.95 $13.95
Total(3).................... $30,000,000 $2,100,000 $23,924,250 $3,975,750
</TABLE>
- --------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company and the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 300,000 additional Shares at the price
to public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions, proceeds to Company and proceeds to Selling Stockholders
will be $34,500,000, $2,415,000, $25,249,500 and $6,835,500,
respectively. See "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Ropes & Gray, counsel for the Underwriters. It is expected that delivery of
the Shares will be made on or about November 8, 1996 at the office of Morgan
Stanley & Co. Incorporated, New York, New York, against payment therefor in
immediately available funds.
----------------
MORGAN STANLEY & CO.
Incorporated
ALEX. BROWN & SONS
Incorporated
MONTGOMERY SECURITIES
November 4, 1996
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
----------------
UNTIL NOVEMBER 29, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 4
The Company......................... 10
Use of Proceeds..................... 10
Dividend Policy..................... 10
Capitalization...................... 11
Dilution............................ 12
Selected Consolidated Financial
Data............................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business......................... 21
Management....................... 35
Certain Transactions............. 42
Principal and Selling
Stockholders.................... 44
Description of Capital Stock..... 46
Shares Eligible for Future Sale.. 49
Underwriters..................... 51
Legal Matters.................... 52
Experts.......................... 52
Additional Information........... 52
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
----------------
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and with quarterly reports
for the first three quarters of each year containing unaudited consolidated
interim financial information.
----------------
SeaChange(TM), SeaChange SPOT System(TM) and MediaCluster(TM) are trademarks
of the Company. This Prospectus also includes trademarks and tradenames of
companies other than SeaChange International, Inc.
----------------
Except as set forth in the financial statements or as otherwise indicated
herein, all information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option; (ii) reflects the filing, prior to the
consummation of this offering, of the Amendment to the Certificate of
Incorporation of the Company increasing the authorized shares of Common Stock;
(iii) reflects the filing upon the closing of this offering of the Amended and
Restated Certificate of Incorporation of the Company; (iv) reflects, upon the
consummation of this offering, the conversion of all outstanding shares of the
Company's Preferred Stock into shares of Common Stock; (v) reflects the 3-for-
2 split of the Company's capital stock effected prior to the consummation of
this offering and (vi) reflects the 100-for-1 split of the Company's capital
stock effected on August 3, 1995. See "Description of Capital Stock,"
"Underwriters" and Note 8 of Notes to Consolidated Financial Statements.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
4/C
<PAGE>
[INSIDE FRONT COVER]
[PICTURES AND CAPTIONS]
[A GRAPHIC REPRESENTATION OF THE PROCESS FOR
DIGITAL VIDEO DELIVERY APPEARS HERE]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
SeaChange provides software-based products to manage, store and distribute
digital video for cable television operators and telecommunications companies.
The Company's products utilize its proprietary distributed application software
and standard industry components to automate the management and distribution of
short- and long-form video streams including advertisements, movies, news
updates and other video programming requiring precise, accurate and continuous
execution. The Company's digital video products are designed to provide higher
image quality and to be more reliable, easier to use and less expensive than
analog tape-based systems. In addition, SeaChange's products enable its
customers to increase revenues by offering more targeted services such as
geography-specific spot advertising and Video-On-Demand movies.
SeaChange's products address a number of specific markets. The SeaChange SPOT
System is the leading digital advertisement and other short-form video
insertion system for the multichannel television market in terms of
installations in the United States, based on currently available industry
sources and the Company's internal data. The SeaChange SPOT System encodes
analog video forms such as commercials and news updates, stores them in remote
or local digital libraries, and inserts them automatically into television
network streams. The SPOT System provides high run-rate accuracy and video
image quality, permits geographic and demographic specificity of advertisements
and reduces operating costs. The Company has recently introduced the SeaChange
Movie System, which provides long-form video storage and delivery for the
Video-On-Demand and pay-per-view movie markets, and is developing the SeaChange
Programming System, a long-form video storage and delivery product for cable
television operators and telecommunications companies. The SeaChange Media
Management Software operates in conjunction with the SeaChange SPOT System to
automate and simplify complex sales, scheduling and billing processes for the
multichannel television market. The Company also sells its Video Server 100,
which is designed to store and distribute video streams of various lengths, and
MediaCluster, SeaChange's proprietary software technology that enables multiple
Video Server 100s to operate together as an integrated server, to systems
integrators and value added resellers.
The Company's products are installed in over 100 geographic markets in the
United States and 6 internationally. The Company's customers include Comcast
Corporation, Continental Cablevision, NYNEX Video Services Operations Company,
Pacific Telesis Video Services, Tele-Communications, Inc., TELEWEST
Communications Group plc, Time Warner, Inc. and U S WEST, Inc.
THE OFFERING
Common Stock offered............ 2,000,000 shares, including 1,715,000 shares
by the Company and 285,000 shares by the
Selling Stockholders
Common Stock to be outstanding 12,752,012 shares(1)
after this offering............
Use of proceeds................. For general corporate purposes, including
working capital, product development and
capital expenditures. See "Use of Proceeds."
Nasdaq National Market symbol... SEAC
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
PERIOD FROM JULY 9, 1993 DECEMBER 31, JUNE 30,
(INCEPTION) THROUGH -------------- -----------------
DECEMBER 31, 1993 1994 1995 1995 1996
------------------------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues................ $ 213 $5,690 $23,202 $ 11,577 $ 24,354
Income (loss) from oper-
ations................. (17) 203 1,810 1,747 3,350
Net income (loss)....... (18) 155 1,211 1,129 2,122
Net income (loss) per
share(2)............... (.01) .02 .10 .09 .18
Weighted average common
shares and equivalent
common shares
outstanding(2)......... 2,700 9,399 11,575 11,901 11,585
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................................... $ 1,369 $24,443
Total assets............................................. 23,857 46,931
Long-term liabilities.................................... -- --
Redeemable convertible preferred stock................... 4,008 --
Total stockholders' equity............................... 1,373 28,455
</TABLE>
- -------
(1) Based on shares of Common Stock outstanding as of August 31, 1996. Excludes
(i) 681,414 shares of Common Stock issuable upon exercise of options
outstanding as of August 31, 1996, of which options to purchase 41,102
shares were then exercisable and (ii) 1,591,973 shares of Common Stock
reserved for future issuance under the Company's stock plans. See
"Management--Stock Plans" and Note 9 of Notes to Consolidated Financial
Statements.
(2) For an explanation of the determination of the number of shares used in
computing net income (loss) per share, see Note 2 of Notes to Consolidated
Financial Statements.
(3) Pro forma to reflect the conversion of all issued and outstanding shares of
Preferred Stock into shares of Common Stock upon the closing of this
offering and adjusted to reflect the sale of 1,715,000 shares of Common
Stock offered by the Company hereby after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
3
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented
in this Prospectus. This Prospectus contains certain statements of a forward-
looking nature relating to future events or the future financial performance
of the Company. Prospective investors are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, prospective investors should specifically consider
the various factors identified in this Prospectus, particularly the matters
set forth below, which could cause actual results to differ materially from
those indicated by such forward-looking statements.
Limited Operating History and Operating Results. The Company was founded in
July 1993 and commenced shipment of its initial products in the third quarter
of 1994. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
persons, and continue to upgrade its technologies and commercialize products
and services incorporating such technologies. There can be no assurance that
the Company will be successful in addressing such risks. Increases in
operating expenses are expected to continue and may result in a decrease in
operating income. There can be no assurance that the Company will continue to
sustain profitability on a quarterly or annual basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have in the past varied and in the future will be affected
by factors such as: (i) the timing and recognition of revenue from significant
orders, (ii) the seasonality of the placement of customer orders, (iii) the
success of the Company's products, (iv) increased competition, (v) changes in
the Company's pricing policies or those of its competitors, (vi) the financial
stability of major customers, (vii) new product introductions or enhancements
by competitors, (viii) delays in the introduction of products or product
enhancements by the Company, (ix) customer order deferrals in anticipation of
upgrades and new products, (x) the ability to access a sufficient supply of
sole source and third party components, (xi) the quality and market acceptance
of new products, (xii) the timing and nature of selling and marketing expenses
(such as trade shows and other promotions), (xiii) personnel changes, and
(xiv) economic conditions affecting the Company's customers. Any significant
cancellation or deferral of purchases of the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations in any particular quarter, and to the extent significant
sales occur earlier than expected, operating results for subsequent quarters
may be adversely affected. The Company's expense levels are based, in part, on
its expectations as to future revenues, and the Company may be unable to
adjust spending in a timely manner to compensate for any revenue shortfall. If
revenues are below expectations, operating results are likely to be adversely
affected and net income may be disproportionately affected because a
significant portion of the Company's expenses do not vary with revenues.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Due to all of
the foregoing factors, in some future quarter the Company's operating results
may be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
Seasonality. The Company's business has been seasonal with more orders being
placed and greater revenues being recognized in the first and second quarters
than in the third and fourth quarters. The Company believes that the
concentration of order placements in specific quarterly periods is due to
customers' buying patterns and budgeting cycles in the cable television
industry. The Company anticipates that these patterns will continue in the
future. As a result, the Company's results of operations have in the past and
likely will in the future vary seasonally in accordance with such purchasing
activity. Due to the relatively fixed nature of certain of the Company's costs
throughout each quarterly period, including personnel and facilities costs,
the decline of
4
<PAGE>
revenues in any quarter typically results in lower profitability in that
quarter and in such event, the price of the Company's Common Stock would
likely be materially adversely effected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results
of Operations."
Management of Growth. The Company has experienced growth in revenues and
expansion of its operations which have placed significant demands on the
Company's management, administrative and operational resources. Following the
audit of the Company's financial statements for the six months ended June 30,
1996, the Company received a management letter from its independent
accountants which disclosed a reportable condition with respect to inventory
controls that occurred in connection with the implementation of a new
automated accounting system in May 1996. The Company has recently hired
additional accounting and finance personnel, including a chief financial
officer and a new controller, and is implementing additional financial and
management controls, reporting systems and procedures which the Company
believes will correct such reportable condition. However, the Company believes
that further improvements in management and operational controls are needed,
and would continue to be needed to manage any future growth. Continued growth
will also require the Company to hire more technical, selling and marketing,
support and administrative personnel, expand manufacturing and customer
service capabilities, and update or expand management information systems.
There can be no assurance that the Company will be able to attract and retain
the necessary personnel to accomplish its growth strategies or that it will
not experience constraints that will adversely affect its ability to satisfy
customer demand in a timely fashion or to satisfactorily support its customers
and operations. Also, the Company may in the future acquire complementary
service or product lines, technologies or businesses, although the Company has
no present understandings, commitments or agreements with respect to any
significant acquisitions. If the Company's management is unable to manage
growth effectively or integrate any acquisition into the Company's operations
successfully, the Company's business, financial condition and results of
operations could be materially and adversely affected. See "Business--
Employees," "Management--Executive Officers and Directors" and "Use of
Proceeds."
Product Concentration. Sales of the SeaChange SPOT System have accounted for
substantially all of the Company's revenues to date, and this product and
related enhancements are expected to continue to account for a majority of the
Company's revenues at least through 1997. The Company's success depends in
part on continued sales of the SeaChange SPOT System. A decline in demand or
average selling prices for the SeaChange SPOT System product line, whether as
a result of new product introductions by others, price competition,
technological change, inability to enhance the products in a timely fashion,
or otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Products."
Highly Competitive Market. The market for digital video products is highly
competitive. The Company currently competes against suppliers of both analog
tape-based and digital systems in the advertisement insertion market and
against both computer companies offering video server platforms and more
traditional movie application providers in the movie system market. When the
Company introduces products in the television broadcast market, the Company
expects to compete in that market against various computer companies offering
video server platforms and television equipment manufacturers. Due to the
rapidly evolving markets in which the Company competes, additional competitors
with significant market presence and financial resources, including computer
hardware and software companies and television equipment manufacturers, may
enter those markets, thereby further intensifying competition. Increased
competition could result in price reductions and loss of market share which
would adversely affect the Company's business, financial condition and results
of operations. Many of the Company's current and potential competitors have
greater financial, selling and marketing, technical and other resources than
the Company. Moreover, the Company's competitors may also foresee the course
of market developments more accurately than the Company. Although the Company
believes it has certain technological and other advantages over its
competitors, realizing and maintaining such advantages will require a
continued high level of investment by the Company in research and product
development, marketing and customer service and support. There can be no
assurance that the Company will have sufficient resources to continue to make
such investments or that the Company will be able to make the technological
advances necessary to compete successfully with its existing competitors or
with new competitors. See "Business--Competition."
5
<PAGE>
Dependence on Emerging Digital Video Market. Cable television operators and
television broadcasters have historically relied on traditional analog
technology for video management, storage and distribution. Digital video
technology is still a relatively new technology and requires a significant
initial investment of capital. The Company's future growth will depend both on
the rate at which television operators convert to digital video systems and
the rate at which digital video technology expands to additional market
segments. There can be no assurance that the use of digital video technology
will expand among television operators or into additional markets. Any failure
by the market to accept digital video technology will have a material adverse
affect on the Company's business, financial condition and results of
operations. See "Business--Industry Background."
Risks Associated with Expansion into New Markets. To date the Company's
products have been purchased primarily by cable television operators and
telecommunications companies. The Company's success depends in part on the
penetration of new markets. In particular, the Company plans to introduce
several products for use by television broadcasters. These broadcast products
will be directed toward a market that the Company has not previously
addressed. There can be no assurance that the Company will be successful in
marketing and selling these new products to customers in the broadcast
television market. Any inability of the Company to penetrate this new market
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Products."
Risk of New Product Introductions. The Company's future success requires
that it develop and market additional products that achieve significant market
acceptance and enhance its current products. The Company has recently
introduced a new product which enables television operators to provide Video-
On-Demand and scheduled playback services to hotels and apartments. The
success of this product may depend in part on relationships with movie content
providers. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of this and other new products and enhancements, or
that its new products and enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. Announcements of currently
planned or other new product offerings may cause customers to defer purchasing
existing Company products. Moreover, there can be no assurance that, despite
testing by the Company, and by current and potential customers, errors or
failures will not be found in the Company's products, or, if discovered,
successfully corrected in a timely manner. Such errors or failures could cause
delays in product introductions and shipments, or require design modifications
that could adversely affect the Company's competitive position. The Company's
inability to develop on a timely basis new products, enhancements to existing
products or error corrections, or the failure of such new products or
enhancements to achieve market acceptance could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Products" and "--Research and Product Development."
Rapid Technological Change. The markets for the Company's products are
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions and enhancements. Future technological
advances in the television and video industries may result in the availability
of new products or services that could compete with the software-based
solutions provided by the Company or reduce the cost of existing products or
services, any of which could enable the Company's existing or potential
customers to fulfill their video needs better and more cost efficiently than
with the Company's products. The Company's future success will depend on its
ability to enhance its existing digital video products, including the
development of new applications for its technology and to develop and
introduce new products to meet and adapt to changing customer requirements and
emerging technologies. There can be no assurance that the Company will be
successful in enhancing its digital video products or developing,
manufacturing and marketing new products which satisfy customer needs or
achieve market acceptance. In addition, there can be no assurance that
services, products or technologies developed by others will not render the
Company's products or technologies uncompetitive, unmarketable or obsolete, or
that announcements of currently planned or other new product offerings by
either the Company or its competitors will not cause customers to defer or
fail to purchase existing Company solutions. The failure of the Company to
respond to rapidly changing technologies related to digital video could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Products" and "--Research and Product
Development."
6
<PAGE>
Significant Concentration of Customers. The Company's customer base is
highly concentrated among a limited number of large customers, primarily due
to the fact that the cable television and telecommunications industries in the
United States are dominated by a limited number of large companies. A fairly
limited number of customers account for a significant percentage of the
Company's revenues in any year. In 1994 and 1995 and the six months ended June
30, 1996, revenues from the Company's five largest customers represented
approximately 94.7%, 90.9% and 75.1%, respectively, of the Company's total
revenues. In each of 1994, 1995 and the six months ended June 30, 1996, four
customers each accounted for more than 10% of the Company's revenues, one of
which accounted for more than 10% of the Company's revenues in each such
period. The Company generally does not have written continuing purchase
agreements with its customers and does not have any written agreements that
require customers to purchase fixed minimum quantities of the Company's
products. The Company's sales to specific customers tend to vary significantly
from year to year depending upon such customers' budgets for capital
expenditures and new product introductions. In addition, the Company derives a
substantial portion of its revenues from products that have a selling price in
excess of $200,000. The Company believes that revenue derived from current and
future large customers will continue to represent a significant proportion of
its total revenues. The loss of, or reduced demand for products or related
services from, any of the Company's major customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Customers."
Dependence on Sole Source Suppliers and Third Party Manufacturers. Certain
key components of the Company's products are currently purchased from a sole
supplier, including a computer chassis manufactured by Trimm Technologic Inc.,
a disk controller manufactured by Mylex Corporation, an MPEG-2 decoder card
manufactured by Vela Research, Inc. and an MPEG-2 encoder manufactured by
Optivision, Inc. The Company does not have material written supply agreements
with these or any of its suppliers. The Company has in the past experienced
quality control problems, where products did not meet specifications or were
damaged in shipping, and delays in the receipt of such components. These
problems were generally of short duration and did not have a material adverse
effect on the Company. However, the Company may in the future experience
similar types of problems which could be more severe or more prolonged. The
inability to obtain sufficient key components as required, or to develop
alternative sources if and as required in the future, could result in delays
or reductions in product shipments which, in turn, could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the Company relies on a limited number of third parties
who manufacture certain components used in the Company's products. While to
date there has been suitable third party manufacturing capacity readily
available at acceptable quality levels, there can be no assurance that such
manufacturers will be able to meet the Company's future volume or quality
requirements or that such services will continue to be available to the
Company at favorable prices. Any financial, operational, production or quality
assurance difficulties experienced by such third party manufacturers that
result in a reduction or interruption in supply to the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."
Regulation of Telecommunications and Television Industries. The
telecommunications and television industries are subject to extensive
regulation in the United States and other countries. The Company's business is
dependent upon the continued growth of such industries in the United States
and internationally. Although recent legislation has lowered the legal
barriers to entry for telecommunications companies into the United States
multichannel television market, there can be no assurance that such
telecommunications companies will successfully enter this or related markets.
Moreover, the growth of the Company's business internationally is dependent in
part on similar deregulation of the telecommunications industry abroad and
there can be no assurance that such deregulation will occur. Television
operators are also subject to extensive government regulation by the Federal
Communications Commission ("FCC") and other federal and state regulatory
agencies. These regulations could have the effect of limiting capital
expenditures by television operators and thus could have a material adverse
effect on the Company's business, financial condition and results of
operations. The enactment by federal, state or international governments of
new laws or regulations, changes in the interpretation of existing regulations
or a reversal of the trend toward deregulation in these industries could
adversely affect the Company's customers, and thereby materially adversely
affect the Company's business, financial condition and results of operations.
See "Business--Industry Background."
7
<PAGE>
Lengthy Sales Cycle. Digital video products are relatively complex and their
purchase generally involves a significant commitment of capital, with
attendant delays frequently associated with large capital expenditures and
implementation procedures within an organization. Moreover, the purchase of
such products typically requires coordination and agreement among a potential
customer's corporate headquarters and its regional and local operations. For
these and other reasons, the sales cycle associated with the purchase of the
Company's digital video products is typically lengthy and subject to a number
of significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which the Company has little or no control. Based
upon all of the foregoing, the Company believes that the Company's quarterly
revenues, expenses and operating results are likely to vary significantly in
the future, that period-to-period comparisons of its results of operations are
not necessarily meaningful and that, in any event, such comparisons should not
be relied upon as indications of future performance. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of
Operations."
Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering, selling and marketing and
manufacturing personnel, many of whom would be difficult to replace. The
Company does not have employment contracts with its key personnel. The Company
believes its future success will also depend in large part upon its ability to
attract and retain highly skilled managerial, engineering, selling and
marketing, finance and manufacturing personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be successful
in attracting and retaining such personnel. The loss of the services of any of
the key personnel, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel, particularly software
engineers and sales personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Employees" and "Management--Executive Officers and Directors."
Dependence on Proprietary Rights. The Company's success and its ability to
compete is dependent, in part, upon its proprietary rights. The Company relies
primarily on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual provisions to
protect its proprietary rights. There can be no assurance that such measures
will be adequate to protect the Company's proprietary rights. The Company
attempts to ensure that its products and technology do not infringe the
proprietary rights of third parties. The Company received a letter in January
1996 stating that the Company's video insertion system may be utilizing
technology patented by a third party. The Company did not respond to such
letter and has received no further communication from the holder of these
patents. The Company does not believe that its products infringe the patents
mentioned in such letter. However, there can be no assurance that the holder
of these patents or other third parties will not assert infringement claims
against the Company in the future or that any such claim will not be
successful. See "Business--Proprietary Rights."
Risks Associated with International Sales. Prior to 1996, the Company
derived no significant revenues from international operations. International
sales accounted for approximately 7% of the Company's revenues in the first
six months of 1996, and the Company expects that international sales will
account for a significant portion of the Company's business in the future.
However, there can be no assurance that the Company will be able to maintain
or increase international sales of its products. International sales are
subject to a variety of risks, including difficulties in establishing and
managing international distribution channels, in servicing and supporting
overseas products and in translating products into foreign languages.
International operations are subject to difficulties in collecting accounts
receivable, staffing and managing personnel and enforcing intellectual
property rights. Other factors that can also adversely affect international
operations include fluctuations in the value of foreign currencies and
currency exchange rates, changes in import/export duties and quotas,
introduction of tariff or non-tariff barriers and economic or political
changes in international markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Selling and
Marketing."
