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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-21393
SEACHANGE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3197974
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
124 Acton Street, Maynard, MA 01754
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 897-0100
Securities Registered Pursuant To Section 12(b) Of The Act: None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 5, 1999 the aggregate market value of the voting stock held by non-
affiliates of the registrant, based upon the closing price for the registrant's
Common Stock on the Nasdaq National Market on such date was $48,774,090. The
number of shares of the registrant's Common Stock outstanding as of the close of
business on March 5, 1999 was 13,748,412.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement in connection with the Annual Meeting
of Stockholders to be held on or about June 17, 1999 to be filed pusuant to
Regulation 14A are incorporated by reference into Part III of this Form 10-K.
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PART I
This Annual Report on Form 10-K includes certain statements of a forward-looking
nature which reflect the Company's current views relating to future events or
the future financial performance of the Company. These forward-looking
statements are only predictions and are subject to risks and uncertainties,
particularly the matters set forth in "Certain Risk Factors" below, which could
cause actual events or results to differ materially from historical results or
those indicated by such forward-looking statements.
ITEM 1. Business
SeaChange International, Inc. ("SeaChange"or the "Company") develops,
markets and supports products to manage, store and distribute digital video for
television operators, broadcast 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 with their state-of-the-art electronic storage
and retrieval capabilities 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. A majority of SeaChange's customers
consist of major cable television operators and telecommunications companies in
the United States. The SeaChange SPOT System converts analog video forms such as
advertisements and news updates to digital video forms. It 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 SeaChange Advertising 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 has two existing movie products and one video-on-demand (VOD)
product all for the movie markets. The Company sells the SeaChange Movie System
which provides long-form video storage and delivery for the pay-per-view movie
markets and the SeaChange GuestServe System for delivering video-on-demand and
other guest services, internet access and PC games in a hotel environment for
cable television and telecommunications companies. The Company also sells its
video server, which is designed to store and distribute video streams of various
lengths, and MediaCluster, SeaChange's proprietary software technology that
enables multiple video servers to operate together as an integrated video
server.
The Company introduced its Broadcast MediaCluster product in 1998, offering
play to air capability for commercials and syndicated or other programming for
broadcast television companies. During 1998, the Company installed broadcast
systems at customer locations including network affiliates in the United States
and broadcast companies internationally.
Finally, SeaChange has developed the SeaChange ITV (Interactive Television)
MediaCluster to provide residential video-on-demand and other interactive
services for cable television operators and telecommunications companies. During
1998, SeaChange entered into agreements with several cable companies to provide
SeaChange's ITV System for demonstration and testing of their video-on-demand
systems. The Company also has agreements with certain developers of digital
set-top boxes to test and integrate their products with SeaChange's ITV System.
The Company was incorporated in Delaware in July 1993.
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Industry Background
Television operators, the largest users of professional quality video,
historically have relied on videotape technology such as reel-to-reel technology
and tape cassettes for the storage and distribution of video streams. These
systems, which use video tape as the primary mechanism for the storage and
distribution of video, have substantial limitations. Video tapes and their
associated recording playback mechanisms are subject to mechanical failure and
generational loss of video quality. Tape-based systems also require significant
manual intervention, which makes them expensive and cumbersome to operate and
limits their flexibility for programming and schedule changes. Finally, video
tapes are bulky and have limited storage capacity.
Over the past decade, the limitations of video 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, to be competitive in the
widening home-entertainment market, must find and offer new and enhanced video
services while simultaneously improving the efficiency of their operations.
While video 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 approximately 12,000 cable systems
currently in the United States, serving over 70 million households. In 1998, 96%
of all cable systems provided over 30 channels of programming to their
subscribers. 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 other 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 1998, 48%
of all television viewers were watching cable networks, yet cable television
advertising revenue accounted for only 24% 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 video tape-based
technology are a major factor which has prevented cable television operators
from historically exploiting their advantages over television broadcasters.
These 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. Increased channel capacity through the installation of fiber optic
cables is providing many cable television operators with the capacity to offer
video-on-demand to hotel and apartments using existing analog set-top boxes. The
addition of two way connectivity, and digital set-top boxes are providing many
cable television operators with the capacity to offer video-on-demand
programming capability throughout their subscriber base.
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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 offering targeted, value-added services with analog tape-based
systems on a cost effective basis.
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 recently
available digital bandwidth to originate multiple program streams. If this
application develops, television operators will require video storage and
delivery systems that can effectively manage and deliver these multiple
television signals.
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The SeaChange Solution
SeaChange develops, markets and supports 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, the Broadcast MediaCluster product
offers this capability to broadcast companies while the SeaChange
Guestserve and ITV MediaCluster Systems make it possible for television
operators to offer video-on-demand movies to individual hotel rooms or
residences.
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.
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Strategy
SeaChange's objective is to be the 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 internationally. The Company has formed its customer
relationships by providing 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 a 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 December 31, 1998 more than 34% 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.
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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.
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 advertising 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.
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SeaChange has developed two additional product offerings, the SeaChange
SPOT Long Form System ("the SeaChange SPOT LF System") and the SeaChange SPOT
PRO System, that are based on the SeaChange SPOT System technology. The
SeaChange SPOT LF 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 the long-form video streams in a multichannel environment. The
SeaChange SPOT LF 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 SPOT PRO System, also employs
the same underlying technology and basic functionality of the SeaChange SPOT
System and is designed to be a platform for the delivery of advertising and
other video content in a small to mid-sized television broadcast environment.