Concentration of Ownership. Following this offering, the Company's officers,
directors and their affiliated entities, and other holders of 5% or more of
the Company's outstanding capital stock (prior to this offering), together
will beneficially own approximately 66.8% of the outstanding shares of Common
Stock of the Company. As a result, such persons will have the ability to elect
the Company's directors and to determine the outcome of corporate actions
requiring stockholder approval, irrespective of how other stockholders of the
Company may
8
<PAGE>
vote. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company which may be favored by a
majority of the remaining stockholders, or cause a change of control not
favored by the Company's other stockholders. See "Management" and "Principal
and Selling Stockholders."
No Prior Trading Market; Potential Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after this offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price was determined solely by negotiations between the Company and
the Representatives of the Underwriters and therefore may not be indicative of
prices that will prevail in the trading market after this offering. The market
price of the Company's Common Stock could be subject to wide fluctuations in
response to, and may be adversely affected by, variations in quarterly
operating results, changes in earnings estimates by analysts, adverse earnings
or other financial announcements of the Company's customers and market
conditions in the industry, as well as general economic conditions. In
addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many
companies' stock and that often has been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." See
"Underwriters" for a discussion of the factors considered in determining the
initial public offering price.
Shares Eligible for Future Sale. Sales of substantial amounts of shares of
the Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. In addition to the
2,000,000 shares offered hereby, approximately 298,000 shares of Common Stock
outstanding as of August 31, 1996, which are not subject to 180-day lock-up
agreements (the "Lock-Up Agreements") with the representatives of the
Underwriters, will be eligible for sale in the public market in accordance
with Rule 144 or Rule 701 under the Securities Act of 1933, as amended (the
"Securities Act") beginning 90 days after the date of this Prospectus. Upon
expiration of the Lock-Up Agreements, 180 days after the date of this
Prospectus, approximately 6,530,000 additional shares of Common Stock will be
available for sale in the public market, subject to the provisions of Rule 144
or Rule 701 under the Securities Act. At August 31, 1996, approximately 48,000
shares of Common Stock were issued or issuable pursuant to vested options
under the Company's stock plans. Shares issued or issuable upon exercise of
options under these plans generally will be eligible for sale in the public
market, subject to the Lock-Up Agreements. In addition, the holders of
approximately 1,093,000 shares of Common Stock will have certain rights to
registration of their shares under the Securities Act. See "Shares Eligible
for Future Sale," and "Underwriters."
Immediate and Substantial Dilution. Purchasers of shares of Common Stock
offered hereby will suffer an immediate and substantial dilution in the net
tangible book value per share of the Common Stock from the initial public
offering price. See "Dilution."
Potential Adverse Effects of Anti-Takeover Provisions; Availability of
Preferred Stock for Issuance. The Company's Amended and Restated Certificate
of Incorporation and Amended and Restated By-Laws, contain provisions that may
make it more difficult for a third party to acquire, or discourage acquisition
bids for, the Company, including provisions that allow the Board of Directors
to take into account a number of non-economic factors, such as the social,
legal and other effects upon employees, suppliers, customers and creditors,
when evaluating offers for acquisitions of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. In addition, shares of the Company's
Preferred Stock may be issued in the future without further stockholder
approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of any holders of Preferred Stock that may be issued
in the future. The issuance of Preferred Stock or of rights to purchase
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock. See "Description of Capital Stock--Delaware Law and Certain Charter and
By-Law Provisions; Anti-Takeover Effects" and "--Preferred Stock."
9
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in July 1993 under the name SeaView
Technology, Inc. and changed its name to SeaChange Technology, Inc. in
September 1993 and to SeaChange International, Inc. in March 1996. The
Company's principal executive offices are located at 124 Acton Street,
Maynard, Massachusetts, 01754 and its telephone number is (508) 897-0100. As
used in this Prospectus, the "Company" and "SeaChange" refer to SeaChange
International, Inc. and its Delaware subsidiary SeaChange Systems, Inc.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,715,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23,074,250 ($24,399,500 if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses. The Company expects to use the net proceeds for
general corporate purposes, including working capital, product development and
capital expenditures. A portion of the net proceeds may also be used for the
acquisition of businesses, services, products and technologies that are
complementary to those of the Company, although, as of the date of this
Prospectus, the Company has no commitments or agreements with respect to any
significant acquisitions, and no portion of the net proceeds has been
allocated for any specific acquisition. Pending such uses, the net proceeds of
this offering will be invested in investment grade, interest-bearing
securities.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain all of its future earnings for use in the
operation and expansion of the business. In addition, the Company's credit
facility prohibits the Company from paying cash dividends without the bank's
consent. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock, and
(iii) as adjusted to give effect to the sale of 1,715,000 shares of Common
Stock offered by the Company hereby, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Series B redeemable convertible
preferred stock, $.01 par value;
1,000,000 shares of preferred
stock authorized; 650,487 shares
designated, issued and
outstanding at June 30, 1996;
none issued and outstanding pro
forma and as adjusted .......... $ 4,008 -- --
Stockholders' equity:(1)
Series A convertible preferred
stock, $.01 par value;
1,000,000 shares of preferred
stock authorized; 30,000
shares designated, 11,808
shares issued and 10,522
shares outstanding at June 30,
1996; none issued and
outstanding pro forma and as
adjusted...................... 0 -- --
Common Stock, $.01 par value,
15,000,000 shares authorized,
9,631,418 shares issued and
8,775,218 shares outstanding
actual; 50,000,000 shares
authorized, 11,892,274 shares
issued and 11,036,074 shares
outstanding pro forma;
50,000,000 shares authorized,
12,751,074 shares issued and
outstanding as adjusted(2).... 96 $ 119 $ 136
Additional paid-in capital..... 414 4,399 27,456
Retained earnings.............. 3,394 3,394 3,394
Treasury stock, 856,200 shares
of common and 1,286 shares of
Series A convertible preferred
at June 30, 1996 actual, pro
forma and as adjusted......... (2,531) (2,531) (2,531)
------------ ------------ ------------
Total stockholders' equity... 1,373 5,381 28,455
------------ ------------ ------------
Total capitalization....... $ 5,381 $ 5,381 $ 28,455
============ ============ ============
</TABLE>
- --------
(1) Gives effect to the Amendment to the Certificate of Incorporation of the
Company filed prior to the consummation of this offering and the Amended
and Restated Certificate of Incorporation of the Company to be filed upon
the consummation of this offering.
(2) Excludes 681,414 shares of Common Stock issuable upon exercise of stock
options outstanding as of August 31, 1996, of which options to purchase
41,102 shares were then exercisable. Also excludes an additional 1,591,973
shares of Common Stock reserved for future issuance under the Company's
stock plans. See "Management--Stock Plans" and Note 9 of Notes to
Consolidated Financial Statements.
11
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $4,758,300, or $.43 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the net tangible book
value of the Company (total tangible assets less total liabilities) by the
total number of shares of Common Stock outstanding, assuming the automatic
conversion of the outstanding shares of Preferred Stock into Common Stock.
After giving effect to the sale of the 1,715,000 shares of Common Stock
offered by the Company hereby (after deducting underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value of the Company as of June 30, 1996 would have been $27,832,500, or $2.18
per share. This represents an immediate increase in the pro forma net tangible
book value of $1.75 per share to existing stockholders and an immediate
dilution of $12.82 per share to new investors. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $15.00
Pro forma net tangible book value per share before the offer-
ing.......................................................... $.43
Increase in pro forma net tangible book value per share at-
tributable to new
investors.................................................... 1.75
Pro forma net tangible book value per share after the offering.. 2.18
------
Dilution per share to new investors............................. $12.82
======
</TABLE>
The following table summarizes on a pro forma basis as of August 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price
per share paid by the existing stockholders and by the new investors (before
deduction of underwriting discounts and commissions and estimated offering
expenses), assuming the conversion of the outstanding shares of Preferred
Stock into Common Stock:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)(2)............... 11,037,012 86.6% $ 1,957,105 7.1% $ .18
New investors............ 1,715,000 13.4 25,725,000 92.9 15.00
---------- ----- ----------- -----
Total.................. 12,752,012 100.0% $27,682,105 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 10,752,012, or
approximately 84.3%, and will increase the number of shares held by the
new investors to 2,000,000, or approximately 15.7% of the total number of
shares of Common Stock outstanding after this offering. See "Principal and
Selling Stockholders."
(2) The total consideration paid to the Company reflects the repurchase of
Treasury Stock totaling $2,531,200.
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of stock options outstanding at August 31, 1996. As of
August 31, 1996, there were options outstanding to purchase 681,414 shares of
Common Stock at a weighted average exercise price of $4.16 per share and
1,591,973 shares reserved for future issuance under the Company's stock plans.
To the extent any of these options are exercised, there will be further
dilution to new investors. See "Management--Stock Plans" and Note 9 of Notes
to Consolidated Financial Statements.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto, and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in this Prospectus.
The consolidated statement of income data set forth below for the period ended
December 31, 1993, for the years ended December 31, 1994 and 1995 and for the
six months ended June 30, 1996 and the consolidated balance sheet data at
December 31, 1994 and 1995 and at June 30, 1996 are derived from, and are
qualified by reference to, the Company's audited consolidated financial
statements, included elsewhere in this Prospectus, which have been audited by
Price Waterhouse LLP, independent accountants. The consolidated balance sheet
data at December 31, 1993 are derived from the Company's audited consolidated
financial statements not included in this Prospectus. The consolidated
statement of income data for the six months ended June 30, 1995 are derived
from, and are qualified by reference to, the Company's unaudited consolidated
financial statements included elsewhere in this Prospectus. The unaudited
consolidated financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations
for such period. The operating results for the six months ended June 30, 1996
are not necessarily indicative of the results to be expected for any other
interim period or any other future fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 9, 1993
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, --------------- -----------------
1993 1994 1995 1995 1996
------------ ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Revenues:
Systems....................... -- $ 5,037 $21,999 $ 11,015 $ 22,906
Services...................... -- 116 1,203 562 1,448
Software development
contract..................... $ 213 537 -- -- --
------ ------- ------- -------- --------
Total revenues.............. 213 5,690 23,202 11,577 24,354
------ ------- ------- -------- --------
Costs of revenues:
Systems....................... -- 3,406 14,917 7,052 14,430
Services...................... -- 176 1,641 549 1,816
Software development
contract..................... 112 304 -- -- --
------ ------- ------- -------- --------
Total costs of revenues..... 112 3,886 16,558 7,601 16,246
------ ------- ------- -------- --------
Gross profit................... 101 1,804 6,644 3,976 8,108
------ ------- ------- -------- --------
Operating expenses:
Research and development...... 43 885 2,367 1,047 1,986
Selling and marketing......... 16 443 1,609 781 1,910
General and administrative.... 59 273 858 401 862
------ ------- ------- -------- --------
Total operating expenses.... 118 1,601 4,834 2,229 4,758
------ ------- ------- -------- --------
Income (loss) from operations.. (17) 203 1,810 1,747 3,350
Interest income (expense),
net........................... (1) 7 114 47 100
------ ------- ------- -------- --------
Income (loss) before income
taxes......................... (18) 210 1,924 1,794 3,450
Provision for income taxes..... -- 55 713 665 1,328
------ ------- ------- -------- --------
Net income (loss).............. $ (18) $ 155 $ 1,211 $ 1,129 $ 2,122
====== ======= ======= ======== ========
Net income (loss) per share
(1)........................... $ (.01) $ .02 $ .10 $ .09 $ .18
====== ======= ======= ======== ========
Weighted average common shares
and equivalent common shares
outstanding (1)............... 2,700 9,399 11,575 11,901 11,585
====== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1993 1994 1995 1996
------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................. $ 90 $ 154 $ 3,493 $ 1,369
Total assets.................................... 228 3,494 13,595 23,857
Long-term liabilities........................... 125 -- -- --
Deferred revenue................................ 72 152 767 1,835
Total liabilities............................... 246 2,977 8,644 18,476
Redeemable convertible preferred stock.......... -- -- 4,008 4,008
Total stockholders' equity (deficit)............ (18) 517 943 1,373
</TABLE>
- -------
(1) For an explanation of the determination of the number of shares used in
computing net income (loss) per share see Note 2 of Notes to Consolidated
Financial Statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The following discussion contains certain trend
analysis and other statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual results or events may differ materially. In evaluating such statements,
prospective investors should specifically consider the risk factors set forth
below and identified elsewhere in this Prospectus, particularly the matters
set forth under the caption "Risk Factors," which could cause actual results
to differ materially from those indicated by such forward-looking statements.
OVERVIEW
The Company shipped its first digital video insertion product, the SeaChange
SPOT System, in the third quarter of 1994. Through June 30, 1996,
substantially all of the Company's revenues were derived from the sale of
SeaChange SPOT Systems and related services to cable television operators and
telecommunications companies in the United States. Revenues from the sale of
systems is recognized upon shipment provided that there are no uncertainties
regarding customer acceptance and collection of the related receivable is
probable. If uncertainties exist, such as performance criteria beyond the
Company's standard terms and conditions, revenue is recognized upon customer
acceptance. Installation and training revenue is deferred and recognized as
these services are performed. Revenue from technical support and maintenance
contracts is deferred and recognized ratably over the period of the related
agreements, generally twelve months. Customers are billed for installation,
training and maintenance at the time of the product sale and to date, the
Company typically receives at least 50% of the total product and services
sales price at the time of the placement of the purchase order.
The Company's business has been seasonal with more product orders being
placed and greater revenues being generated in the first and second quarters
than in the third and fourth quarters. The Company believes that this
concentration of order placements in specific quarterly periods is due to
customers' buying patterns and budgeting cycles in the cable television
industry. Many television operators want new video insertion systems to be
operational in the third and fourth calendar quarters in order to be able to
respond to higher seasonal advertising demand from their customers in these
periods. The Company expects that these patterns will continue and that, at
least in the near future, the Company's revenues and results of operations
will reflect these seasonal variations.
The Company first achieved profitability in the fourth quarter of 1994. The
Company's profitability is significantly influenced by a number of factors,
including the Company's pricing, the costs of materials used in the Company's
products and the expansion of the Company's operations. The Company prices its
products and services based on its costs as well as the prices of competitive
products and services in the marketplace. Although the Company historically
has not offered discounts or promotional prices for its products and services,
in the third quarter of 1995, the Company decreased the selling price of its
first generation digital video insertion system in anticipation of the
introduction of the second generation system in January 1996. The price
decrease had a negative effect on the Company's gross margin in the last six
months of 1995 and the first six months of 1996. The costs of the Company's
products primarily consist of the costs of components and subassemblies. The
costs of such materials have generally declined over time. As a result of the
expansion of the Company's operations, operating expenses of the Company have
increased in the areas of research and development, selling and marketing, and
customer service and support and related infrastructure. The Company
anticipates the addition of personnel and related infrastructure as it seeks
to increase revenue, develop new products, enter new markets and expand
internationally.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in the Company's
Consolidated Statement of Income. Gross profit shown for systems and services
revenues at the bottom of the table is stated as a percentage of related
revenues.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 9, 1993
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, --------------- -------------------
1993 1994 1995 1995 1996
------------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Systems................. -- 88.5 % 94.8 % 95.1 % 94.1%
Services................ -- 2.0 5.2 4.9 5.9
Software development
contract............... 100.0 % 9.5 -- -- --
----- ------ ------ -------- --------
Total revenues........ 100.0 100.0 100.0 100.0 100.0
----- ------ ------ -------- --------
Cost of revenues:
Systems................. -- 59.9 64.3 61.0 59.2
Services................ -- 3.1 7.1 4.7 7.5
Software development
contract............... 52.4 5.3 -- -- --
----- ------ ------ -------- --------
Total costs of reve-
nues................. 52.4 68.3 71.4 65.7 66.7
----- ------ ------ -------- --------
Gross profit.............. 47.6 31.7 28.6 34.3 33.3
----- ------ ------ -------- --------
Operating expenses:
Research and develop-
ment................... 20.2 15.5 10.2 9.0 8.2
Selling and marketing... 7.6 7.8 6.9 6.7 7.8
General and administra-
tive................... 27.7 4.8 3.7 3.5 3.5
----- ------ ------ -------- --------
Total operating ex-
penses............... 55.5 28.1 20.8 19.2 19.5
----- ------ ------ -------- --------
Income (loss) from opera-
tions.................... (7.9) 3.6 7.8 15.1 13.8
Interest income (expense),
net...................... (.5) .1 .5 .4 .4
----- ------ ------ -------- --------
Income (loss) before in-
come taxes............... (8.4) 3.7 8.3 15.5 14.2
Provision for income tax-
es....................... -- 1.0 3.1 5.7 5.5
----- ------ ------ -------- --------
Net income (loss)......... (8.4)% 2.7 % 5.2 % 9.8 % 8.7%
===== ====== ====== ======== ========
Gross profit:
Systems................. -- 32.4 % 32.2 % 36.0 % 37.0%
Services................ -- (52.0) (36.4) 2.4 (25.4)
</TABLE>
Revenues
Systems. The Company's systems revenues consist of sales of its digital
video insertion products. The Company had no systems revenues in the period
ended December 31, 1993. The Company sold its first digital video insertion
systems in the third quarter of 1994. Systems revenues increased 337% from
$5.0 million in 1994 to $22.0 million in 1995, and increased 108% from $11.0
million for the six months ended June 30, 1995 to $22.9 million for the six
months ended June 30, 1996. The increases in systems revenues resulted from
the increase in the number of the Company's digital video insertion systems
sold to television operators in the United States, partially offset in 1995
and the first six months of 1996 by the price reduction on first generation
systems. The increased systems revenues in the first six months of 1996
reflect the Company's introduction of the second generation of its video
insertion system, which significantly expanded the scalability and performance
of the Company's digital video insertion products, and the subsequent increase
in the number of systems sold.
For the years ended December 31, 1994 and 1995 and for the six months ended
June 30, 1996, sales to the Company's five largest customers represented
approximately 94.7%, 90.9% and 75.1%, respectively, of the Company's total
revenues. In each of 1994, 1995 and the six months ended June 30, 1996, four
customers each
15
<PAGE>
accounted for more than 10% of systems revenues, one of which accounted for
more than 10% of the Company's revenues in each such period. The Company
believes that revenues derived from current and future large customers will
continue to represent a significant proportion of total revenues. See "Risk
Factors--Significant Concentration of Customers" and "Business--Customers."
Prior to 1996, the Company derived no significant revenues from
international operations. International sales accounted for approximately 7%
of the Company's revenues in the first six months of 1996, and the Company
expects that international sales will account for a significant portion of the
Company's business in the future. As of September 30, 1996, all sales of the
Company's products have been made in United States dollars and the Company
expects this practice to continue in the foreseeable future. Therefore, the
Company has not experienced, nor does it expect to experience in the near
term, any impact from fluctuations in foreign currency exchange rates on its
results of operations or liquidity. If this practice changes in the future,
the Company will re-evaluate its foreign currency exchange rate risk.
Services. The Company's services revenues consist of fees for installation,
training, product maintenance and technical support services. The Company had
no services revenues in the period ended December 31, 1993. Services revenues
increased 936% from $116,000 in 1994 to $1.2 million in 1995, and increased
157% from $562,000 for the six months ended June 30, 1995 to $1.4 million for
the six months ended June 30, 1996. These increases in services revenues
primarily resulted from the increase in product sales and renewals of
maintenance and support contracts related to the growing installed base of
systems.
Software Development Contract. The Company's software development contract
revenues consisted of revenues related to a software development contract
between the Company and a computer hardware company. Such revenue was
recognized pursuant to the related agreement as work was performed and defined
milestones were attained. The Company recognized revenue of $213,000 and
$537,000 for the period ended December 31, 1993 and for the year ended
December 31, 1994, respectively. The costs associated with this contract
during the period ended December 31, 1993 and the year ended December 31, 1994
were $112,000 and $304,000, respectively. The Company substantially completed
its contract obligations in 1994.
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, testing and quality control of complete systems and related
expenses. Costs of systems revenues increased 338% from $3.4 million in 1994
to $14.9 million in 1995, and 105% from $7.1 million for the six months ended
June 30, 1995 to $14.4 million for the six months ended June 30, 1996. The
increases in costs of systems revenues primarily reflect the overall growth in
systems sales, partially offset by the change in product mix upon the
introduction of the second generation video insertion product in January 1996
and the decreasing costs of components and subassemblies.
Systems gross margins were 32.4% of systems revenues in 1994 and 32.2% of
systems revenues in 1995 and increased from 36.0% of systems revenues in the
six months ended June 30, 1995, to 37.0% of systems revenues in the six months
ended June 30, 1996. While the annual systems gross margins for 1994 and 1995
were fairly consistent, quarterly systems gross margins during 1995 fluctuated
significantly. Systems gross margins for the first and second quarters were
favorably impacted as a result of improved product design and of the Company
achieving certain manufacturing efficiencies associated with the increased
sales volume. Systems gross margins for the third and fourth quarters of 1995
were negatively impacted by the price reduction described above and thus were
lower than the first two quarters of 1995. The increase in systems gross
margins from the six months ended June 30, 1995 to the six months ended June
30, 1996 reflects design improvements in the second generation video insertion
product as well as lower costs of certain purchased components and
subassemblies. This increase was partially offset by an increase of $414,000
in the Company's inventory valuation allowance, during the six-month period
ended June 30, 1996. The Company evaluates inventory levels and expected usage
on a periodic basis and provides a valuation allowance for estimated inactive,
obsolete and surplus inventory.
16
<PAGE>
Services. Costs of services revenues consist primarily of the costs of
labor, materials and overhead relating to the installation, training, product
maintenance and technical support services provided by the Company. Costs of
services revenues increased 830% from $176,000 in 1994 to $1.6 million in
1995, and 231% from $549,000 for the six months ended June 30, 1995 to $1.8
million for the six months ended June 30, 1996. For the years ended December
31, 1994 and 1995 and the six month periods ended June 30, 1995 and 1996 costs
of services revenues exceeded or approximately equalled services revenues,
primarily as a result of the costs associated with the Company building a
service organization to support the installed base of systems.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of compensation of development personnel, depreciation of equipment,
and an allocation of related facility expenses. Research and development
expenses increased from $43,000 for the period ended December 31, 1993 to
$885,000 for 1994, 168% to $2.4 million in 1995, and 90% from $1.0 million for
the six months ended June 30, 1995 to $2.0 million for the six months ended
June 30, 1996. These increases were primarily attributable to the hiring of
additional development personnel. The Company anticipates that it will
continue to devote substantial resources to its research and development
efforts and that research and development expenses will increase in dollar
amount for the remainder of 1996 and in 1997.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation expenses, including sales commissions and travel expenses, and
certain promotional expenses. Selling and marketing expenses increased from
$16,000 for the period ended December 31, 1993 to $443,000 in 1994, 263% to
$1.6 million in 1995, and 145% from $781,000 for the six months ended June 30,
1995 to $1.9 million for the six months ended June 30, 1996. These increases
reflect the hiring of additional selling and marketing personnel, expanded
promotional activities, and increased commissions relating to increased
revenues. The Company expects that selling and marketing expenses will
continue to increase in dollar amount as the Company hires additional
personnel and expands selling and marketing activities for the remainder of
1996 and in 1997.
General and Administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services as well as an
allocation of related facility expenses. General and administrative expenses
increased from $59,000 for the period ended December 31, 1993 to $273,000 for
1994, 214% to $858,000 in 1995, and 115% from $401,000 for the six months
ended June 30, 1995 to $862,000 for the six months ended June 30, 1996. These
increases were primarily due to increased staffing and associated expenses
necessary to manage and support the expansion of the Company's operations. The
Company believes that its general and administrative expenses will increase in
dollar amount for the remainder of 1996 and in 1997 as a result of an
expansion of the Company's administrative staff to support its growing
operations and as a result of expenses associated with being a public company.
Provision for Income Taxes
The Company incurred a net loss and consequently recorded no federal or
state income tax expenses for the period ended December 31, 1993. Net
operating loss carryforwards resulting from this net loss were fully utilized
in 1994 and, together with the effects of the research and development tax
credit, resulted in an effective tax rate for 1994 of 26.2%. In 1995 and for
the six months ended June 30, 1995, the Company recorded a tax provision for
federal and state income taxes at an effective rate of 37.1%. In the period
ended June 30, 1996, the Company recorded a provision for income taxes at an
effective rate of 38.5%.
17
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly information for the
six quarters ended June 30, 1996 in dollars and as a percentage of the
Company's revenues. Gross profit shown for systems and services revenues at
the bottom of the table is stated as a percentage of related revenues. This
information is derived from unaudited financial statements and has been
prepared on the same basis as the Company's audited financial statements which
appear elsewhere in this Prospectus. In the opinion of the Company's
management, this data reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information
when read in conjunction with the Company's Consolidated Financial Statements
and Notes thereto. The results for any quarter are not necessarily indicative
of future quarterly results of operations, and the Company believes that
period-to-period comparisons should not be relied upon as an indication of
future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME DATA:
Revenues:
Systems................ $4,544 $6,471 $5,340 $5,644 $ 9,684 $13,222
Services............... 262 300 281 360 545 903
------ ------ ------ ------ ------- -------
Total revenues......... 4,806 6,771 5,621 6,004 10,229 14,125
------ ------ ------ ------ ------- -------
Costs of revenues:
Systems................ 2,994 4,058 3,598 4,267 6,342 8,088
Services............... 213 336 480 612 729 1,087
------ ------ ------ ------ ------- -------
Total costs of
revenues.............. 3,207 4,394 4,078 4,879 7,071 9,175
------ ------ ------ ------ ------- -------
Gross profit............ 1,599 2,377 1,543 1,125 3,158 4,950
------ ------ ------ ------ ------- -------
Operating expenses:
Research and
development........... 484 563 626 694 992 994
Selling and marketing.. 295 486 356 472 755 1,155
General and
administrative........ 208 193 234 223 294 568
------ ------ ------ ------ ------- -------
Total operating
expenses.............. 987 1,242 1,216 1,389 2,041 2,717
------ ------ ------ ------ ------- -------
Income (loss) from
operations............. 612 1,135 327 (264) 1,117 2,233
Interest income
(expense), net......... 29 18 11 56 48 52
------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 641 1,153 338 (208) 1,165 2,285
Provision (benefit) for
income taxes........... 237 428 125 (77) 446 882
------ ------ ------ ------ ------- -------
Net income (loss)....... $ 404 $ 725 $ 213 $ (131) $ 719 $ 1,403
====== ====== ====== ====== ======= =======
<CAPTION>
AS A PERCENTAGE OF REVENUES
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Systems................ 94.5 % 95.6 % 95.0 % 94.0 % 94.7 % 93.6%
Services............... 5.5 4.4 5.0 6.0 5.3 6.4
------ ------ ------ ------ ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------- -------
Costs of revenues:
Systems................ 62.3 59.9 64.0 71.1 62.0 57.3
Services............... 4.4 5.0 8.5 10.2 7.1 7.7
------ ------ ------ ------ ------- -------
Total costs of
revenues.............. 66.7 64.9 72.5 81.3 69.1 65.0
------ ------ ------ ------ ------- -------
Gross profit............ 33.3 35.1 27.5 18.7 30.9 35.0
------ ------ ------ ------ ------- -------
Operating expenses:
Research and
development........... 10.1 8.3 11.2 11.5 9.7 7.0
Selling and marketing.. 6.2 7.2 6.3 7.9 7.4 8.2
General and
administrative........ 4.3 2.9 4.2 3.7 2.9 4.0
------ ------ ------ ------ ------- -------
Total operating
expenses.............. 20.6 18.4 21.7 23.1 20.0 19.2
------ ------ ------ ------ ------- -------
Income (loss) from
operations............. 12.7 16.7 5.8 (4.4) 10.9 15.8
Interest income
(expense), net......... .6 .3 .2 .9 .5 .4
------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 13.3 17.0 6.0 (3.5) 11.4 16.2
Provision (benefit) for
income taxes........... 4.9 6.3 2.2 (1.3) 4.4 6.2
------ ------ ------ ------ ------- -------
Net income (loss)....... 8.4 % 10.7 % 3.8 % (2.2)% 7.0 % 10.0%
====== ====== ====== ====== ======= =======
Gross profit:
Systems................ 34.1 % 37.3 % 32.6 % 24.4 % 34.5 % 38.8%
Services............... 18.8 (11.9) (71.1) (70.0) (33.7) (20.5)
</TABLE>
18
<PAGE>
The Company has experienced significant variations in revenues, expenses and
operating results from quarter to quarter and such variations are likely to
continue. A significant portion of the Company's revenues have been generated
from a limited number of customers and it is difficult to predict the timing
of future orders and shipments to these and other customers. Customers can
cancel or reschedule shipments, and development or production difficulties
could delay shipments. See "Business--Customers."
The Company has also experienced significant variations in its quarterly
gross margins. In the third quarter of 1995, the Company decreased the selling
price of its first generation SeaChange SPOT digital video insertion system in
anticipation of the introduction of the second generation system in January
1996. This price reduction had a negative impact on the Company's systems
gross margins in the last two quarters of 1995 and the first quarter of 1996.
Quarterly services gross margins have historically fluctuated significantly
since services revenue is recognized upon the completion of installation and
training services, the timing of which may vary, while the related costs are
incurred and recognized ratably.
Operating expenses also vary with the number, timing and significance of new
product and product enhancement introductions by the Company and its
competitors, increased competition, changes in pricing policies by the Company
or its competitors, the gain or loss of significant customers, the hiring of
new personnel and general economic conditions. All of the above factors are
difficult for the Company to forecast, and these or other factors may
materially adversely effect the Company's business, financial condition and
results of operations for one quarter or a series of quarters. Only a small
portion of the Company's expenses vary with revenues in the short-term and
there would likely be a material adverse effect on the operating results of
the Company if revenues are lower than expectations.
Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "Risk Factors--Fluctuations in Quarterly Operating Results"
and "--Seasonality."
RECENT OPERATING RESULTS
The following table shows certain unaudited financial data for the quarters
ended September 30, 1995 and September 30, 1996. The Company believes that
this information reflects all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information for the
period presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue............................ $5,621 $12,926
------ -------
Income from operations............. 327 2,177
------ -------
Net income......................... 213 1,426
====== =======
Net income per share............... .02 .12
====== =======
Weighted average common shares and
equivalent common shares
outstanding....................... 12,208 11,590
====== =======
</TABLE>
The financial data for the quarter ended September 30, 1996 set forth above
is generally consistent with the historic seasonality of the Company's
business and the other trends discussed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash provided by operations and the private sale of equity securities.
19
<PAGE>
Net cash provided by operating activities was $90,000, $618,000, and $2.8
million for the period ended December 31, 1993, and the years ended December
31, 1994 and 1995, respectively. The increase in 1994 was primarily the result
of an increase in customer deposits, which represent advance payments from
customers. Cash flows related to customer deposits are dependent upon the
timing, volume and size of customer orders. The increase in 1995 was primarily
attributable to the increased profitability of the Company's operations, and
increases in accounts payable and accrued expenses, partially offset by
increases in accounts receivable, related to the increase in overall product
revenues, and increased inventory procurement, in anticipation of the
introduction of the Company's second generation digital video insertion system
in early 1996. Net cash provided by operating activities for the six month
periods ended June 30, 1995 and 1996 increased from $265,000 to $905,000. The
increase is primarily the result of the increased profitability of the
Company's operations together with an increase in accounts payable and
customer deposits partially offset by increases in accounts receivable and
inventories.
The Company's investing activities used net cash of $14,000, $207,000 and
$659,000 in the period ended December 31, 1993, and the years ended December
31, 1994 and 1995, respectively, and $245,000 and $1.1 million for the six
months ended June 30, 1995 and 1996, respectively. The principal uses of cash
have been for capital expenditures related to the acquisition of computer
equipment, office furniture and other capital equipment required to support
the expansion and growth of the business. In addition, in June 1996 the
Company paid $450,000 for a software license related to software to be
sublicensed to customers.
The Company's financing activities provided net cash of $133,000, $251,000
and $3.2 million in the period ended December 31, 1993, and the years ended
December 31, 1994 and 1995, respectively, primarily through proceeds from the
private sale of equity securities. In 1995, the cash provided by financing
activities included $4.0 million received in connection with the issuance of
the Series B Convertible Preferred Stock, partially offset by a $795,000 cash
outlay related to loans to stockholders. For the six months ended June 30,
1996, cash used in financing activities totaled $1.7 million consisting of the
repurchase of shares of the Company's Common Stock and Series A Convertible
Preferred Stock from certain employees and directors of the Company, net of
the repayment of loans to stockholders.
The Company's future capital requirements will depend on many factors,
including revenue growth, the timing and extent of spending to support
development efforts, the timing of new product introductions and enhancements
to existing products, and market acceptance of the Company's products. There
can be no assurance that additional equity or debt financing, if required,
will be available at acceptable terms, or at all. As of September 30, 1996,
the Company had no material commitments for capital expenditures.
At June 30, 1996 the Company's principal sources of liquidity included $4.2
million of cash and cash equivalents and working capital of approximately $1.4
million. The Company believes that the net proceeds of this offering, together
with available funds and cash generated from operations will be sufficient to
meet the Company's cash requirements for at least the next twelve months. In
September 1996 the Company entered into a $6.0 million revolving line of
credit and a $1.5 million equipment line of credit (the "Lines of Credit")
with a bank. The revolving line of credit expires on September 24, 1997 and
the equipment line of credit expires on March 31, 1997. Borrowings under the
Lines of Credit are secured by substantially all of the Company's assets.
Loans made under the revolving line of credit will bear interest at a rate per
annum equal to, at the Company's option, the bank's base rate or the LIBOR
rate plus an applicable margin. Loans made under the equipment line of credit
will bear interest at a rate per annum equal to the bank's base rate. The loan
agreement relating to the Lines of Credit requires that the Company provide
the bank with certain periodic financial reports and comply with certain
financial ratios. As of September 30, 1996, the Company had not borrowed
against either of these lines.
20
<PAGE>
BUSINESS
SeaChange provides software-based products to manage, store and distribute
digital video for cable television operators and telecommunications companies.
The Company's products utilize its proprietary distributed application
software and standard industry components to automate the management and
distribution of short- and long-form video streams including advertisements,
movies, news updates and other video programming requiring precise, accurate
and continuous execution. The Company's digital video products are designed to
provide higher image quality and to be more reliable, easier to use and less
expensive than analog tape-based systems. In addition, SeaChange's products
enable its customers to increase revenues by offering more targeted services
such as geography-specific spot advertising and Video-On-Demand movies.
SeaChange's products address a number of specific markets. The SeaChange
SPOT System is the leading digital advertisement and other short-form video
insertion system for the multichannel television market in terms of
installations in the United States, based on currently available industry
sources and the Company's internal data. The SeaChange SPOT System encodes
analog video forms such as commercials and news updates, stores them in remote
or local digital libraries, and inserts them automatically into television
network streams. The SPOT System provides high run-rate accuracy and video
image quality, permits geographic and demographic specificity of
advertisements and reduces operating costs. The Company has recently
introduced the SeaChange Movie System, which provides long-form video storage
and delivery for the Video-On-Demand and pay-per-view movie markets and is
developing the SeaChange Programming System, a long-form video storage and
delivery product for cable television operators and telecommunications
companies. The SeaChange Media Management Software operates in conjunction
with the SeaChange SPOT System to automate and simplify complex sales,
scheduling and billing processes for the multichannel television market. The
Company also sells its Video Server 100, which is designed to store and
distribute video streams of various lengths, and MediaCluster, SeaChange's
proprietary software technology that enables multiple Video Server 100s to
operate together as an integrated video server, to systems integrators and
value added resellers ("VARs"). In addition, the Company is developing digital
play-to-air systems for the broadcast television industry.
The Company's products are installed in over 100 geographic markets in the
United States and 6 internationally. The Company's customers include Comcast
Corporation, Continental Cablevision, NYNEX Video Services Operations Company,
Pacific Telesis Video Services, Tele-Communications, Inc., TELEWEST
Communications Group plc, Time Warner, Inc. and U S WEST, Inc.
INDUSTRY BACKGROUND
Television operators, the largest users of professional quality video,
historically have relied on analog technology for the storage and distribution
of video streams. Analog systems, which use video tapes as the primary
mechanism for the storage and distribution of video, have substantial
limitations. Analog tapes and their associated playback mechanisms are subject
to mechanical failure and generational loss of video quality. Analog tape-
based systems also require significant manual intervention, which makes them
expensive and cumbersome to operate and also limits their flexibility for
programming changes. Finally, analog tapes are bulky and have limited storage
capacity.
Over the past decade, the limitations of analog tape-based systems have
become increasingly apparent. Changes in government regulation and increased
competition have forced television operators to seek new revenue sources and
reduce costs. In addition, television operators are increasingly seeking to
offer new and enhanced video services while simultaneously improving the
efficiency of their operations. While analog tape-based systems are sufficient
for some traditional applications, they do not meet the performance and cost
requirements of these new, targeted applications.
Cable Television Operators & Telecommunications Companies
According to industry sources, there are over 11,000 cable systems currently
in the United States, serving approximately 64 million households. In 1995,
57.3% of all cable systems provided between 30 and 53 channels
21
<PAGE>
of programming as compared to 35.9% in 1985. Because cable television
programming is sent over broadband lines, operators can segment and target
their programming to viewers in selected geographies. In addition, the
continuing growth in cable television's multiple specialized programming
networks, such as CNN, MTV and ESPN and newer networks such as Black
Entertainment Television, the Discovery Channel and Nickelodeon, allow
advertisers to target viewers in selected demographic profiles.
Despite this advantage over television broadcasters, cable television
operators historically have not realized advertising revenues in proportion to
their share of television viewers. According to industry sources, in 1995, 36%
of all television viewers were watching cable networks, yet cable television
advertising revenue accounted for only 16% of the total television advertising
revenue. In addition, advertising represents the major source of revenue for
television broadcasters, while most cable television operators derive less
than 5% of their gross revenue from advertising. The limitations of analog
tape-based technology are a major factor which has prevented cable television
operators from historically exploiting their advantages over television
broadcasters. Analog systems are difficult to manage in multichannel and
multi-zone environments, resulting in relatively poor video insertion accuracy
and high operating costs.
Video-On-Demand represents a new opportunity for cable television operators.
Industry sources project that the Video-On-Demand market will generate
approximately $1.8 billion in revenues for cable television operators in 1999.
Increased channel capacity through the installation of fiber optic cables is
providing many cable television operators with the capacity to offer Video-On-
Demand programming capability to hotels and apartments. However, these complex
applications which demand reliable, rapid and cost-effective management and
operation are not as practical or feasible with existing analog technology.
The recent deregulation of the United States telecommunications industry has
lowered the legal barriers to entry for telecommunications companies to enter
the multichannel video delivery market. Telecommunications companies are
attempting to capitalize on the new growth opportunities by acquiring existing
cable television operators and by leveraging their existing telephony networks
to establish new multichannel video delivery operations. However,
telecommunications companies face the same limitations as cable television
operators in cost-effectively offering targeted, value-added services with
analog tape-based systems.
Increased demand for video and audio content over the Internet will require
a substantial increase in storage capacity and bandwidth over time. The
Company believes that cable television operators and telecommunications
companies will play an integral role in providing these broadband Internet
applications. The Company also believes that in order to offer high quality
video applications over the Internet, cable television operators and
telecommunications companies will need storage and distribution products
capable of complex management and scheduling of video data streams.
Television Broadcasters
The more than 1,500 broadcast stations in the United States, including
network affiliates and independent stations, face many of the same
technological issues as cable television operators. Additionally, television
broadcasters rely on advertising for nearly all of their revenue and require
high advertisement run-rate reliability and image quality. To date, television
broadcasters have utilized tape-based systems with robotic libraries, which
are cumbersome and require high levels of maintenance and manual intervention
to ensure that the needed performance requirements are met. Also, the video
tapes in these systems need to be replaced frequently due to repeated use.
In addition, many broadcasters are contemplating the use of the cable
infrastructure for the delivery of geography-specific advertising. These
broadcasters will insert targeted advertising into their television signals
and distribute them directly, often via microwave, to cable operators'
distribution sites. If this application develops, television operators will
require video storage and delivery systems that can effectively manage and
deliver multiple television signals to targeted markets.
22
<PAGE>
Initial Digital Video Products
Over the past five years, several companies have introduced digital video
products aimed at addressing the limitations of analog tape-based systems.
These products generally have been expensive, not scalable, difficult to
program and have poor video quality. In addition, many initial digital video
products have required users to integrate several components from different
vendors to create a complete solution, which is time consuming,
technologically difficult and often results in poor system performance.
THE SEACHANGE SOLUTION
SeaChange develops, markets and supports software-based digital video
solutions designed to enhance its customers' ability to store, retrieve,
manage and distribute short- and long-form video streams, including
advertisements, movies, news updates and other video programming requiring
precise, accurate and continuous execution. The Company's solutions are based
on five core areas of functionality: (i) real-time conversion of analog video
into digital video format; (ii) storage and retrieval of video content to and
from digital libraries; (iii) scheduled distribution of video streams between
digital libraries via local and wide area data networks; (iv) delivery of
video streams over single and multiple channels; and (v) management of video
sales, scheduling, billing and execution of related business transactions.
SeaChange uses these core capabilities to provide solutions to a number of
commercial markets. The Company's products are designed to provide a
consistent set of features and benefits, including:
Viewer Targeting. The Company's digital video products enable television
operators to efficiently target viewers in specific demographic or
geographic groups. The ability to target selected viewers enables
television operators to increase revenues by offering more targeted
services. The SeaChange SPOT System offers this capability to television
operators, while the SeaChange Movie System makes it possible for
television operators to offer Video-On-Demand movies to individual hotel
rooms or apartments.
Cost Reduction. The Company's products are designed to provide its
customers operating cost reductions as compared to analog tape-based
systems due to, among other things, the elimination of video tapes and
their storage and lower operating personnel requirements. The Company is
also able to price its products on a competitive basis by using standard
operating systems and components. The Company believes that the combination
of competitive pricing of its products and reductions in the operating
costs of its customers results in attractive pay-back periods on customers'
initial capital outlay for the Company's products.
Scalability. The Company's products are scalable to the needs of a
particular cable television operator or television broadcaster whether
operating in a single channel system concentrated in one specific zone or a
system with hundreds of channels serving multiple zones and markets.
Moreover, the Company's proprietary storage technology enables the
scalability of storage of digital video from a few minutes to hundreds of
hours of video.
Reliability. The Company's products eliminate the need for traditional
mechanical tape-based systems, thereby reducing the likelihood of
breakdowns. Furthermore, through the use of redundant components and
proprietary storage technology and application software, SeaChange's
products are designed to be fault resilient, providing the high reliability
required for television operations.
Scheduling Flexibility. The digitizing and storage of video streams allows
advertisements, news updates and movies to be inserted on channels in local
communities and allows cable television operators to insert or delete video
content rapidly. This flexibility enables the provision of services such as
Video-On-Demand movies and provides advertisers and television broadcasters
the opportunity to insert new video content on short notice.
Video Image Quality. Because digital video streams do not degrade with
playback, image content and quality remain at the original professional
level even after multiple airings.
Ease of Use. The Company's products are simple to learn, require less
maintenance, and are less personnel intensive than analog systems. Due to
their innovative architecture, the Company's products offer a number of
features that simplify their use, including remote monitoring and service
and automated short- and long-form video distribution.
23
<PAGE>
STRATEGY
SeaChange's objective is to be a leader in the emerging market for the
storage, management and distribution of professional quality digital video.
The key elements of the Company's strategy are to:
Develop Long-Term Customer Relationships. The Company is focusing its
product development, marketing and direct sales efforts on developing long-
term customer relationships with cable television operators,
telecommunications companies and television broadcasters in the United
States and, more recently, internationally. The Company has formed its
customer relationships by providing software- based digital video solutions
to address customers' immediate problems, such as advertisement and other
short-form video insertion. The Company intends to continue to leverage its
customer relationships to offer new, compatible products to meet evolving
market needs, such as Video-On-Demand programming. The Company believes
that the fundamental shift from analog to digital video and the growing
emphasis on interactive technologies will continue to present opportunities
for the Company to develop, market and support its products to both its
existing customer base and to customers in additional markets.
Offer Complete Solutions. SeaChange's customers operate complex networks
that require the delivery and management of video programming across
multiple channels and target zones. SeaChange believes television operators
desire complete solutions that integrate all steps of digital video
delivery from scheduling to post-air verification and billing. To address
these needs, SeaChange provides integrated applications and support
services which are more valuable to customers than individual functional
products not specifically designed to work together. The Company believes
that providing complete solutions has been a significant factor in its
success and will be an increasingly important competitive advantage.
Establish and Maintain Technological Leadership Through Software. SeaChange
believes its competitive position is dependent in large part on the
features and performance of its application and network and storage
software. As a result, the Company focuses a majority of its research and
development efforts on introducing new software applications and improving
its current software. The Company seeks to use standard hardware components
wherever possible to maintain its focus on software development.
Provide Superior Customer Service and Support. The Company's products
operate in environments where continuous operation is critical. As a
result, the Company believes that providing a high level of service and
support gives it a competitive advantage and is a differentiating factor in
developing key customer relationships. The Company's in-depth industry and
application knowledge allows it to better understand the service needs of
its customers. As of August 31, 1996, more than 25% of the Company's
employees were dedicated to customer service and support, including project
design and implementation, installation and training. In addition, using
remote diagnostic and communications features embedded in the Company's
products, the service organization has the ability to monitor the
performance of customer installations and, in most cases, rectify problems
remotely. Customers have access to service personnel via 24-hour, seven-day
a week telephone support.
PRODUCTS
SeaChange develops digital video products and related applications for the
television industry. Its products are marketed to cable television operators,
telecommunication companies, television broadcasters, systems integrators and
VARs.
SeaChange SPOT System
The SeaChange SPOT System automates the complex process of advertisement and
other video insertion across multiple channels and geographic zones for cable
television operators and telecommunications companies. Through its proprietary
software, the SeaChange SPOT System allows cable television operators to
insert local and regional advertisements and other short-form video streams
into the time allocated for these video streams by cable television networks
such as CNN, MTV, ESPN, Black Entertainment Television, the Discovery Channel
and Nickelodeon.
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The SeaChange SPOT System is an integrated solution composed of software
applications, hardware platforms, data networks and easy to use graphical
interfaces. The SeaChange SPOT System is designed to be installed at local
cable transmission sites, known as headends, and advertising sales business
offices. The SeaChange video insertion process consists of six steps:
Encoding: The process begins with the SeaChange Encoding Station, which is
based on SeaChange's proprietary encoding software, where analog-
based short- and long-form video is digitized and compressed in
real-time using standard MPEG-2 hardware.
Storage: Digital video is then stored in a disk-based video library,
capable of storing thousands of spots, where the SeaChange SPOT
System organizes, manages and stores these video streams.
Scheduling: SeaChange's scheduling and management software coordinates with
the traffic and billing application to determine the designated
time slot, channel and geographic zone for each video stream.
Distribution:
SeaChange's strategic digital video software then copies the video
streams from the master video library and distributes them over
the operator's data network to headends, where they are stored in
video servers for future play.
Insertion: Following a network cue, the SeaChange video switch module
automatically initiates the conversion of video streams to analog
and inserts them into the network feed, where they are then seen
by television viewers.
Verification:
After the video streams run, SeaChange's proprietary software and
hardware verifies the content, accuracy, timing and placement of
such video streams to facilitate proper customer billing.
[A GRAPHIC REPRESENTATION OF THE SEACHANGE SPOT
SYSTEM VIDEO INSERTION PROCESS APPEARS HERE]
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SeaChange has developed two additional product offerings, the SeaChange
Small Market Self-Contained System and the SeaChange Small Market Remote
System, that are based on the SPOT System and target smaller cable television
markets. The SeaChange Small Market Self-Contained System is ideal for small
markets operating out of a single headend. The SeaChange Small Market Remote
System best suits customers who serve markets where a number of small remote
headends will be served from a single advertising sales operation. As the
needs of Small Market Systems customers change, the systems can be upgraded to
full SeaChange SPOT Systems.
The SeaChange SPOT System and Small Market Systems permit cable television
operators to monitor and control the entire advertisement delivery process,
regardless of the number of advertisements, network channels or distributed
geographic locations. Additionally, SeaChange has designed its systems with
remote management and diagnostic capabilities that allow problems, in most
cases, to be diagnosed and rectified using data networks without having to
travel to the customer's location. The selling price for a base SeaChange SPOT
System is approximately $250,000; to date, the largest single sale of a
SeaChange SPOT System was $2.5 million. To date, the Company has sold the
SeaChange Small Market Self-Contained System to one customer at a sales price
of $228,000. The Company introduced the SeaChange Small Market Remote System
in June 1996 and to date, the Company has not sold any such systems.
SeaChange Media Management Software
The SeaChange Media Management Software is based on software the Company has
licensed from a third party and is designed to permit television operators to
manage advertising sales, scheduling, packaging and billing operations. This
product provides advertising sales executives with: (i) management performance
reports; (ii) inventory tracking; and (iii) order entry, billing and accounts
receivable management. Media Management Software can be integrated with the
SeaChange SPOT System and is also compatible with many other advertisement
insertion systems currently in use. The Company introduced the SeaChange Media
Management Software in the second quarter of 1996 and is installing Media
Management Software for one customer for use at multiple sites with a selling
price of approximately $500,000.
Long-Form Video Products
SeaChange is developing and marketing two products for the management and
delivery of long-form video content for cable television operators and
telecommunications companies.
SeaChange Movie System. SeaChange has developed a new product, the
SeaChange Movie System, which is a platform for the storage and delivery of
long-form video streams, particularly movies. SeaChange has worked together
with IPC Interactive ("IPC"), a provider of Video-On-Demand systems, to
integrate IPC's Guestnet system and its related movie programming with the
SeaChange Movie System. The integrated system is designed to permit viewers in
hotels and apartments to choose particular movies on demand and also offers a
variety of ancillary programming services, such as local programming and
advertisements. The Company and IPC are currently negotiating joint marketing
rights to the integrated system. It is anticipated that SeaChange will be
marketing the SeaChange Movie System featuring the Guestnet movie programming
to cable television operators, acting as a sales representative for the IPC
portion of the system. IPC would also be entitled to market this product,
acting as a dealer or sales representative for the SeaChange portion of the
system. The cable television operators will then package full scale Video-On-
Demand systems for hotels and apartments.
The integrated system will consist of user interfaces and application
hardware and software, including set- top boxes and remote control devices,
provided by IPC and SeaChange's Video Server 100 technology and software
architecture for the delivery and storage of movies. The video servers will be
installed at the cable headend and the video will be delivered over a
dedicated fiber-optic line. The integrated system is designed to provide cable
television operators with a new source of revenue and a competitive advantage
over the encroaching services of direct broadcast satellite companies. The
SeaChange Movie System has been ordered by
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one customer for use with the Guestnet movie programming and the Company
expects to begin marketing the integrated system shortly after an agreement
with IPC is reached. There can be no assurance, however, that the Company and
IPC will reach agreement on a joint arrangement and failure to do so would
delay the Company's marketing of the SeaChange Movie System.
In addition, the SeaChange Movie System may be used by television operators
to provide pay-per-view movies. Pay-per-view movies are presented at regular
intervals and viewers can order and begin watching a movie at a time
convenient to them. The Company has begun marketing the Seachange Movie System
to television operators for pay-per-view movies and has received an order for
one system from a customer with a sales price of approximately $300,000.
SeaChange Programming System. The SeaChange Programming System, which
employs the same underlying technology and basic functionality of the
SeaChange SPOT System, is designed to be a platform for the delivery of long-
form video streams in a multichannel environment. The SeaChange Programming
System is designed to permit television operators to store, manage and
distribute long-form video streams, such as movies, infomercials, and other
local origination programming. The SeaChange Programming System is designed to
provide for the storage of up to a terabyte of digital video (approximately
250 feature length movies on-line), which is expected to accommodate most
current customer applications. Its proprietary software applications are
designed to enable television operators to easily schedule and manage the
automated delivery of movies, infomercials and other local programming.
The SeaChange Programming System is designed to have a number of advantages
over traditional analog tape-based systems. It is designed to provide a high
level of scheduling control to reduce personnel needs and improve scheduling
flexibility. By sharing common functions with the SeaChange SPOT System such
as encoding, scheduling, storage libraries and networks, the SeaChange
Programming System is designed to leverage a customer's existing investment in
SeaChange products. The Company intends to sell the SeaChange Programming
System in 1997.
Broadcast Television Products
SeaChange plans to introduce two offerings to the television broadcast
market in 1997.
SeaChange Extensible Disk Play-to-Air System. The SeaChange Extensible Disk
Play-to-Air System is designed to provide high quality, MPEG-2 based video
storage and playback for use with automation systems in broadcast television
stations. This product is intended to replace on-air tape decks used to store
and play back advertising from video tape cart systems and, in some cases, to
replace the cart systems themselves. The SeaChange Extensible Disk Play-to-Air
System is designed for customers in larger broadcast television markets which
use station automation systems.
The SeaChange Extensible Disk Play-to-Air System is designed to
simultaneously record, encode, store to a disk and play video content, using
industry standard MPEG-2 compression. This product is designed to seamlessly
integrate into television broadcasters' current tape-based operations and meet
the high performance requirements of television broadcasters.
SeaChange Commercial Playback System. The SeaChange Commercial Playback
System is designed to store, manage and distribute advertisements and other
short-form video streams for broadcast stations where broadcast automation
systems are not widely deployed. This product is designed to have the same
functionality and features of the SeaChange SPOT System but is designed to be
tailored for the high performance requirements of the broadcast television
environment.
The SeaChange Commercial Playback System is designed to encode
advertisements and other short-form video streams from video tape, interface
with sales and billing systems for scheduling and verification, and store and
manage large libraries of short-form video streams. The Company believes that
the SeaChange Commercial Playback System will often be a first step toward
automation for many television broadcasters.
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OEM Products
The Company currently markets two original equipment manufacturer ("OEM")
products.
Video Server 100. The Video Server 100, which is the Company's second
generation video server, is designed to store and distribute video streams of
various lengths. The Video Server 100 provides the base technology for all of
SeaChange's digital video products and is offered to systems integrators and
VARs as a platform for the storage and delivery of video in a wide range of
applications. Such video applications include library content management, the
training of corporate employees and satellite delivery.
The Video Server 100 provides custom power and packaging and software for
use in professional video applications. It has features such as RAID and
redundant power supply to ensure the continuous uninterrupted airing of video.
The Video Server 100 uses industry standard components, which differentiates
it from various video servers based on proprietary processors and specialized
hardware components and operating systems. The OEM list price of the Video
Server 100 is $32,000.
MediaCluster. The MediaCluster is SeaChange's proprietary software
technology that enables multiple Video Server 100s to operate together as an
integrated video server. While the Video Server 100 is the base technology for
short-form video applications, the MediaCluster serves as the base technology
for long-form video applications.
Through its software architecture, the MediaCluster can join multiple Video
Server 100s to support large- scale applications by storing large amounts of
video data and delivering multiple video streams, with no single point of
failure in the system. The Company currently has a patent application pending
for its MediaCluster technology. Although the MediaCluster software technology
has been integrated into the SeaChange SPOT System and the SeaChange Movie
System, the Company has not to date sold MediaCluster to any customer on a
stand-alone basis. The Company is currently marketing the first generation of
MediaCluster and plans to introduce a new version of MediaCluster in 1997.
The Company is in the process of establishing a subsidiary at its
Greenville, New Hampshire location for the manufacture, development and OEM
sale of the Video Server 100 and MediaCluster products. The Company expects
that certain employees of the Company or the subsidiary will acquire up to a
20% interest over time in the subsidiary and that the Company will own the
remaining 80%. The Company intends that the subsidiary will license the
necessary technology from the Company and will manufacture these products on a
contract basis for the Company. The subsidiary will have the right to sell
these products to OEM customers that do not compete with the Company. The
Company intends to provide administrative and management services and, at
least initially, selling and marketing and support services, to the subsidiary
on a negotiated fee basis. It is expected that the subsidiary will conduct
research and development on video server-based products, including the Video
Server 100 and MediaCluster products, and will license all developments to the
Company on a royalty-free basis. It is intended that after three years, the
Company will have the right, but not the obligation, to acquire the 20%
interest from the employees at fair market value.
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CUSTOMER SERVICE AND SUPPORT
The Company installs, maintains and supports its products in the United
States and Canada. Annual maintenance contracts are generally required for the
first year of a customer's use of the Company's products and customers are
billed for the initial maintenance fee at the time of the placement of the
purchase order. The maintenance contracts are renewable on an annual basis,
and, as of August 31, 1996, all of the Company's customers have renewed such
contracts annually. The Company also offers basic and advanced formal on-site
training for customer employees at the time of product installation. For
international customers, the Company's agents and distributors generally
provide installation, maintenance and support to their customers.
The Company offers technical support to customers, agents and distributors
on a 24-hour, seven-day a week basis. Support engineers are committed to
providing a response to technical support calls within two hours. The
Company's products are designed with remote diagnostic capabilities which
permit the support engineers to immediately begin to diagnose any problems
without having to travel to the customer's location, thereby reducing both
response time and cost. When necessary, however, support engineers are
dispatched to the customer's facility. The Company's commitment to service is
evidenced by the fact that as of August 31, 1996 more than 25% of Company
employees were providing customer service and support, including project
design and implementation, installation and training.
CUSTOMERS
The Company currently sells its products primarily to cable television
operators and telecommunications companies. In addition, the Company is
developing several products for television broadcasters. To date, the
Company's customers include the following:
CABLE TELEVISION OPERATORS
Adelphia Cable Communications Dakota Cable Communications
Antietam Cable TV, Inc. Indianapolis Interconnect
Buckeye Cablevision, Inc. Intermedia Partners
Cable Advertising Communications (Cable Adcom)
Jones Intercable, Inc.
Cable Advertising Network of Greater St. Louis, Inc.
Love Communications Company of
Cablevision Systems Corporation Jackson
CAMA (Cable Advertising of Metro Atlanta) Multimedia Cablevision, Inc.
Central Oregon Cable Advertising, Inc. New York Interconnect
Charter Communications, Inc. Scripps-Howard Cable
Coaxial Communications Southwest Florida Interconnect
Comcast Corporation Tele-Communications, Inc. (TCI)
Continental Cablevision Time Warner, Inc.
Cox Communications, Inc. TKR Cable Company
TELECOMMUNICATIONS COMPANIES SYSTEMS INTEGRATORS AND VARS
Bell Atlantic Video Services International Business Machines
GTE Corporation Corporation
Lucent Technologies Roscor Corporation
MCI Telecommunications Corporation United Video Satellite Group
NYNEX Video Services Operations Company
Pacific Telesis Video Services
TELEWEST Communications Group plc
TELE-TV Systems
U S WEST, Inc.
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As of September 30, 1996, the Company had an installed base of more than 100
digital video insertion systems in the United States and 6 internationally.
The following map illustrates installations of SeaChange SPOT Systems.
SEACHANGE SPOT SYSTEM INSTALLATIONS
[A GRAPHIC REPRESENTATION OF SEACHANGE SPOT SYSTEM INSTALLATIONS ON A MAP
WITH SYMBOLS DESIGNATING THE SITE OF EXISTING INSTALLED SYSTEMS APPEARS HERE]
The Company's customer base is highly concentrated among a limited number of
large customers, primarily due to the fact that the cable and
telecommunications industries in the United States are dominated by a limited
number of large companies. A significant portion of the Company's revenues in
any given fiscal period have been derived from substantial orders placed by
these large organizations. In 1994 and 1995 and the first six months of 1996,
revenues from the Company's five largest customers represented approximately
94.7%, 90.9% and 75.1%, respectively, of the Company's total revenues.
Customers accounting for more than 10% of total revenues have consisted of
Continental Cablevision (51%), Cox Communications, Inc. (18%), Digital
Equipment Corporation (11%) and Time Warner, Inc. (10%) in 1994; Continental
Cablevision (29%), Tele-Communications, Inc. (29%), Time Warner, Inc. (16%)
and Cox Communications, Inc. (12%) in 1995; and Tele-Communications, Inc.
(26%), Comcast Corporation (19%), Time Warner, Inc. (13%) and U S WEST,
Inc./CAMA (Cable Advertising of Metro Atlanta) (10%) in the first six months
of 1996. The Company expects that it will continue to be dependent upon a
limited number of customers for a significant portion of its revenues in
future periods. As a result of this customer concentration, the Company's
business, financial condition and results of operations could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellations of orders as a result of changes in customer
requirements or new product announcements or introductions. See "Risk
Factors--Significant Concentration of Customers."
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The Company believes that its backlog at any particular time is not
meaningful as an indicator of its future level of sales for any particular
period. Because of the software-based nature of the Company's products and its
use of standard components, substantially all of the backlog at the end of a
quarter can be manufactured by the Company and is intended to be shipped by
the end of the following quarter. However, because of the requirements of
particular customers, the seasonality of the business and, in respect to
certain sales, the acceptance criteria necessary for revenue recognition, such
backlog may not be shipped or, if shipped, the related revenues may not be
recognized in such quarter. Therefore, there is no direct correlation between
the backlog at the end of any quarter and the Company's total sales for the
following quarter or other periods.
SELLING AND MARKETING
The Company sells and markets its products in the United States primarily
through a direct field sales organization and internationally primarily
through independent agents and distributors, complemented by a coordinated
marketing effort of the Company's marketing group. Direct sales activities in
the United States are conducted from the Company's Massachusetts headquarters
and three field offices. In October 1996, the Company entered into an
exclusive sales and marketing representative agreement with a private Italian
company which covers continental Europe. The Company also markets certain of
its products, namely the Video Server 100 and MediaCluster, to systems
integrators and VARs. As of August 31, 1996, the Company's selling and
marketing organization consisted of 12 people.
In light of the complexity of the Company's digital video products, the
Company primarily employs a consultative direct sales process. Working closely
with customers to understand and define their needs enables the Company to
obtain better information regarding market requirements, enhance its expertise
in its customers' industries, and more effectively and precisely convey to
customers how the Company's solutions address the customer's specific needs.
In addition to the direct sales process, customer references and visits by
potential customers to sites where the Company's products are in place are
often critical in the sales process.
The Company uses several marketing programs focused on the Company's
targeted markets to support the sale and distribution of its products. The
Company uses exhibitions at a limited number of prominent industry trade shows
and conferences and presentations at technology seminars to promote awareness
of the Company and its products. The Company also publishes technical articles
in trade and technical journals and product promotional literature.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes that the Company's success will depend to a substantial
degree upon its ability to develop and introduce in a timely fashion new
products and enhancements to its existing products that meet changing customer
requirements in the Company's current and new markets. The Company has in the
past made, and intends to continue to make, substantial investments in product
and technological development. Through its direct sales process the Company
monitors changing customer needs, changes in the marketplace and emerging
industry standards, and is therefore better able to focus its research and
development efforts to address such evolving industry requirements.
The Company's research and development expenditures totaled approximately
$43,000, $885,000 and $2.4 million for the period ended December 31, 1993 and
for the years ended December 31, 1994 and 1995, respectively, and
approximately $2.0 million for the first six months of 1996. At August 31,
1996, 41 employees were engaged in research and product development. The
Company believes that the experience of its product development personnel is
an important factor in the Company's success. The Company performs its
research and product development activities at its headquarters and in offices
in Greenville, New Hampshire and Atlanta, Georgia. The Company has
historically expensed its direct research and development costs as incurred.
The Company has a variety of new products being developed and tested,
including long-form video products for cable television operators and
telecommunications companies, digital play-to-air systems for television
broadcasters and the next version of its MediaCluster software. There can be
no assurance that the Company
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will be able to successfully develop and market such products, or to identify,
develop, manufacture, market or support other new products or enhancements to
its existing products successfully or on a timely basis, that new Company
products will gain market acceptance, or that the Company will be able to
respond effectively to product announcements by competitors or technological
changes. See "Risk Factors--Risk of New Product Introductions."
MANUFACTURING
The Company's manufacturing operations are located at facilities in Acton,
Massachusetts and in Greenville, New Hampshire. The manufacturing operations
in Massachusetts consist primarily of component and subassembly procurement,
system integration and final assembly, testing and quality control of the
complete systems. The Company's operations in New Hampshire consist primarily
of component and subassembly procurement, video server integration and final
assembly, testing and quality control of the video servers. The Company relies
on independent contractors to manufacture components and subassemblies to the
Company's specifications. Each of the Company's products undergoes testing and
quality inspection at the final assembly stage.
The Company attempts to use standard parts and components available from
multiple vendors. Certain components used in the Company's products, however,
are currently purchased from a single source, including a computer chassis
manufactured by Trimm Technologic Inc., a disk controller manufactured by
Mylex Corporation, an MPEG-2 decoder card manufactured by Vela Research, Inc.
and an MPEG-2 encoder manufactured by Optivision, Inc. While the Company
believes that there are alternative suppliers available for the foregoing
components, the Company believes that the procurement of such components from
alternative suppliers would take anywhere from 45-120 days. There can be no
assurance that such alternative components would be functionally equivalent or
would be available on a timely basis or on similar terms. The Company
purchases several other components from a single supplier, although the
Company believes that alternative suppliers for such components are readily
available on a timely basis. The Company generally purchases sole source or
other components pursuant to purchase orders placed from time to time in the
ordinary course of business and has no written agreements or guaranteed supply
arrangements with its sole source suppliers. The Company has experienced
quality control problems and supply shortages for sole source components in
the past and there can be no assurance that the Company will not experience
significant quality control problems or supply shortages for these components
in the future. The Company has begun to increase its inventory of these
components. However, any interruption in the supply of such single source
components could have a material adverse effect on the Company's business,
financial condition and results of operations. Because of the Company's
reliance on these vendors, the Company may also be subject to increases in
component costs which could adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on Sole
Source Suppliers and Third Party Manufacturers."
COMPETITION
The markets in which the Company competes are characterized by intense
competition, with a large number of suppliers providing different types of
products to different segments of the markets. The Company currently competes
principally on the basis of: (i) the breadth of its products' features and
benefits, including the ability to precisely target viewers in specific
geographic or demographic groups, and the flexibility, scalability,
professional quality, ease of use, reliability and cost effectiveness of its
products; and (ii) the Company's reputation and the depth of its expertise,
customer service and support. While the Company believes that it currently
competes favorably overall with respect to these factors and that its ability
to provide software-based solutions to manage, store and distribute digital
video differentiates the Company from its competitors, there can be no
assurance that the Company will be able to continue to compete successfully
with respect to such factors.
In the digital advertisement insertion market, the Company generally
competes with Channelmatic Inc., a subsidiary of Indenet Inc., Sony
Corporation, Digital Equipment Corporation, Starnet Inc., Texscan Corporation,
a subsidiary of TSX Corporation, and various suppliers of traditional analog
tape-based systems. In the market
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for long-form video products, the Company competes against various computer
companies offering video server platforms such as Hewlett-Packard Company,
Digital Equipment Corporation, and Silicon Graphics, Inc., and more
traditional movie application providers like The Ascent Entertainment Group,
Panasonic Company, and Lodgenet Entertainment. In addition, the SeaChange
Media Management Software competes against certain products of Columbine Cable
Systems, Inc., Cable Computerized Management Systems, Inc., a subsidiary of
Indenet Inc., CAM Systems, Inc., a subsidiary of Starnet Inc., Visiontel, Inc.
and various suppliers of sales, scheduling and billing products. When the
Company introduces a product for the television broadcast market, the Company
expects to compete against Tektronix, Inc., BTS Inc., a division of Robert
Bosch GMBH, Hewlett-Packard Company, Sony Corporation, Silicon Graphics, Inc.,
Sun Microsystems, Inc. and ASC Incorporated. The Company expects the
competition in each of these markets to intensify.
Many of the Company's current and prospective competitors have significantly
greater financial, technical, manufacturing, sales, marketing and other
resources than the Company. As a result, these competitors may be able to
devote greater resources to the development, promotion, sale and support of
their products than the Company. Moreover, these companies may introduce
additional products that are competitive with those of the Company or enter
into strategic relationships to offer complete solutions, and there can be no
assurance that the Company's products would compete effectively with such
products.
Although the Company believes that it has certain technological and other
advantages over its competitors, maintaining such advantages will require
continued investment by the Company in research and development, selling and
marketing and customer service and support. In addition, as the Company enters
new markets, distribution channels, technical requirements and levels and
bases of competition may be different than those in the Company's current
markets. There can be no assurance that the Company will be able to compete
successfully against either current or potential competitors in the future.
See "Risk Factors--Highly Competitive Market."
PROPRIETARY RIGHTS
The Company's success and its ability to compete is dependent, in part, upon
its proprietary rights. Although the Company has filed one patent application
for its MediaCluster technology, it does not hold any issued patents and
currently relies on a combination of contractual rights, trademark laws, trade
secrets and copyright laws to establish and protect its proprietary rights in
its products. There can be no assurance that a patent will be issued with
respect to the pending application or that, if issued, the validity of such
patent would be upheld. Nor can there be any assurance that the steps taken by
the Company to protect its intellectual property will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of some foreign
countries in which the Company's products are or may be distributed do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights of others. The Company
attempts to ensure that its products do not infringe any existing proprietary
rights of others. The Company received a letter in January 1996 stating that
the Company's video insertion system may be utilizing technology patented by a
third party. The Company did not respond to such letter and has received no
further communication from the holder of these patents. The Company does not
believe that its products infringe such patents. There can be no assurance
that the holder of these patents or other third parties will not assert
infringement claims against the Company in the future based on patents,
copyrights, trademarks or trade secrets, or that any such claims will not be
successful. The Company could incur substantial costs in defending itself and
its customers against any such claims, regardless of the merits of such
claims. Parties making such claims may be able to obtain injunctive or other
equitable relief which could effectively block the Company's ability to sell
its products in the United States and abroad, and could result in significant
litigation costs and expenses or an award of substantial damages. In the event
of a successful claim of infringement, the Company and its customers may be
required to obtain one or more licenses from third parties or to develop
alternative technologies. There can be no assurance that the Company or its
customers could obtain necessary
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licenses from third parties at a reasonable cost or at all, or would be able
to develop alternative technologies. The defense of any lawsuit could result
in time consuming and expensive litigation, damages, license fees, royalty
payments and restrictions on the Company's ability to sell its products, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on Proprietary Rights."
The SeaChange Media Management Software is based on software the Company
licensed from Summit Software Systems, Inc. of Boulder, Colorado in May 1996.
The Company has been granted a perpetual, nonexclusive license to such
software in return for the payment of an up-front license fee and royalties
for sales occurring prior to June 1998.
EMPLOYEES
As of August 31, 1996, the Company employed 104 persons, including 41 in
research and development, 28 in customer service and support, 12 in selling
and marketing, 12 in manufacturing and 11 in finance and administration. None
of the Company's employees is represented by a collective bargaining
arrangement, and the Company believes that its relations with its employees
are good.
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, professional services, customer
support and product development personnel. The loss of any of the key
management or technical personnel could have a material adverse effect on the
Company. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly-skilled managerial, sales,
professional services, customer support and product development personnel. The
Company has at times experienced and continues to experience difficulty in
recruiting qualified personnel. Competition for qualified personnel in the
Company's industry is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. Failure to
attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Dependence on Key Personnel."
FACILITIES
The Company's corporate headquarters, which is also its principal
administrative, selling and marketing, customer service and support and
product development facility, is located in Maynard, Massachusetts and
consists of approximately 27,000 square feet under a lease which expires on
March 31, 1998, with an annual base rent for 1996 of approximately $107,000.
The Company plans to lease an additional 10,000 square feet in the same
building beginning in January 1997 and to move its manufacturing facility,
currently located in 4,800 square feet of leased space in Acton,
Massachusetts, to such space. The Company leases a facility of approximately
9,000 square feet in Greenville, New Hampshire that is used for the
development and final assembly of its video servers, and a facility of
approximately 1,400 square feet in Atlanta, Georgia that is used for research
and development. The Company also leases small sales and support offices in
Burlingame, California and St. Louis, Missouri. The Company believes its
existing and planned facilities are adequate for its current needs and that
suitable additional or substitute space will be available as needed.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company
believes that it is not currently involved in any legal proceedings the
resolution of which, individually or in the aggregate, would have a material
adverse effect on the Company's business, financial condition or results of
operation.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William C. Styslinger, III..... 50 President, Chief Executive Officer,
Chairman of the Board and Director
Edward J. McGrath.............. 44 Vice President, Engineering, Chief
Technical Officer, Secretary and Director
Edward J. Delaney, Jr.......... 36 Vice President, Sales and Marketing
Thomas Franeta................. 41 Vice President, Business Development
Alan R. Lathrop ............... 44 Vice President, Software Engineering
Bruce E. Mann.................. 48 Vice President, Network Storage Engineering
Beat Marti..................... 50 Vice President, Customer Services
Joseph S. Tibbetts, Jr. ....... 44 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Martin R. Hoffmann (1)(2)...... 64 Director
Paul H. Saunders (1)(2)........ 42 Director
Carmine Vona (1)(2)............ 58 Director
</TABLE>
- --------
(1) Member of the Compensation and Option Committee
(2) Member of the Audit Committee
William C. Styslinger, III, a founder of the Company, has served as the
President, Chief Executive Officer and a Director since the Company's
inception in July 1993 and as Chairman of the Board since January 1995. Prior
to forming the Company in 1993, Mr. Styslinger was employed at Digital
Equipment Corporation since March 1978, most recently as manager of the Cable
Television Business Unit from October 1991 to May 1993.
Edward J. McGrath, a founder of the Company, has served as Secretary since
the Company's inception in July 1993, and as Vice President, Engineering,
Chief Technical Officer and a Director since August 1993. Mr. McGrath served
as the Treasurer of the Company from its inception to June 1996. Prior to
forming the Company in 1993, Mr. McGrath was employed in various positions at
Digital Equipment Corporation since November 1976, most recently as Director
of Engineering of the Cable Television Business Unit from March 1992 to May
1993, and prior to that, from March 1989 to March 1992, as Group Manager--
Silicon Systems Engineering.
Edward J. Delaney, Jr. joined the Company in February 1994 as Vice
President, Sales and Marketing. Prior to joining the Company, Mr. Delaney
spent 12 years with Digital Equipment Corporation in a variety of positions,
including Marketing and Operations Manager for Digital's Cable Television
Business Unit, marketing manager of media products for the Asia/Pacific
region, executive assistant to the Vice President of United States sales, and
sales manager.
Thomas Franeta has served as Vice President, Business Development of the
Company since June 1996. Prior to that, Mr. Franeta served as Vice President--
Eastern Region Sales from March 1994 to June 1996. Before joining the Company,
from November 1981 to February 1994, Mr. Franeta held several management
positions at Digital Equipment Corporation, most recently as a Corporate
Account Manager in the Financial Industry Business.
Alan R. Lathrop joined the Company in October 1993 as Vice President,
Software Engineering. Prior to joining the Company, Mr. Lathrop served as
Technical Director for Logica North America, Northeast Division, a software
consulting company, from January 1993 to October 1993. Prior to that, from
August 1991 to January 1993, Mr. Lathrop was a Consulting Software Engineer at
Digital Equipment Corporation.
35
<PAGE>
Bruce E. Mann joined the Company in September 1994 as Vice President,
Network Storage Engineering. Mr. Mann has been selected to be the President of
SeaChange Systems, the subsidiary the Company is in the process of
establishing to develop and manufacture video server-based products. Prior to
joining the Company, Mr. Mann served as Director of Network Technology at
Ungermann- Bass, Inc., a subsidiary of Tandem Computers Inc., from March 1993
to September 1994. Prior to that, from September 1976 to March 1993 Mr. Mann
was an engineer at Digital Equipment Corporation, most recently as Senior
Consulting Engineer.
Beat Marti joined the Company in July 1994 as Vice President, Customer
Services. Prior to joining the Company, Mr. Marti held various positions at
Digital Equipment Corporation from January 1973 to July 1994, most recently as
an engineering manager of various software development groups.
Joseph S. Tibbetts, Jr. joined the Company in June 1996 as Vice President,
Finance and Administration, Chief Financial Officer and Treasurer. Prior to
joining the Company, Mr. Tibbetts was employed in various positions by Price
Waterhouse LLP from July 1976 to June 1996, most recently serving as Partner
from July 1986 to June 1996 and the National Director of the Software Services
Group from July 1989 to June 1996.
Martin R. Hoffmann has served as Director of the Company since January 1995.
Mr. Hoffmann has served as Of Counsel to Skadden, Arps, Slate, Meagher & Flom
since January 1996. From April 1995 to January 1996, Mr. Hoffmann maintained a
law practice and business consulting practice. He was a Visiting Senior Fellow
at the Center for Policy, Industry and Industrial Development at Massachusetts
Institute of Technology from May 1993 to April 1995, prior to which, from
April 1989, he served as Vice President and General Counsel for Digital
Equipment Corporation. Mr. Hoffmann is a member of the Board of Directors of
Castle Energy Corporation, an oil and gas refining and exploration company.
Paul H. Saunders has served as a Director of the Company since July 1995.
Mr. Saunders has been the Chairman and Chief Executive Officer of James River
Capital Corporation, a money management firm, from January 1995 to the
present. Prior to that, Mr. Saunders was Managing Director of the Managed
Futures Department at Kidder Peabody & Co. Incorporated from April 1983 to
January 1995. Mr. Saunders is a director of Centaur, a company involved in the
development and manufacturing of veterinary diagnostic and therapeutic
healthcare products.
Carmine Vona has served as a Director of the Company since January 1995. Mr.
Vona has been President and Chief Executive Officer of Vona Information
Systems, a consulting firm, since June 1996. Prior to that Mr. Vona was
Executive Vice President and Managing Director for worldwide technology at
Bankers Trust Co. from November 1969 to June 1996. From August 1986 to June
1996 Mr. Vona was Chairman of BT-FSIS, a software development company and a
wholly-owned subsidiary of Bankers Trust Co.
The Company's By-laws provide for the Company's Board of Directors to be
comprised of as many directors as are designated from time to time by the
Board of Directors or by the stockholders of the Company. The Board is
currently comprised of five members. Each director holds office until his
successor is duly elected and qualified, or until his earlier death,
resignation or removal. Prior to this offering, the Company's stockholders
approved an amendment and restatement of the Company's By-laws, as amended, to
take effect upon the consummation of this offering, that includes a provision
to establish a classified Board of Directors. See "Description of Capital
Stock--Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover
Effects."
Executive officers of the Company are appointed by, and serve at the
discretion of, the Board of Directors, and serve until their successors have
been duly elected and qualified. There are no family relationships among any
of the executive officers or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
In January 1995 the Board of Directors established a Compensation Committee,
later renamed the Compensation and Option Committee, and an Audit Committee.
The Compensation and Option Committee
36
<PAGE>
makes recommendations concerning the salaries and incentive compensation of
management and key employees of the Company and administers the Company's
stock plans. The Audit Committee is responsible for reviewing the results and
scope of audits and other services provided by the Company's independent
accountants and reviewing the Company's internal controls.
DIRECTOR COMPENSATION
Following the consummation of this offering, non-employee directors will
receive a fee of $1,000 for each meeting of the Board of Directors that they
attend in person and will be reimbursed for their reasonable out-of- pocket
expenses incurred in attending such meetings. No director who is an employee
of the Company will receive separate compensation for services rendered as a
director. Non-employee directors are also eligible for participation in the
Company's 1996 Non-Employee Director Stock Option Plan. See "Management--Stock
Plans."
In June 1995 the Company sold 11,251 shares of Common Stock of the Company
to each of Mr. Hoffmann and Mr. Vona, each a director of the Company, for a
price of $.023 per share. In August 1995, the Company sold 5,625 shares of
Common Stock of the Company to Mr. Saunders, a director of the Company, for a
purchase price of $.50 per share.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information with
respect to the compensation paid to or accrued by the Company for services
rendered during the year ended December 31, 1995 by the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers whose annual salary and bonus for the fiscal year ended December 31,
1995 exceeded $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG- TERM
ANNUAL COMPENSATION
COMPENSATION(2) AWARDS(3)(4)
--------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION(1) SALARY OPTIONS (#)
- ------------------------------ --------------- ------------
<S> <C> <C>
William C. Styslinger, III
President and Chief Executive Officer............ $145,000 27,000
Edward J. McGrath
Vice President, Engineering and Chief Technology
Officer.......................................... 124,978 18,000
Bruce E. Mann
Vice President, Network Storage Engineering...... 121,348 --
Alan R. Lathrop
Vice President, Software Engineering............. 121,000 5,250
Edward J. Delaney, Jr.
Vice President, Sales and Marketing.............. 109,375 15,000
</TABLE>
- --------
(1) Joseph S. Tibbetts, Jr. joined the Company as Vice President, Finance and
Administration, Chief Financial Officer and Treasurer in June 1996. Mr.
Tibbetts' annual base salary will be $200,000. In addition, in June 1996
the Company granted Mr. Tibbetts options to purchase 186,825 shares of
Common Stock at an exercise price of $7.33 per share.
(2) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executive Officers
which are available generally to all salaried employees of the Company and
certain perquisites and other personal benefits, securities or property
received by the Named Executive Officers which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this
table.
37
<PAGE>
(3) Represents stock options granted under the Company's 1995 Stock Option
Plan. The Company did not grant any restricted stock awards or stock
appreciation rights or make any long-term incentive plan payouts during
1995.
(4) The Company has sold stock subject to restrictions on vesting to the Named
Executive Officers at a purchase price equal to the then fair market value
of such stock. The number and value of all unvested stock holdings by each
of the Named Executive Officers as of the year ended December 31, 1995 are
as set forth below. Since there was no public trading market for the
Common Stock as of December 31, 1995, the values of the unvested shares
have been calculated on the basis of the fair market value of the
Company's Common Stock at the end of 1995 ($4.195 per share), as
determined by the Board of Directors. Mr. Styslinger--720,000 shares,
$3,020,640; Mr. McGrath--720,000 shares, $3,020,640; Mr. Mann--270,000
shares, $1,132,740; Mr. Lathrop--450,000 shares, $1,887,900; and Mr.
Delaney--960,000 shares, $4,027,520.
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended December 31, 1995 to the Named
Executive Officers. The Company did not grant any stock appreciation rights
("SARs") during the fiscal year ended December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
POTENTIAL
PERCENT OF REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(4)
OPTIONS IN FISCAL PRICE PER EXPIRATION -------------------
NAME GRANTED(1) YEAR(2) SHARE(3) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William C. Styslinger,
III.................... 27,000 8.3% $1.36 10/20/00 $ 10,145 $ 22,418
Edward J. McGrath....... 18,000 5.5 1.36 10/20/00 6,763 14,945
Bruce E. Mann........... -- -- -- -- -- --
Alan R. Lathrop......... 5,250 1.6 1.23 10/20/05 4,072 10,319
Edward J. Delaney, Jr... 15,000 4.6 1.36 10/20/00 5,636 12,454
</TABLE>
- --------
(1) Options granted become exercisable at the rate of 20% after one year and
an additional 5% after each subsequent quarter.
(2) Based on an aggregate of 327,114 shares subject to options granted to
employees of the Company in 1995.
(3) The exercise price per share of the option granted to Mr. Lathrop was
equal to the fair market value of the Common Stock on the date of grant,
as determined by the Board of Directors, and the exercise price per share
of the options granted to Messrs. Styslinger, McGrath and Delaney were
equal to 110% of the fair market value of the Common Stock on the date of
grant, as determined by the Board of Directors.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date, and are not intended to forecast possible future
appreciation, if any, in the price of the Company's Common Stock. The
gains shown are net of the option exercise price, but do not include
deductions for federal or state income taxes or other expenses associated
with the exercise of the options or the sale of the underlying shares. The
actual gains, if any, on the stock option exercises will depend on the
future performance of the Common Stock, the optionholder's continued
employment through the option period and the date on which the options are
exercised.
38
<PAGE>
YEAR-END OPTION TABLE
The following table sets forth certain information concerning the number and
value of unexercised stock options held by each of the Named Executive
Officers as of December 31, 1995. No SARs or stock options were exercised
during the fiscal year ended December 31, 1995 by any Named Executive Officer.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William C. Styslinger,
III...................... -- 27,000 -- $76,554
Edward J. McGrath......... -- 18,000 -- 51,036
Bruce E. Mann............. -- -- -- --
Alan R. Lathrop........... -- 5,250 -- 15,550
Edward J. Delaney, Jr..... -- 15,000 -- 42,530
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, as permitted by the rules of the Securities and
Exchange Commission, these values have been calculated on the basis of the
fair market value of the Company's Common Stock at the end of 1995 ($4.195
per share), as determined by the Board of Directors, less the applicable
exercise price.
Certain executive officers of the Company hold certain of their shares of
Common Stock pursuant to Stock Restriction Agreements, which generally provide
for five year annual vesting of such shares of Common Stock and acceleration
of vesting upon the death of the stockholder. Upon the termination of the
stockholder's business relationship with the Company, the Company has a right
to repurchase the shares owned by the stockholder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 1995, the Company had no separate compensation or stock
option committee or other board committee performing equivalent functions, and
these functions were performed by the Company's Board of Directors. No stock
options were granted prior to the formation of the Compensation and Option
Committee of the Board of Directors.
STOCK PLANS
1995 Stock Option Plan. The Company's 1995 Stock Option Plan was adopted by
the Board in September 1995 and approved by the Company's stockholders in
October 1995. An Amended and Restated 1995 Stock Option Plan was adopted by
the Board in September 1996 and approved by the Company's stockholders in
September 1996 (the "1995 Plan"). Under the terms of the 1995 Plan, the
Company is authorized to grant incentive ("ISO") and non- qualified stock
options (collectively, "Stock Options") to employees, directors and officers
of and consultants to the Company. The aggregate number of shares of Common
Stock which may be issued pursuant to the Plan is 1,950,000.
The 1995 Plan is administered by the Compensation and Option Committee of
the Board of Directors, which currently consists of three disinterested
directors, Martin R. Hoffmann, Paul H. Saunders and Carmine Vona. Subject to
the provisions of the 1995 Plan, the Compensation and Option Committee has the
authority to select the optionees and determine the terms of the Stock Options
granted under the 1995 Plan, including: (i) the number of shares subject to
each Stock Option, (ii) when the Stock Option becomes exercisable, (iii) the
exercise price of the Stock Option, which in the case of an ISO cannot be less
than the fair market value of the Common
39
<PAGE>
Stock as of the date of grant, or not less than 110% of the fair market value
in the case of ISO's granted to an employee or officer holding 10% or more of
the voting stock of the Company, (iv) the duration of the Stock Option and (v)
the time, manner and form of payment upon exercise of a Stock Option. A Stock
Option is not transferable by the recipient except by will or by the laws of
descent and distribution or in the case of non-qualified stock options only to
the extent set forth in the agreement relating to such option. Generally, no
ISO may be exercised more than 90 days following termination of employment.
However, in the event that termination is due to death or disability, the
Stock Option is exercisable for a maximum of 180 days after such termination.
As of August 31, 1996, options to purchase a total of 671,289 shares of
Common Stock at exercise prices ranging from $.50 to $9.33 per share (with a
weighted average exercise price of $4.11 per share) were outstanding under the
1995 Plan (of which 37,727 options were then exercisable) and options for
6,617 shares of Common Stock had been exercised.
1996 Non-Employee Director Stock Option Plan. The 1996 Non-Employee Director
Stock Option Plan (the "Director Option Plan") was adopted by the Board of
Directors in June 1996 and approved by the Company's stockholders in June
1996. The Director Option Plan provides for the grant of options to purchase a
maximum of 30,000 shares of Common Stock of the Company to non-employee
directors of the Company.
The Director Option Plan is administered by the Compensation and Option
Committee of the Board of Directors. Under the Director Option Plan, each
director who is not an employee of the Company will receive upon the later of
(i) the date of approval of the Plan by the Stockholders of the Company, (ii)
the date of his or her initial election to the Board, or (iii) the date such
person first becomes a non-employee director (the "Grant Date") an option to
purchase 3,375 shares of Common Stock. Options granted under the Director
Option Plan will vest as to 33 1/3% of the shares underlying the option
immediately upon the date of the grant, and will vest as to an additional 8
1/3% of the shares underlying the option at the end of each of the next 8
quarters, provided that the optionee remains a director at the time of vesting
of the installments. Each non-employee director will also receive, on each
three-year anniversary of such director's Grant Date, an additional option to
purchase 3,375 shares of Common Stock, vesting in accordance with the
aforementioned schedule, provided that such director continues to serve on the
Board of Directors at the time of grant. All options granted under the
Director Option Plan have an exercise price equal to the fair market value of
the Common Stock on the date of grant and a term of ten years from the date of
grant. Options may not be transferred except by will or by the laws of descent
and distribution or pursuant to a domestic relations order and generally are
exercisable to the extent vested only while the optionee is serving as a
director or within 90 days after the optionee ceases to serve as a director of
the Company. However, if an optionee ceases to serve as a director of the
Company due to death or disability, all of the director's options become fully
vested and are exercisable until the scheduled expiration date of the option.
All unvested options granted under the Director Option Plan shall become fully
exercisable in the event of any "Change in Control" of the Company, as defined
in the Plan. An aggregate of 10,125 options have been granted to date under
the Director Option Plan. On June 28, 1996 options for 3,375 shares were
granted pursuant to the Director Option Plan to each of Messrs. Hoffmann,
Saunders and Vona at an exercise price of $7.33 per share.
1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "1996 Purchase Plan") was adopted by the Board of Directors in September
1996 and approved by the Company's stockholders in September 1996. The 1996
Purchase Plan provides for the issuance of a maximum of 300,000 shares of
Common Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1996 Purchase Plan is administered by the Compensation and Option
Committee of the Board of Directors. All employees of the Company whose
customary employment is more than 20 hours per week and for more than five
months in any calendar year are eligible to participate in the 1996 Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the Company's stock and directors who
are not employees of the Company may not participate in the 1996 Purchase
Plan. To participate in the 1996 Purchase Plan, an employee must authorize the
Company to deduct an amount
40
<PAGE>
(not less than one percent nor more than ten percent of a participant's total
cash compensation) from his or her pay during six- month periods commencing on
January 1 and July 1 of each year (each a "Plan Period"), but in no case shall
an employee be entitled to purchase more than 750 shares in any Plan Period.
The exercise price for the option for each Plan Period is 85% of the lesser of
the market price of the Common Stock on the first or last business day of the
Plan Period. If an employee is not a participant on the last day of the Plan
Period, such employee is not entitled to exercise his or her option, and the
amount of his or her accumulated payroll deductions will be refunded. Options
granted under the 1996 Purchase Plan may not be transferred or assigned. An
employee's rights under the 1996 Purchase Plan terminate upon his or her
voluntary withdrawal from the plan at any time or upon termination of
employment. No options have been granted to date under the 1996 Purchase Plan.
401(K) PLAN
In January 1994, the Company adopted a Section 401(k) Retirement Savings
Plan (the "401(k) Plan"). The 401(k) Plan is a tax-qualified plan covering
Company employees who are over 21 years of age and elect to participate in the
401(k) Plan. All Company contributions to the 401(k) Plan, if any, shall vest
20% after two years of service, and 20% for each additional year of service.
41
<PAGE>
CERTAIN TRANSACTIONS
Since being established in July 1993, the Company has sold shares of Common
Stock to a number of executive officers, directors and holders of more than 5%
of the Company's outstanding Common Stock. In July 1993, the Company sold
1,200,000 shares of Common Stock to Mr. Styslinger and 1,200,000 shares to Mr.
McGrath, in each case at a purchase price of $.00013 per share. In October
1993, the Company sold 150,000 shares of Common Stock to each of Mr. McGrath
and Mark Sanders at a price per share of $.00013. In April 1994, the Company
sold 1,350,000 shares of Common Stock to Mr. Delaney, 574,950 shares to Mr.
Franeta, 81,450 shares to Mr. Sanders and 75,000 shares to Mr. Styslinger, in
each case at a purchase price of $.00067 per share. Also in April 1994, the
Company sold 750,000 shares of Common Stock to Mr. Lathrop, 600,000 shares to
Mr. Sanders and 300,000 shares to Mr. Styslinger, in each case at a purchase
price of $.00013. In May 1994, the Company sold 150,000 shares of Common Stock
to Mr. Styslinger at a purchase price of $.00067. In November and December
1994, the Company sold 150,000 shares of Common Stock to Mr. Mann and 150,000
shares to Mr. Marti, respectively in each case at a purchase price of $.023
per share. In June 1995, the Company sold 11,250 shares of Common Stock to Mr.
Hoffmann, 150,000 shares to Mr. Mann and 11,250 shares to Mr. Vona, in each
case at a purchase price of $.023 per share. In August 1995, the Company sold
5,625 shares of Common Stock to Mr. Saunders at a purchase price of $.50 per
share.
In June 1994, the Company sold shares of Series A Convertible Preferred
Stock, at a common equivalent purchase price of $.167 per share, to investors
that included the following directors and officers or their family members:
Mr. Delaney's wife's IRA--150,000 shares; Mr. Hoffmann--150,000 shares; Mr.
Saunders--300,000 shares; and Mr. Styslinger's IRA--150,000 shares. Also in
June 1994, the Company sold shares of Series A Convertible Preferred Stock, at
a common equivalent purchase price of $.233 per share, to the following
directors or officers or their family members: Mr. Franeta--25,050 shares; Mr.
Saunders--642,900 shares; and Mr. Vona's sons--300,000 shares. All of the
above share numbers represent the number of shares of Common Stock into which
the shares of Series A Convertible Preferred Stock are convertible.
In October and November 1995, the Company sold shares of Series B
Convertible Preferred Stock, at a purchase price of $6.293 per share, to
investors that included the following directors and holders of more than 5% of
the Company's outstanding Common Stock: Summit Investors II and affiliated
entities--512,699 shares; Mr. Hoffmann--3,204 shares; and members of Mr.
Vona's family--6,409 shares. The purchasers of Series B Convertible Preferred
Stock have certain rights to register the shares of Common Stock issuable upon
conversion of such Series B Convertible Preferred Stock. Based on the
conversion price in effect as a result of this offering and as adjusted to
give effect to the 3-for-2 split of the Company's Common Stock, shares of
Series B Convertible Preferred Stock will convert into shares of Common Stock
upon the consummation of the offering at a rate of 1.0493 shares of Common
Stock for every 1 share of Series B Convertible Preferred Stock outstanding.
In January 1996, the Company repurchased shares of Common Stock and Series A
Preferred Stock from stockholders at a purchase price of $4.195 and $419.50
per share, respectively, including the following executive officers, directors
and holders of more than 5% of the Company's outstanding Common Stock (all of
the following share numbers representing the number of shares of Common Stock
repurchased or the number of shares of Common Stock into which the shares of
Series A Preferred Stock repurchased are convertible): Mr. Delaney--150,000
shares; Mr. Lathrop--112,500 shares; Mr. Sanders--60,000 shares; and Mr.
Saunders--192,900 shares. Also in January 1996, Messrs. Styslinger and McGrath
sold an aggregate of 98,946 and 135,000 shares of Common Stock, respectively,
to the holders of Series B Convertible Preferred Stock at a purchase price of
$4.195 per share pursuant to the exercise of a call to a Put and Call
Agreement between Messrs. Styslinger and McGrath individually and the holders
of Series B Convertible Preferred Stock entered into in October 1995. The
purchasers included the following directors or holders of 5% of the Company's
outstanding Common Stock (all of the following share numbers representing the
aggregate number of shares purchased from Messrs. Styslinger and McGrath by
such purchaser): Summit Investors II and related entities--184,391 shares; Mr.
Hoffmann--1,155 shares; and members of Mr. Vona's family--2,305 shares.
42
<PAGE>
In October 1995, the Company made loans to employees, including to the
following executive officers, directors and holders of more than 5% of the
Company's outstanding Common Stock in the following amounts: Mr. Lathrop--
$125,000; Mr. McGrath--$200,000; Mr. Sanders--$50,000, Mr. Delaney--$160,000
and Mr. Styslinger--$90,000. All of the loans had an annual interest rate of
5.9% and were secured by a pledge of shares of Common Stock. All of such loans
were repaid in January 1996.
In connection with Mr. Tibbetts joining the Company in June 1996, the
Company agreed that in the event the Company terminates his employment without
cause or Mr. Tibbetts terminates his employment with the Company involuntarily
(including in each case, a termination by the Company's successor after the
acquisition of the Company, or its business or assets) (i) at any time prior
to June 30, 1997, the Company or its successor, as applicable, will pay Mr.
Tibbetts severance equal to 12 months salary continuation at his then current
base salary and (ii) thereafter, the Company or its successor, as applicable,
will pay Mr. Tibbetts severance equal to six months salary continuation at his
then current base salary, and in each case, vesting under his stock option
agreements will be accelerated by 12 months or six months, under (i) and (ii)
above, respectively. In addition, the Company agreed that, upon the request of
Mr. Tibbetts, it would loan him up to $50,000 at any time prior to June 30,
1997 and an additional $50,000 at any time prior to June 30, 1998. Any such
loan will have a five year term and will bear interest equal to the then
current Applicable Federal Rate determined under Section 1274(d) of the
Internal Revenue Code. No such loan has been requested or made at this time.
Prior to joining the Company, Mr. Tibbetts was a partner at Price Waterhouse
LLP, the Company's independent accountants since the inception of the Company
and was the audit partner for the audits of the Company's 1993 and 1994
consolidated financial statements.
The Company has adopted a policy that all transactions between the Company
and its officers, directors, principal stockholders and affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 31, 1996 and as adjusted
to reflect the sale of the shares offered hereby by (i) each person who is
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director and Named Executive Officer of the
Company, (iii) all directors and executive officers of the Company as a group,
and (iv) each Selling Shareholder. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law. Except as
otherwise provided below, the address of each person listed below is c/o
SeaChange International, Inc., 124 Acton Street, Maynard MA 01754.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) SHARES OFFERING(1)
----------------------- BEING -----------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---- ------------ ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
William C. Styslinger,
III(2)................. 1,781,454 16.1% -- 1,781,454 14.0%
Edward J. Delaney,
Jr.(3)................. 1,353,000 12.3 -- 1,353,000 10.6
Edward J. McGrath(4).... 1,218,600 11.0 -- 1,218,600 9.6
Mark Sanders(5)......... 772,141 7.0 -- 772,141 6.1
Paul H. Saunders(6)..... 757,031 6.9 -- 757,031 5.9
Summit Partners(7) ..... 722,364 6.5 239,851 482,513 3.8
Alan R. Lathrop(8)...... 638,550 5.8 -- 638,550 5.0
Thomas Franeta(9)....... 600,001 5.4 -- 600,001 4.7
Carmine Vona(10)........ 319,881 2.9 -- 319,881 2.5
Bruce E. Mann........... 300,000 2.7 -- 300,000 2.4
Advent Internation-
al(11)................. 180,595 2.1 45,149 135,446 1.1
Martin R. Hoffmann(12).. 167,174 1.5 -- 167,174 1.3
Beat Marti(13).......... 151,050 1.4 -- 151,050 1.2
Joseph S. Tibbetts,
Jr.(14)................ 30,000 * -- 30,000 *
All executive officers
and directors as a
group
(11 persons)(15)(16)... 7,316,741 66.0 -- 7,316,741 57.2
</TABLE>
- --------
*Less than 1% of the outstanding Common Stock
(1) Applicable percentage of ownership as of August 31, 1996 is based upon
shares of Common Stock and shares of Common Stock issuable upon
conversion of all outstanding shares of the Company's Preferred Stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to shares. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days after August 31, 1996
are deemed outstanding for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing
the percentage of any other person.
(2) Includes 150,000 shares of Common Stock owned by First Trust, Trustee
f/b/o William C. Styslinger, III, IRA which are issuable upon the
conversion of shares of Series A Preferred Stock, 64,286 shares of Common
Stock owned by Thomas and Emily Franeta as Trustees of The Styslinger
Family Trust, 2,142 shares of Common Stock held by Thomas Franeta as
Custodian for Kimberly J. Styslinger, and 5,400 shares of Common Stock
issuable upon the exercise of stock options, which options are
exercisable within 60 days of August 31, 1996. Mr. Styslinger disclaims
beneficial ownership of the shares held by The Styslinger Family Trust
and by Thomas Franeta as Custodian for Kimberly J. Styslinger.
(3) Includes 150,000 shares of Common Stock owned by First Trust, Trustee
f/b/o Kathryn H. Delaney, IRA which are issuable upon the conversion of
shares of Series A Preferred Stock, 360,000 shares of Common Stock held
by The Delaney Family Limited Partnership of which Mr. Delaney is both a
general and a limited partner, and 3,000 shares of Common Stock issuable
upon the exercise of stock options, which options are exercisable within
60 days of August 31, 1996. Mr. Delaney disclaims beneficial ownership of
the shares held by his wife's IRA.
(4) Includes 300,000 shares of Common Stock held by The McGrath Family
Limited Partnership of which Mr. McGrath is both a general and a limited
partner, and 3,600 shares of Common Stock issuable upon the exercise of
stock options, which options are exercisable within 60 days of August 31,
1996.
(5) Includes 690 shares of Common Stock issuable upon the exercise of stock
options, which options are exercisable within 60 days of August 31, 1996.
44
<PAGE>
(6) Includes 617,144 shares of Common Stock issuable upon the conversion of
shares of Series A Preferred Stock, 64,286 shares of Common Stock owned
by Richard R. Saunders, Jr. as Trustee for The Paul H. Saunders
Irrevocable Trust Agreement No. 1 For The Benefit Of J. Brock Saunders,
64,286 shares of Common Stock owned by Richard R. Saunders, Jr. as
Trustee for The Paul H. Saunders Irrevocable Trust Agreement No. 1 For
The Benefit Of Paul H. Saunders, 2,142 shares of Common Stock owned by
Craig E. Chason as Trustee for The Paul H. Saunders Irrevocable Trust
Agreement No. 2 For The Benefit Of J. Brock Saunders, 2,142 shares of
Common Stock owned by Craig E. Chason as Trustee of The Paul H. Saunders
Irrevocable Trust Agreement No. 2 For The Benefit Of Paul H. Saunders,
and 1,406 shares of Common Stock issuable upon the exercise of stock
options, which options are exercisable within 60 days of August 31, 1996.
Mr. Saunders disclaims beneficial ownership of the shares held by the
various trusts noted above.
(7) Includes 350,242 shares owned by Summit Ventures III, L.P., 350,242
shares owned by Summit Ventures IV, L.P. and 21,880 shares owned by
Summit Investors II, L.P., in each case prior to the sale of shares in
this offering, of which 260,839, 260,839 and 16,295 shares, respectively,
are issuable upon the conversion of shares of Series B Preferred Stock.
The respective general partners of these entities exercise sole voting
and investment power with respect to the shares owned by such entities.
The address of Summit Partners is 600 Atlantic Avenue, Boston, MA 02210.
(8) Includes 1,050 shares of Common Stock issuable upon the exercise of stock
options, which options are exercisable within 60 days of August 31, 1996.
(9) Includes 25,050 shares of Common Stock issuable upon the conversion of
shares of Series A Preferred Stock. Does not include shares held by Mr.
Franeta as the trustee of various trusts for the benefit of members of
the Styslinger family. See Note 2 above.
(10) Includes (i) 1,406 shares of Common Stock issuable upon the exercise of
stock options, which options are exercisable within 60 days of August 31,
1996, (ii) 922 shares of Common Stock held by each of his sons Joseph C.
Vona and Salvatore Vona, (iii) 150,000 shares of Common Stock issuable
upon the conversion of shares of Series A Preferred Stock held by each of
his two sons, and (iv) 2,690 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock held by each of his two
sons. Mr. Vona disclaims beneficial ownership of those shares held by his
sons.
(11) Includes 36,120 shares owned by Adtel Limited Partnership, 903 shares
owned by Advent International Investors II Limited Partnership, 36,120
shares owned by Advent Partners Limited Partnership, 36,120 shares owned
by Adwest Limited Partnership and 71,332 shares owned by Golden Gate
Development & Investment Limited Partnership, in each case prior to the
sale of shares in this offering, of which 26,899, 673, 26,899, 26,899 and
53,125, respectively, are issuable upon the conversion of shares of
Series B Preferred Stock. The respective general partners of these
entities exercise sole voting and investment power with respect to the
shares owned by such entities. The address of Advent International is 101
Federal Street, Boston, MA 02108.
(12) Includes 150,000 shares of Common Stock issuable upon the conversion of
shares of Series A Preferred Stock, 3,362 shares of Common Stock issuable
upon the conversion of shares of Series B Preferred Stock and 1,406
shares of Common Stock issuable upon the exercise of stock options, which
options are exercisable within 60 days of August 31, 1996.
(13) Includes 1,050 shares of Common Stock issuable upon the exercise of stock
options, which options are exercisable within 60 days of August 31, 1996.
(14) Includes 30,000 shares of Common Stock issuable upon the exercise of
stock options, which options are exercisable within 60 days of August 31,
1996.
(15) Includes 48,318 shares of Common Stock issuable upon the exercise of
stock options, which options are exercisable within 60 days of August 31,
1996.
(16) The above table assumes no exercise of the over-allotment option. If the
Underwriters exercise their over-allotment option in full, the number of
shares sold, the number of shares beneficially owned and the percentage
of ownership after the offering for each of the persons listed in the
above table would be: (a) William C. Styslinger, III--32,821, 1,748,633,
13.7%; (b) Edward J. Delaney, Jr.--36,000, 1,317,000, 10.3%; (c) Edward
J. McGrath--61,650, 1,156,950, 9.1%; (d) Mark Sanders--23,130, 749,011,
5.9%; (e) Paul H. Saunders--0, 757,031, 5.9%; (f) Summit Partners--0,
482,513, 3.8%; (g) Alan R. Lathrop--6,000, 632,550, 5.0%; (h) Thomas
Franeta--0, 600,001, 4.7%; (i) Carmine Vona--0, 319,881, 2.5%; (j) Bruce
E. Mann--0, 300,000, 2.4%; (k) Advent International--0, 135,446, 1.1%;
(l) Martin R. Hoffmann--0, 167,174, 1.3%; (m) Beat Marti--0, 151,050,
1.2%; (n) Joseph S. Tibbetts, Jr.--0, 30,000, *; and (o) all executive
officers and directors as a group (11 persons)--136,471, 7,180,270,
56.1%. In addition, if the over-allotment option is exercised in full,
seven other Selling Stockholders, who are all employees of the Company,
who beneficially own in the aggregate 1,122,060 shares or 10.2% prior to
the offering will sell an aggregate of 45,399 shares of Common Stock.
Such Selling Stockholders would beneficially own in the aggregate
1,076,661 or 8.4% after the offering.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock of
the Company will consist of 50,000,000 shares of Common Stock, $.01 par value
per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share.
Prior to this offering, there were outstanding an aggregate of 10,522 shares
of Series A Preferred Stock and 650,487 shares of Series B Preferred Stock
which will automatically convert into an aggregate of 1,578,300 and 682,556
shares of Common Stock, respectively, upon the closing of this offering.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified in its entirety by reference to the
provisions of applicable law and to the Company's Amended and Restated
Certificate of Incorporation (the "Charter") and Amended and Restated By-laws
(the "By-laws"), filed as exhibits to the Registration Statement of which this
Prospectus is a part. Such Charter and By-laws will be effective upon the
closing of this offering.
COMMON STOCK
As of August 31, 1996, there were 11,037,012 shares of Common Stock
outstanding held by approximately 60 stockholders of record. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 1,715,000 shares of Common Stock offered by the Company hereby, there
will be 12,752,012 shares of Common Stock outstanding upon the closing of this
offering. In addition, as of August 31, 1996, there were outstanding stock
options for the purchase of a total of 681,414 shares of Common Stock.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares
present in person or by proxy at the meeting and entitled to vote in such
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities of the Company, subject to the prior rights of any
outstanding Preferred Stock. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights, nor are they entitled to the
benefit of any sinking fund. The outstanding shares of Common Stock are, and
the shares offered by the Company in this offering will be, when issued and
paid for, validly issued, fully paid and nonassessable. The rights, powers,
preferences and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future. Upon
the closing of this offering, there will be no shares of Preferred Stock
outstanding.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of to 5,000,000 shares of Preferred Stock, in one or
more series. Each such series of Preferred Stock shall have such number of
shares, designations, preferences, voting powers, qualifications and special
or relative rights or privileges as shall be determined by the Board of
Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject
to the rights of holders of any Preferred Stock issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of Common
Stock, and could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue any shares of Preferred Stock.
46
<PAGE>
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section
203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained such status
with the approval of the Board of Directors or the business combination is
approved in a prescribed manner, or certain other conditions are satisfied. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more
for the corporation's voting stock.
The By-laws provide for the election of directors. See "Management--
Executive Officers." The By-laws provide that (i) the number of directors
shall be determined from time to time by resolution adopted by a majority of
the Board of Directors, (ii) vacancies on the Board of Directors may be filled
by the Board unless and until filled by the stockholders, and (iii) directors
may be removed only for cause by the vote of the holders of at least 75% of
the shares then entitled to vote at an election of directors.
The By-laws provide for a classified Board of Directors consisting of three
classes of directors having staggered terms of three years each, with each of
the classes being as nearly equal as possible. A single class of directors is
elected each year at the Company's annual meeting of stockholders. Subject to
transition provisions, each director elected at each such meeting will serve
for a term ending on the date of the third annual meeting of stockholders
after his election and until his successor has been elected and duly
qualified. Mr. Styslinger is serving for a term expiring on the date of the
Company's 1997 Annual Meeting of Stockholders, Messrs. Hoffmann and McGrath
are serving for terms expiring on the date of the Company's 1998 Annual
Meeting of Stockholders and Messrs. Saunders and Vona are serving for terms
expiring on the date of the Company's 1999 Annual Meeting of Stockholders.
The Company's By-laws provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before
a meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a notice
must be delivered not less than 120 days nor more than 150 days prior to the
first anniversary of the date of the proxy statement delivered to stockholders
in connection with the preceding year's annual meeting, provided, however,
that if either (i) the date of the annual meeting is more than 30 days before
or more than 60 days after such anniversary, or (ii) if no proxy statement was
delivered to stockholders in connection with the preceding year's annual
meeting, such notice must be delivered not earlier than 90 days prior to such
annual meeting and not later than the later of (i) 60 days prior to the annual
meeting or (ii) 10 days following the date on which public announcement of the
date of such annual meeting is first made by the Company. With respect to
special meetings called by the Company for the purpose of electing directors,
the stockholder's notice must generally be delivered not more than 90 days
prior to such meeting and not later than the later of 60 days prior to such
meeting or 10 days following the day on which public announcement of such
meeting is first made by the Company. The notice must contain, among other
things, certain information about the stockholder delivering the notice and,
as applicable, background information about each nominee or a description of
the proposed business to be brought before the meeting.
The Charter empowers the Board of Directors, when considering a tender offer
or merger or acquisition proposal, to take into account any factors that the
Board of Directors determines to be relevant, including, without limitation,
(i) the interests of the Company's stockholders, including the possibility
that these interests might be best served by the continued independence of the
Company, (ii) whether the proposed transaction might violate federal or state
laws, (iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the outstanding
capital stock of the Company, but also to the market price for the capital
stock of the Company over a period of years, the estimated price that might be
achieved in a negotiated sale of the Company as a whole or in part or through
orderly liquidation, the premiums over market price for the securities of
other corporations in similar transactions, current political, economic and
other factors
47
<PAGE>
bearing on securities prices and the Company's financial condition and future
prospects, and (iv) the social, legal and economic effects upon employees,
suppliers, customers, creditors and others having similar relationships with
the Company, upon the communities in which the Company conducts its business
and upon the economy of the state, region and nation.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
The Charter and By-laws also provide that any action required or permitted
to be taken by the stockholders of the Company may be taken only at a duly
called annual or special meeting of the stockholders, and may not be taken by
written consent. The Charter and By-laws provide that special meetings of
stockholders may be called only by the Chairman of the Board of Directors, a
majority of the Board of Directors or the President of the Company. These
provisions could have the effect of delaying until the next annual
stockholders meeting stockholder actions which are favored by the holders of a
majority of the then outstanding voting securities of the Company. These
provisions may also discourage another person or entity from making a tender
offer for the Company's Common Stock, because such person or entity, even if
it acquired a majority of the outstanding voting securities of the Company,
would be able to take action as a stockholder (such as electing new directors
or approving a merger) only at a duly called stockholders meeting, and not by
written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
The Charter requires the affirmative vote of the holders of at least 75% of
the outstanding voting stock of the Company to amend or repeal any of the
foregoing Charter provisions, and to reduce the number of authorized shares of
Common Stock and Preferred Stock. A 75% vote of stockholders is required for
the stockholders to adopt, amend or repeal any By-law provisions. The By-laws
may also be amended or repealed by a majority vote of the Board of Directors
subject to any limitations set forth in the By-laws.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating to
the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty,
except in certain circumstances involving certain wrongful acts, such as (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) for any transaction from which the director derives an
improper personal benefit. These provisions do not limit or eliminate the
rights of the Company or any stockholder to seek non-monetary relief, such as
an injunction or recession, in the event of a breach of a director's fiduciary
duty. These provisions will not alter a director's liability under federal
securities laws. The Company's Charter also contains provisions indemnifying
the directors and officers of the Company to the fullest extent permitted by
the DGCL. The Company believes that these provisions will assist the Company
in attracting and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,752,012 shares of
Common Stock outstanding (assuming no exercise of outstanding options). Of
these shares, the 2,000,000 shares (2,300,000 shares if the over-allotment
option is exercised in full) to be sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except that any shares purchased
by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule
144") under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 10,752,012 shares of Common Stock outstanding upon completion
of this offering are deemed "Restricted Shares" under Rule 144 or Rule 701
under the Securities Act. Subject to the lock-up agreements described below
(the "Lock-up Agreements"), approximately 6,386,000 Restricted Shares will be
eligible for sale in the public market pursuant to Rule 144 or Rule 701
beginning 90 days after the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Common Stock
(approximately 127,520 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed, provided certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied. In
addition, Affiliates must comply with the restrictions and requirements of
Rule 144, other than the two-year holding period requirement, in order to sell
shares of Common Stock which are not restricted securities. Under Rule 144(k),
a person who is not an Affiliate and has not been an Affiliate for at least
three months prior to the sale and who has beneficially owned Restricted
Shares for at least three years may resell such shares without compliance with
the foregoing requirements. In meeting the two and three year holding periods
described above, a holder of Restricted Shares can include the holding periods
of a prior owner who was not an Affiliate. The two and three year holding
periods described above do not begin to run until the full purchase price or
other consideration is paid by the person acquiring the Restricted Shares from
the issuer or an Affiliate. Rule 701 provides that currently outstanding
shares of Common Stock acquired under the Company's employee compensation
plans may be resold by persons, other than Affiliates, beginning 90 days after
the date of this Prospectus, subject only to the manner of sale provisions of
Rule 144, and by Affiliates under Rule 144 without compliance with its two-
year minimum holding period, subject to certain limitations.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 to become eligible for resale in the public market. This
proposal if adopted would increase the number of shares of Common Stock
eligible for resale in the public market following this offering. No assurance
can be given concerning whether or when the proposal will be adopted by the
Securities and Exchange Commission.
OPTIONS
Rule 701 also provides that the shares of Common Stock acquired on the
exercise of currently outstanding options issued under the Company's stock
plans may be resold by persons, other than Affiliates, beginning 90 days after
the date of this Prospectus, subject only to the manner of sale provisions of
Rule 144, and by Affiliates under Rule 144 without compliance with its two-
year minimum holding period, subject to certain limitations. Subject to the
Lock-up Agreements, approximately 681,400 additional shares, of which options
to purchase 41,102 shares were exercisable as of August 31, 1996, will be
available under such provisions.
49
<PAGE>
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock otherwise issuable pursuant to the
Company's various stock plans that do not qualify for an exemption under Rule
701 from the registration requirements of the Securities Act. Such
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale
in the public markets to the extent applicable.
LOCK-UP AGREEMENTS
Subject to certain limited exceptions, the Company, the executive officers
and directors, the Selling Stockholders and certain other stockholders have
agreed not to sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock (or any security convertible into or exchangeable or
exercisable for Common Stock) without the prior written consent of Morgan
Stanley & Co. Incorporated for a period of 180 days from the date of this
Prospectus. In addition, for a period of 180 days from the date of this
Prospectus, except as required by law, the Company has agreed that its Board
of Directors will not consent to any offer for sale, sale or other
disposition, or any transaction which is designed or could be expected, to
result in, the disposition by any person, directly or indirectly, of any
shares of Common Stock without the prior written consent of Morgan Stanley &
Co. Incorporated. See "Underwriters."
REGISTRATION RIGHTS
After the completion of this offering, certain stockholders of the Company
(the "Rightsholders") will be entitled to require the Company to register
under the Securities Act up to a total of 1,092,753 shares of outstanding
Common Stock (the "Registrable Shares") under the terms of a certain agreement
among the Company and the Rightsholders (the "Registration Agreement"). The
Registration Agreement provides that in the event the Company proposes to
register any of its securities under the Securities Act at any time or times,
the Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some or all of such
Registrable Shares from such registration. The Rightsholders have, subject to
certain conditions and limitations, additional rights to require the Company
to prepare and file a registration statement with respect to their Registrable
Shares and the Company is required to use its best efforts to effect such
registration if the aggregate offering price of such proposed offering is at
least $10,000,000. Furthermore, such holders may require the Company to file
additional registration statements on Form S-3 subject to certain conditions
and limitations. The Company is generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock prevailing from time to time, or the
availability of shares for future sale, may have on the market price for the
Common Stock. Sales of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely effect prevailing market prices
for the Common Stock and could impair the Company's future ability to obtain
capital through an offering of equity securities.
50
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus, the Underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated and
Montgomery Securities are acting as Representatives (the "Underwriters"), have
severally agreed to purchase, and the Company and the Selling Stockholders
have agreed to sell to them, the respective number of shares of Common Stock
set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................. 446,668
Alex. Brown & Sons Incorporated................................... 446,666
Montgomery Securities............................................. 446,666
Adams, Harkness & Hill, Inc....................................... 40,000
Bear, Stearns & Co. Inc. ......................................... 60,000
Dean Witter Reynolds Inc. ........................................ 60,000
A.G. Edwards & Sons, Inc. ........................................ 60,000
Hambrecht & Quist LLC............................................. 60,000
Brad Peery Inc. .................................................. 40,000
Piper Jaffray Inc. ............................................... 40,000
Punk, Ziegel & Knoell, L.P. ...................................... 40,000
Ragen MacKenzie Incorporated...................................... 40,000
Robertson, Stephens & Company LLC................................. 60,000
Soundview Financial Group, Inc. .................................. 40,000
Tucker Anthony Incorporated....................................... 40,000
Van Kasper & Company.............................................. 40,000
Wedbush Morgan Securities......................................... 40,000
---------
Total........................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to
take and pay for all the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the Common Stock
directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price which represents a
concession not in excess of $.63 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, this offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable for 30 days from the date of the Prospectus, to purchase
up to an additional 300,000 shares of Common Stock at the public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions. The Underwriters may exercise such option to purchase solely for
the purpose of covering over-allotments, if any, made in connection with this
offering. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock offered by the Underwriters hereby.
Subject to certain limited exceptions, the Company and the executive
officers and directors of the Company, the Selling Stockholders and certain
other stockholders have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, they will not (a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible
51
<PAGE>
into or exercisable or exchangeable for Common Stock (whether such shares or
any such securities are then owned by such person or are thereafter acquired),
or (b) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transactions described in clause (a) or (b) of this
paragraph is to be settled by delivery of such Common Stock or such other
securities, in cash or for a period of 180 days after the date of this
Prospectus.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
by negotiation between the Company and the Representatives of the
Underwriters. Among the factors considered in determining the initial public
offering price were the future prospects of the Company and its industry in
general, net revenue, earnings and certain other financial and operating
information of the Company in recent periods, and the price-earnings ratios,
certain other ratios, and market prices of securities and certain financial
operating information of companies engaged in activities similar to those of
the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
June 30, 1996 and for the period July 9, 1993 (inception) through December 31,
1993, for the years ended December 31, 1994 and 1995 and for the six months
ended June 30, 1996 included in this Prospectus and the financial statement
schedule included in the Registration Statement have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement may be inspected without charge at
the principal office of the Commission in Washington, D.C. and copies of all
or any part of which may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can also be obtained at prescribed
rates by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a
Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
52
<PAGE>
SEACHANGE INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet as of December 31, 1994 and 1995, June 30, 1996
and pro forma June 30, 1996 (unaudited)................................... F-3
Consolidated Statement of Income for the period from July 9, 1993
(inception) through December 31, 1993, for the years ended December 31,
1994 and 1995 and for the six months ended June 30, 1995 (unaudited) and
1996...................................................................... F-4
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the period from July 9, 1993 (inception) through
June 30, 1996 and pro forma June 30, 1996 (unaudited)..................... F-5
Consolidated Statement of Cash Flows for the period from July 9, 1993
(inception) through December 31, 1993, for the years ended December 31,
1994 and 1995 and for the six months ended June 30, 1995 (unaudited) and
1996...................................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SeaChange International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of redeemable convertible preferred stock
and stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of SeaChange International, Inc. and its
subsidiaries at June 30, 1996 and December 31, 1995 and 1994, and the results
of their operations and their cash flows for the six months ended June 30,
1996, the years ended December 31, 1995 and 1994 and the period from July 9,
1993 (inception) through December 31, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 12, 1996 except
as to the 3-for-2 stock split
discussed in Note 8 which
is as of October 30, 1996
F-2
<PAGE>
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 870,700 $ 6,184,100 $ 4,213,100 $ 4,213,100
Accounts receivable, net of
allowance for doubtful
accounts of $40,000 at
December 31, 1995 and
$60,000 at June 30, 1996.. 1,375,200 3,335,200 8,067,700 8,067,700
Inventories................ 790,700 2,438,500 6,874,900 6,874,900
Prepaid expenses........... 28,300 27,700 352,100 352,100
Deferred income taxes...... 66,000 151,000 337,000 337,000
---------- ----------- ----------- -----------
Total current assets...... 3,130,900 12,136,500 19,844,800 19,844,800
Property and equipment,
net........................ 352,900 1,433,100 3,355,500 3,355,500
Other assets................ 9,900 25,400 657,000 657,000
---------- ----------- ----------- -----------
$3,493,700 $13,595,000 $23,857,300 $23,857,300
========== =========== =========== ===========
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to
stockholders.............. $ 8,000 $ -- $ -- $ --
Accounts payable........... 1,070,400 3,139,700 7,405,300 7,405,300
Accrued expenses........... 242,500 1,935,500 2,027,000 2,027,000
Customer deposits.......... 1,382,700 2,082,200 7,209,100 7,209,100
Deferred revenue........... 152,100 766,600 1,834,700 1,834,700
Income taxes payable....... 121,000 720,000 -- --
---------- ----------- ----------- -----------
Total current
liabilities.............. 2,976,700 8,644,000 18,476,100 18,476,100
---------- ----------- ----------- -----------
Commitments (Note 10)
Series B redeemable
convertible preferred
stock, $.01 par value;
1,000,000 shares of
preferred stock authorized;
650,487 shares designated,
issued and outstanding at
December 31, 1995 and June
30, 1996, at issuance
price, net of issuance
costs; none outstanding on
a pro forma basis at
June 30, 1996 (unaudited).. -- 4,008,100 4,008,100 --
---------- ----------- ----------- -----------
Stockholders' Equity:
Series A convertible
preferred stock, $.01 par
value; 1,000,000 shares of
preferred stock
authorized; 30,000 shares
designated, 11,808 shares
issued at December 31,
1994 and 1995 and June 30,
1996, at issuance price;
none outstanding on a pro
forma basis at June 30,
1996 (unaudited).......... 100 100 100 --
Common stock, $.01 par
value; 15,000,000 shares
authorized; 9,309,615
shares, 9,625,740 shares,
9,631,418 shares and
11,892,274 shares issued
at December 31, 1994 and
1995, June 30, 1996 and
June 30, 1996 on a pro
forma basis (unaudited),
respectively.............. 93,100 96,300 96,400 119,000
Additional paid-in
capital................... 366,700 373,600 414,200 4,399,800
Retained earnings.......... 60,700 1,271,500 3,393,600 3,393,600
Treasury stock, 424,950
shares of common at
December 31, 1994 and
1995; 856,200 shares of
common and 1,286 shares of
Series A convertible
preferred at June 30, 1996
and on a pro forma basis
at June 30, 1996
(unaudited), respectively,
at cost................... (3,600) (3,600) (2,531,200) (2,531,200)
Notes receivable from
stockholders.............. -- (795,000) -- --
---------- ----------- ----------- -----------
Total stockholders'
equity................... 517,000 942,900 1,373,100 5,381,200
---------- ----------- ----------- -----------
$3,493,700 $13,595,000 $23,857,300 $23,857,300
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JULY 9, 1993
(INCEPTION) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- -----------------------
1993 1994 1995 1995 1996
------------ ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Systems................ $ -- $5,037,000 $21,999,300 $11,014,700 $22,906,200
Services............... -- 116,100 1,203,300 562,700 1,448,000
Software development
contract.............. 213,100 536,900 -- -- --
---------- ---------- ----------- ----------- -----------
213,100 5,690,000 23,202,600 11,577,400 24,354,200
---------- ---------- ----------- ----------- -----------
COSTS OF REVENUES:
Systems................ -- 3,405,600 14,916,900 7,052,000 14,429,700
Services............... -- 176,500 1,641,000 549,000 1,816,400
Software development
contract.............. 111,700 303,700 -- -- --
---------- ---------- ----------- ----------- -----------
111,700 3,885,800 16,557,900 7,601,000 16,246,100
---------- ---------- ----------- ----------- -----------
Gross profit............ 101,400 1,804,200 6,644,700 3,976,400 8,108,100
---------- ---------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and
development........... 43,000 884,700 2,367,300 1,047,100 1,986,600
Selling and marketing.. 16,200 443,700 1,608,600 780,600 1,909,900
General and
administrative........ 59,000 273,000 858,400 401,500 862,000
---------- ---------- ----------- ----------- -----------
118,200 1,601,400 4,834,300 2,229,200 4,758,500
---------- ---------- ----------- ----------- -----------
Income (loss) from
operations............ (16,800) 202,800 1,810,400 1,747,200 3,349,600
Interest income
(expense), net......... (1,100) 7,000 113,400 47,000 100,900
---------- ---------- ----------- ----------- -----------
Income (loss) before
income taxes.......... (17,900) 209,800 1,923,800 1,794,200 3,450,500
Provision for income
taxes.................. -- 55,000 713,000 665,100 1,328,400
---------- ---------- ----------- ----------- -----------
Net income (loss)...... $ (17,900) $ 154,800 $ 1,210,800 $ 1,129,100 $ 2,122,100
========== ========== =========== =========== ===========
Net income (loss) per
share.................. $ (.01) $ .02 $ .10 $ .09 $ .18
========== ========== =========== =========== ===========
Weighted average common
shares and equivalent
common shares
outstanding............ 2,699,950 9,399,480 11,575,320 11,901,200 11,584,850
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral partof these consolidated financial
statements.
F-4
<PAGE>
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 9, 1993 (INCEPTION) THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
SERIES B
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
------------------------
NUMBER OF
SHARES AMOUNT
------------------------
<S> <C> <C>
Issuance of
common stock..... -- $ --
Net loss......... -- --
--------- ------------
Balance at
December 31,
1993............ -- --
Issuance of
common stock..... -- --
Conversion of
notes payable to
Series A
preferred stock.. -- --
Issuance of
Series A
preferred stock.. -- --
Purchase of
treasury stock... -- --
Net income....... -- --
--------- ------------
Balance at
December 31,
1994............ -- --
Issuance of
common stock..... -- --
Issuance of
Series B
preferred stock,
net of issuance
costs of
$85,500.......... 650,487 4,008,100
Loans to
stockholders..... -- --
Net income....... -- --
--------- ------------
Balance at
December 31,
1995............ 650,487 4,008,100
Issuance of
common stock
pursuant to
exercise of stock
options.......... -- --
Compensation
expense
associated with
stock options.... -- --
Purchase of
treasury stock... -- --
Net income....... -- --
--------- ------------
Balance at June
30, 1996........ 650,487 4,008,100
Pro forma effect
of conversion of
preferred stock
into common stock
(unaudited)...... (650,487) (4,008,100)
--------- ------------
Pro forma
balance at June
30, 1996
(unaudited)..... -- $ --
========= ============
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------------------------------------
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK RETAINED NOTES TOTAL
----------------- ------------------- ADDITIONAL EARNINGS RECEIVABLE STOCKHOLDERS'
NUMBER OF NUMBER OF PAR PAID-IN (ACCUMULATED TREASURY FROM EQUITY
SHARES AMOUNT SHARES VALUE CAPITAL DEFICIT) STOCK STOCKHOLDERS (DEFICIT)
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock..... -- $ -- 3,150,000 $ 31,500 $ -- $ (31,100) $ -- $ -- $ 400
Net loss......... -- -- -- -- -- (17,900) -- -- (17,900)
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
Balance at
December 31,
1993............ -- -- 3,150,000 31,500 -- (49,000) -- -- (17,500)
Issuance of
common stock..... -- -- 6,159,615 61,600 -- (45,100) -- -- 16,500
Conversion of
notes payable to
Series A
preferred stock.. 5,000 -- -- -- 128,500 -- -- -- 128,500
Issuance of
Series A
preferred stock.. 6,808 100 -- -- 238,200 -- -- -- 238,300
Purchase of
treasury stock... -- -- -- -- -- -- (3,600) -- (3,600)
Net income....... -- -- -- -- -- 154,800 -- -- 154,800
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
Balance at
December 31,
1994............ 11,808 100 9,309,615 93,100 366,700 60,700 (3,600) -- 517,000
Issuance of
common stock..... -- -- 316,125 3,200 6,900 -- -- -- 10,100
Issuance of
Series B
preferred stock,
net of issuance
costs of
$85,500.......... -- -- -- -- -- -- -- -- --
Loans to
stockholders..... -- -- -- -- -- -- -- (795,000) (795,000)
Net income....... -- -- -- -- -- 1,210,800 -- -- 1,210,800
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
Balance at
December 31,
1995............ 11,808 100 9,625,740 96,300 373,600 1,271,500 (3,600) (795,000) 942,900
Issuance of
common stock
pursuant to
exercise of stock
options.......... -- -- 5,678 100 4,400 -- -- -- 4,500
Compensation
expense
associated with
stock options.... -- -- -- -- 36,200 -- -- -- 36,200
Purchase of
treasury stock... -- -- -- -- -- -- (2,527,600) 795,000 (1,732,600)
Net income....... -- -- -- -- -- 2,122,100 -- -- 2,122,100
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
Balance at June
30, 1996........ 11,808 100 9,631,418 96,400 414,200 3,393,600 (2,531,200) -- 1,373,100
Pro forma effect
of conversion of
preferred stock
into common stock
(unaudited)...... (11,808) (100) 2,260,856 22,600 3,985,600 -- -- -- 4,008,100
--------- ------- ---------- -------- ---------- ------------ ------------ ------------ -------------
Pro forma
balance at June
30, 1996
(unaudited)..... -- $ -- 11,892,274 $119,000 $4,399,800 $3,393,600 $(2,531,200) $ -- $ 5,381,200
========= ======= ========== ======== ========== ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
JULY 9, 1993 DECEMBER 31, JUNE 30,
(INCEPTION) THROUGH ------------------------ ------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
------------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss)..... $ (17,900) $ 154,800 $ 1,210,800 $ 1,129,100 $ 2,122,100
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 800 38,900 230,200 80,400 528,000
Inventory valuation
allowance............ -- -- 56,200 -- 413,800
Compensation expense
associated with stock
options.............. -- -- -- -- 36,200
Deferred income
taxes................ -- (66,000) (85,000) 45,000 (186,000)
Changes in assets and
liabilities:
Accounts receivable.. -- (1,375,200) (2,035,000) (2,066,300) (4,732,500)
Inventories.......... -- (962,200) (2,280,000) (1,237,500) (6,575,700)
Prepaid expenses and
other assets........ (6,400) (31,800) (14,900) (200) (333,100)
Accounts payable..... 5,200 1,065,000 2,069,300 682,200 4,265,600
Accrued expenses..... 36,400 209,800 1,693,000 897,200 (108,500)
Customer deposits.... -- 1,382,700 699,500 25,000 5,126,900
Deferred revenue..... 71,700 80,500 614,500 293,700 1,068,100
Income taxes
payable............. -- 121,000 599,000 416,500 (720,000)
--------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... 89,800 617,500 2,757,600 265,100 904,900
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of software.. -- -- -- -- (450,000)
Purchases of property
and equipment........ (13,900) (207,300) (659,400) (244,700) (697,800)
--------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities......... (13,900) (207,300) (659,400) (244,700) (1,147,800)
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Issuance (repayment)
of notes payable..... 8,000 -- (8,000) (8,000) --
Proceeds from issuance
of convertible
preferred stock,
net.................. -- 238,300 4,008,100 -- --
Proceeds from issuance
of convertible notes
payable.............. 125,000 -- -- -- --
Proceeds from issuance
of common stock...... 400 16,500 10,100 7,300 4,500
Purchase of treasury
stock................ -- (3,600) -- -- (2,022,600)
(Loans to) repayments
from stockholders.... -- -- (795,000) -- 290,000
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... 133,400 251,200 3,215,200 (700) (1,728,100)
--------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 209,300 661,400 5,313,400 19,700 (1,971,000)
Cash and cash
equivalents, beginning
of period............. -- 209,300 870,700 870,700 6,184,100
--------- ----------- ----------- ----------- -----------
Cash and cash
equivalents, end of
period................ $ 209,300 $ 870,700 $ 6,184,100 $ 890,400 $ 4,213,100
========= =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid......... $ 1,100 $ 3,700 $ -- $ -- $ --
========= =========== =========== =========== ===========
Income taxes paid..... $ -- $ -- $ 180,000 $ 180,000 $ 2,562,400
========= =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF NONCASH ACTIVITY:
Conversion of notes
payable plus accrued
interest to Series A
convertible preferred
stock................ -- 128,500 -- -- --
Receipt of computer
equipment in lieu of
cash payment of
accounts receivable
from customer........ -- -- 75,000 -- --
Transfer of items
originally classified
as inventories to
fixed assets......... -- 171,500 576,000 41,100 1,725,500
Purchase of treasury
stock in lieu of cash
payment of notes
receivable from
stockholders......... -- -- -- -- 505,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company develops software-based products to manage, store and distribute
digital video. Through June 30, 1996, substantially all of the Company's
revenues have been derived from sales of digital video insertion systems (the
"SeaChange SPOT System") to cable television operators and telecommunications
companies in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated.
Revenue Recognition
Revenue from the sale of systems is recognized upon shipment provided that
there are no uncertainties regarding customer acceptance and collection of the
related receivable is probable. If uncertainties exist, such as performance
criteria beyond the Company's standard terms and conditions, revenue is
recognized upon customer acceptance. Installation and training revenue is
deferred and recognized as these services are performed. Revenue from
technical support and maintenance contracts is deferred and recognized ratably
over the period of the related agreements, generally twelve months. Customer
deposits represent advance payments from customers for systems.
Revenue from the software development contract was recognized pursuant to
the related agreement as work was performed and defined milestones were
attained. Nonrefundable payments received under the contract prior to the
attainment of defined milestones were recorded as deferred revenue.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. To minimize
this risk, the Company evaluates customers' financial condition and requires
advance payments from the majority of its customers. At December 31, 1995 and
June 30, 1996, the Company had an allowance for doubtful accounts of $40,000
and $60,000, respectively, to provide for potential credit losses and such
losses to date have not exceeded management's expectations.
For the years ended December 31, 1994 and 1995 and for the six months ended
June 30, 1996, certain customers accounted for more than 10% of the Company's
revenues. Individual customers accounted for 50%, 18%, 11% and 10% of revenues
in 1994; 29%, 29%, 16% and 12% in 1995; and 26%, 19%, 13% and 10% in the six-
month period ended June 30, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-7
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash in U.S. government securities that are subject to
minimal credit and market risk.
At December 31, 1995 and June 30, 1996, the Company's cash equivalents
include approximately $4,700,000 and $4,200,000 of U.S. government securities,
respectively. These securities are classified as held-to-maturity and are
stated at amortized cost, which approximates fair market value.
Property and Equipment
Property and equipment consist of office and computer equipment, leasehold
improvements, demonstration equipment and spare components and assemblies used
to service the Company's installed base. Demonstration equipment consists of
systems manufactured by the Company for use in the Company's marketing and
selling efforts. Property and equipment are recorded at cost and depreciated
using the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the respective leases by use of the straight-line method.
Maintenance and repair costs are expensed as incurred.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily of
components and subassemblies and finished products held for sale. Rapid
technological change and new product introductions and enhancements could
result in excess or obsolete inventory. To minimize this risk, the Company
evaluates inventory levels and expected usage on a periodic basis and records
valuation allowances as required.
The Company is dependent upon certain vendors for the manufacture of
significant components of its digital advertising insertion system. If these
vendors were to become unwilling or unable to continue to manufacture these
products in required volumes, the Company would have to identify and qualify
acceptable alternative vendors. The inability to develop alternate sources, if
required in the future, could result in delays or reductions in product
shipments.
Research and Development and Software Development Costs
Costs incurred in the research and development of the Company's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to
establishing technological feasibility and capitalized thereafter until the
product is released for sale. Software development costs eligible for
capitalization to date have not been material to the Company's financial
statements. Costs associated with acquired software rights are capitalized if
technological feasibility of the software has been established.
At June 30, 1996, other assets includes $623,000 of purchased software, net
of amortization. The software is amortized over its estimated economic life of
two years and the related amortization expense for the six months ended June
30, 1996 totaled $27,000 and is included in the cost of systems revenues.
Stock Compensation
The Company's employee stock option plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." In January 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation." (See Note 9.)
F-8
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were
$0, $34,800, $173,900 and $119,000 for the period ended December 31, 1993, the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively.
Net Income (Loss) Per Share
Net income (loss) per share was determined by dividing net income (loss) by
the weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents are comprised of
common stock options and convertible preferred stock and have been included in
the calculation to the extent their effect is dilutive, except that pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
share equivalents issued at prices below the anticipated initial public
offering price in the twelve months preceding the anticipated initial public
offering have been included in the calculation for all periods presented,
including the period July 9, 1993 (inception) through December 31, 1993, in
which the Company incurred a net loss.
Unaudited Pro Forma Information
The unaudited pro forma information at June 30, 1996 included in the
consolidated balance sheet and the consolidated statement of redeemable
convertible preferred stock and stockholders' equity reflects the automatic
conversion of the Series A and Series B preferred stock into 2,260,856 shares
of common stock upon the closing of the Company's anticipated initial public
offering.
Interim Financial Data
The interim financial data for the six months ended June 30, 1995 is
unaudited. In the opinion of management, this interim financial data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of operations for this interim period.
The interim financial data for the six months ended June 30, 1996 is not
necessarily indicative of the results of operations for the full year.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Components and assemblies....................... $546,700 $2,261,100 $4,434,900
Finished products............................... 244,000 177,400 2,440,000
-------- ---------- ----------
$790,700 $2,438,500 $6,874,900
======== ========== ==========
</TABLE>
F-9
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------- JUNE 30,
(YEARS) 1994 1995 1996
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Office furniture and equipment...... 5 $ 34,900 $ 108,300 $ 264,600
Computer equipment.................. 3 357,700 1,156,300 1,875,800
Demonstration equipment............. 3 -- -- 830,000
Service and spare components........ 5 -- 350,000 1,050,400
Leasehold improvements.............. 1-3 -- 47,700 45,100
-------- ---------- ----------
392,600 1,662,300 4,065,900
Less--Accumulated depreciation...... 39,700 229,200 710,400
-------- ---------- ----------
$352,900 $1,433,100 $3,355,500
======== ========== ==========
</TABLE>
Depreciation expense was $800, $38,900, $230,200 and $501,000 for the period
ended December 31, 1993, the years ended December 31, 1994 and 1995 and the
six months ended June 30, 1996, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Accrued software license fees................... $164,000 $ 444,000 $ 445,900
Accrued sales and use taxes..................... 53,100 1,247,800 614,800
Other accrued expenses.......................... 25,400 243,700 966,300
-------- ---------- ----------
$242,500 $1,935,500 $2,027,000
======== ========== ==========
</TABLE>
6. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------------ JUNE 30,
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Current provision:
Federal....................................... $116,000 $652,000 $1,232,400
State......................................... 5,000 146,000 282,000
-------- -------- ----------
121,000 798,000 1,514,400
-------- -------- ----------
Deferred benefit:
Federal....................................... (51,000) (65,000) (139,000)
State......................................... (15,000) (20,000) (47,000)
-------- -------- ----------
(66,000) (85,000) (186,000)
-------- -------- ----------
$ 55,000 $713,000 $1,328,400
======== ======== ==========
</TABLE>
F-10
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Inventory basis difference......................... $20,000 $ 55,300 $229,000
Allowance for doubtful accounts.................... -- 15,700 24,000
Deferred revenue................................... 61,000 92,100 111,000
------- -------- --------
Total deferred tax assets........................ 81,000 163,100 364,000
Deferred tax liabilities............................. 15,000 12,100 27,000
------- -------- --------
Net deferred tax assets.............................. $66,000 $151,000 $337,000
======= ======== ========
</TABLE>
The income tax provision computed using the federal statutory income tax
rate differs from the Company's effective tax rate primarily due to the
following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------- JUNE 30,
1994 1995 1996
------ ------ ----------
<S> <C> <C> <C>
Statutory U.S. federal tax rate....................... 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit............... 1.7 4.4 4.4
Utilization of operating loss carryforwards........... (0.5) -- --
Research and development tax credits.................. (10.9) (2.8) --
Foreign sales corporation exempt income............... -- -- (0.4)
Nondeductible expenses................................ 1.9 1.5 0.5
Other................................................. -- -- --
------ ----- ----
26.2% 37.1% 38.5%
====== ===== ====
</TABLE>
7. PREFERRED STOCK
Voting Rights
Stockholders of both classes of convertible preferred stock are entitled to
votes equal to the number of common shares into which the shares of preferred
stock are convertible.
Dividends
Cash dividends on the Series A convertible preferred stock ("Series A
Stock") and the Series B redeemable convertible preferred stock ("Series B
Stock") (collectively, "Convertible Preferred Stock") are payable no later
than any dividends are paid on common stock and must be at least equal to the
per share amount paid or set aside for the common stock. As of June 30, 1996,
no dividends have been declared.
Conversion
The Convertible Preferred Stock is convertible into common stock at the
option of the holder, at any time, however, the Series B Stock may not be
converted prior to certain events. The Series A Stock conversion rate is one
hundred and fifty shares of common stock for one share of Series A Stock. The
Series B Stock conversion rate is a maximum of 2.625 shares of common stock
for one share of Series B Stock, based on a formula. The Series A Stock is
automatically convertible into common stock upon the closing of an initial
public offering in which net proceeds to the Company equal or exceed
$5,000,000. The Series B Stock is automatically convertible
F-11
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
into common stock upon the closing of an initial public offering in which net
proceeds to the Company equals or exceeds $15,000,000 and in which the price
paid by the public for such shares are at least twice the then conversion
value per share. The unaudited pro forma information at June 30, 1996,
included in the consolidated financial statements, assumes the conversion of
each share of Series B Stock into 1.0493 shares of Common Stock.
Redemption
If the Company has not consummated an initial public offering prior to
October 31, 2000, holders of at least 30% of the Series B Stock have the right
to require the Company to repurchase any or all of their shares. In addition,
if such request is made the Company must offer to redeem all shares of the
Series B Stock. The redemption price shall be the fair market value as of the
date of redemption, as agreed upon in good faith by the Company and the
stockholders. The Company may issue interest-bearing promissory notes in
satisfaction of its redemption obligation, to the extent that the aggregate
redemption price exceeds 50% of its working capital as of the redemption date.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the affairs of
the Company, the convertible preferred stockholders are entitled to receive
prior to and in preference to the common stockholders, an amount equal to the
greater of (i) in the case of the Series A Stock, $35.00 per share plus
declared but unpaid dividends and (ii) in the case of Series B Stock, $7.802
per share plus declared but unpaid dividends at a rate of 6% compounded
annually or (iii) such amount per share as would have been payable had each
share of Series A Stock or Series B Stock been converted into common stock
immediately prior to such liquidation, dissolution or winding up. Any
remaining assets of the Company shall be distributed ratably to all other
stockholders.
Stock Authorization
Upon the closing of the Company's anticipated public offering, the Board of
Directors will be authorized to issue from time to time up to an aggregate of
5,000,000 shares of preferred stock, in one or more series. Each such series
of preferred stock shall have the number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges to
be determined by the Board of Directors, including, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights.
8. COMMON STOCK
Stock Splits
Effective August 3, 1995, the Company's Board of Directors approved a 100-
for-1 stock split of the Company's common stock. All shares of common stock,
common stock options, preferred stock conversion ratios and per share amounts
included in the accompanying consolidated financial statements have been
adjusted to give retroactive effect to the stock split for all periods
presented.
On September 6, 1996, the Board of Directors authorized a 3-for-2 stock
split of the Company's common stock, which was effective on October 30, 1996.
All shares of common stock, common stock options, preferred stock conversion
ratios and per share amounts included in the accompanying consolidated
financial statements have been adjusted to give retroactive effect to the
stock split for all periods presented.
F-12
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restriction Agreements
The holders of 7,075,800 common shares have entered into stock restriction
and repurchase agreements under which the Company has the right to repurchase
unvested common shares at the original issuance price and vested common shares
at fair value upon termination of a business relationship with the Company.
Common shares subject to these agreements vest ratably over a five-year period
and, at June 30, 1996, 4,571,430 of such shares are unvested. In addition, the
Company has a right of first refusal to repurchase any vested shares offered
for sale by the holder.
Stock Repurchase
During January 1996, the Company repurchased 431,250 shares of its common
stock and 1,286 shares of Series A Stock from certain employees and directors
of the Company. Of the common stock repurchased, 21,750 shares were held by
the stockholders for less than six months from the time the shares became
vested. Accordingly, compensation expense was recorded for the difference
between the repurchase price and the original purchase price paid by the
stockholders. Compensation expense recorded as a result of this transaction
was $91,000.
Notes Receivable from Stockholders
The principal amount of the notes receivable from certain stockholders at
December 31, 1995 was payable at the earlier of (i) six months from the date
of issuance or (ii) the closing of any sale to a third party or redemption by
the Company of pledged shares of the Company's common stock or preferred
stock. Interest on the principal amount outstanding accrued at a rate of 5.9%
per annum. These loans were secured by common stock held by the noteholders
and, consequently, the loans are reflected as an offset to stockholders'
equity at December 31, 1995. In January 1996, the notes were settled in
connection with the repurchase by the Company of the common shares and Series
A preferred shares noted above.
Reserved Shares
At June 30, 1996, the Company has 3,285,828 shares and 1,954,448 shares of
common stock reserved for issuance upon the conversion of the convertible
preferred stock and the exercise of common stock options, respectively.
9. STOCK PLANS
1995 Stock Option Plan
The Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option
Plan") provides for the grant of incentive stock options and nonqualified
stock options for the purchase of up to an aggregate of 1,950,000 shares of
the Company's common stock by officers, employees, consultants and directors
of the Company. The Board of Directors is responsible for administration of
the 1995 Stock Option Plan. The Board of Directors determines the term of each
option, option exercise price, number of shares for which each option is
granted and the rate at which each option is exercisable. Options generally
vest ratably over five years. The Company may not grant an employee incentive
stock options with a fair value in excess of $100,000 that is first
exercisable during any one calendar year.
F-13
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Incentive stock options may be granted to employees at an exercise price per
share of not less than the fair value per common share on the date of the
grant (not less than 110% of the fair value in the case of holders of more
than 10% of the Company's voting stock). Nonqualified stock options may be
granted to any officer, employee, director or consultant at an exercise price
per share, as determined by the Company's Board of Directors.
Options granted under the 1995 Stock Option Plan generally expire ten years
from the date of the grant (five years for incentive stock options granted to
holders of more than 10% of the Company's voting stock).
Director Stock Option Plan
In June 1996, the Company's Board of Directors adopted and the stockholders
approved a director stock option plan (the "Director Option Plan") which
provides for the grant of options to full time directors of the Company to
purchase a maximum of 30,000 shares of common stock. Under the Director Option
Plan, each participating director will receive an option to purchase 3,375
shares of common stock. Options granted under the Director Option Plan will
vest as to 33 1/3% of the shares underlying the option immediately upon the
date of the grant, and will vest as to an additional 8 1/3% of the shares
underlying the option at the end of each of the next 8 quarters, provided that
the optionee remains a director. Directors will also receive, on each three-
year anniversary of such director's option grant date, an additional option to
purchase 3,375 shares of common stock, provided that such director continues
to serve on the Board of Directors. All options granted under the Director
Option Plan have an exercise price equal to the fair value of the common stock
on the date of grant and a term of ten years from the date of grant.
Employee Stock Purchase Plan
In September 1996, the Company's Board of Directors adopted and the
stockholders approved an employee stock purchase plan (the "1996 Stock
Purchase Plan") which provides for the issuance of a maximum of 300,000 shares
of common stock to participating employees who meet eligibility requirements.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of the Company's stock and directors who are
not employees of the Company may not participate in the 1996 Stock Purchase
Plan. The exercise price of the option is 85% of the lesser of the market
price of the common stock on the first or last business day of each six-month
plan period.
Transactions under the 1995 Stock Option Plan and the Director Option Plan
during the year ended December 31, 1995 and the six months ended June 30, 1996
are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... -- -- 327,120 $ .92
Granted................................ 327,120 $ .92 379,360 6.36
Exercised.............................. -- -- (5,680) .79
Cancelled.............................. -- -- (31,000) 1.20
-------- --------
Outstanding at period end................ 327,120 669,800
======== ========
Options exercisable at period end........ -- 33,710
-------- --------
Weighted average fair value of options
granted during the period............... $ .32 $ 2.96
======== ========
</TABLE>
F-14
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1996, the Company granted 17,625 options with an exercise price of
$9.33. In September 1996, 25,275 options were granted with an exercise price
of $10.67.
The following table summarizes information about employee and director stock
options outstanding at June 30, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE
RANGE OF EXERCISE PRICES JUNE 30, 1996 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
$ .50.......................... 134,070 9.2 $ .50
1.23-1.36.................... 159,390 9.3 1.28
4.19-5.00.................... 112,440 9.6 4.44
6.67-7.33.................... 263,900 10.0 7.21
-------
669,800
=======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
-----------------------------
NUMBER WEIGHTED
EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES JUNE 30, 1996 EXERCISE PRICE
- ------------------------ -------------- --------------
<S> <C> <C>
$ .50........................................... 30,330 $ .50
1.23-1.36..................................... -- --
4.19-5.00..................................... -- --
6.67-7.33..................................... 3,380 7.33
------
33,710
======
</TABLE>
Fair Value Disclosures
Had compensation cost for the Company's option plans been determined based
on the fair value at the grant dates, as prescribed in FAS 123, the Company's
net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Net income:
As reported........................................... $1,210,800 $2,122,100
Pro forma............................................. 1,207,800 2,103,500
Net income per share:
As reported........................................... $ .11 $ .18
Pro forma............................................. .10 .18
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.89% to 6.00% for options granted during the year ended
December 31, 1995 and 5.36% to 6.34% for options granted during the six months
ended June 30, 1996; and a weighted average expected option term of 5 years
for both periods.
F-15
<PAGE>
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because the determination of the fair value of all options granted after the
Company becomes a public entity will include an expected volatility factor in
addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro
forma disclosures are not representative of pro forma effects of reported net
income for future years.
10. COMMITMENTS
The Company leases its operating facilities and certain office equipment
under noncancelable operating leases which expire at various dates through
1998. Rental expense under operating leases was approximately $4,600 for the
period July 9, 1993 (inception) through December 31, 1993, $53,000 and
$154,000 for the years ended December 31, 1994 and 1995, respectively, and
$136,000 for the six months ended June 30, 1996. Future minimum lease payments
as of June 30, 1996 are as follows:
<TABLE>
<S> <C>
Six months ending December 31, 1996................................ $174,400
1997............................................................... 409,300
1998 (and thereafter).............................................. 95,500
--------
$679,200
========
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) retirement savings plan. Participation in the
plan is available to full-time employees who meet eligibility requirements.
Eligible employees may contribute up to 15% of their salary, subject to
certain limitations. Company contributions to the plan may be made at the
discretion of the Board of Directors. Through June 30, 1996, the Company made
no contributions.
F-16
<PAGE>
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