The selling price for the SeaChange SPOT Systems ranges from under $100,000 to
several million dollars with an average system selling price of approximately
$250,000.
SeaChange Advertising Management Software
The SeaChange Advertising Management Software (formerly Traffic and Billing
Software) 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. Advertising Management Software can be integrated with the SeaChange
SPOT System and is also compatible with many other advertisement insertion
systems currently in use.
Movie and Interactive Products
SeaChange Guestserve System. The SeaChange Guestserve System is a platform
for the storage and delivery of long-form video streams, particularly movies on
demand and interactive guest services such as hotel checkout, internet access
and PC games. 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. SeaChange is marketing the SeaChange Guestserve
system to cable television operators. The cable television operators can package
full scale video-on-demand systems for hotels and apartments.
The integrated system consists of user interfaces and application hardware
and software, including set-top boxes and remote control devices, and
SeaChange's MediaCluster technology and software architecture for the delivery
and storage of movies. The video servers are installed at the cable headend and
the video is 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.
SeaChange Movie System. The SeaChange Movie System provides cable
television operators, pay-per-view (PPV) movie service providers and Direct-to-
Home (DTH) providers with capability to originate multiple PPV movie channels or
any other scheduled video programming. The Movie System includes SeaChange's
MediaCluster technology for storage and delivery of the video programming as
well as an MPEG-2 encoder for capturing movies from video tape, and scheduling
software and hardware to enable creating programming schedules for the PPV
channels. This system includes fault resiliency in both the video server
technology and scheduling technology so as to ensure the highest levels of up
time.
SeaChange ITV MediaCluster System. The Company has developed and is testing
its ITV MediaCluster system. This system will be sold to cable television
operators and other telecommunications companies and is intended to enable them
to offer movies on demand and other interactive services to their subscribers
who have digital set-top
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boxes and access two way cable plants. This system comprises MediaCluster
servers which will reside at headends or nodes in the cable system, control
software to manage and control the system, and interfaces to digital headend
modulators and control systems and subscriber management systems.
Broadcast Television Products
SeaChange Broadcast MediaCluster System. The SeaChange Broadcast
MediaCluster 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 Broadcast MediaCluster System
is designed for customers in larger broadcast television markets which use
station automation systems or to smaller markets using control software included
in the system.
The SeaChange Broadcast MediaCluster System is designed to simultaneously
record, encode, store to a disk and play video content using SeaChange designed
MPEG-2 4:2:2 compression and decompression hardware. This product is designed
to seamlessly integrate into television broadcasters' current tape-based
operations and meet the high performance requirements of television
broadcasters.
OEM Products
Video Server 100 (and variants). 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 together with the
MediaCluster provides the base technology for all of SeaChange's digital video
products. The Video Server 100 is offered to systems integrators and VARs as a
platform for the storage and delivery of primarily short-form video in a wide
range of applications.
The Video Server 100 provides custom power and packaging for software use
in professional video applications. It incorporates RAID technology and a
redundant power supply to enable 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.
MediaCluster. 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, MediaCluster serves as the base technology for primarily
long-form video applications.
Through its software architecture, MediaCluster can join multiple SeaChange
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 has a patent for its MediaCluster technology.
The Company established a subsidiary, SeaChange Systems, at its Greenville,
New Hampshire location for the manufacture, development and OEM sale of the
Video Server 100 and MediaCluster products in 1997. Certain employees of the
Company or the subsidiary have been granted options and may be granted options
to acquire up to a 20% interest over time in the subsidiary.
Customer Service and Support
The Company installs, maintains and supports its products in North America,
Asia, South America and Europe. Annual maintenance contracts are generally
required for the first year of a customer's use of the Company's products. The
maintenance contracts are renewable on an annual basis. The Company also offers
basic and
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advanced formal on-site training for customer employees at the time of product
installation. The Company currently provides installation, maintenance and
support to international customers and also provides movie content in
conjunction with sales of SeaChange GuestServe System. The Company offers
technical support to customers, agents and distributors on a 24-hour, seven-day
a week basis.
Customers
The Company currently sells its products primarily to cable television
operators, broadcast and telecommunications companies.
The Company's customer base is highly concentrated among a limited number
of large customers, primarily due to the fact that the cable, movie, broadcast,
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 1996, 1997 and 1998, revenues from the
Company's five largest customers represented approximately 76%, 68% and 54%,
respectively, of the Company's total revenues. Customers accounting for more
than 10% of total revenues consisted of Tele-Communications, Inc. (29%), U.S.
West Media Group (17%), Comcast Corporation (13%) and Time Warner, Inc. (12%)
in 1996; Tele-Communications, Inc. (24%), Time Warner, Inc. (18%) and Comcast
Corporation (10%) in 1997; Tele-Communications, Inc. (24%) and Time Warner,
Inc. (15%) in 1998. 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.
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 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
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 seven
field offices. In October 1996, the Company entered into an exclusive sales and
marketing services agreement with a private Italian company to provide such
services throughout continental Europe. The Company also markets certain of its
products, namely the Video Server 100 and MediaCluster, to systems integrators
and VARs. As of December 31, 1998, the Company's selling and marketing
organization consisted of 32 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.
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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 promotional product 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
$5.4 million, $11.8 million and $15.8 million for the years ended December 31,
1996, 1997 and 1998, respectively. At December 31, 1998, 102 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,
Atlanta, Georgia and Novato, California. 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 interactive television 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 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.
Acquired In-Process Research and Development
In 1997, in connection with the acquisition of IPC, $5,290,000 of the
purchase price, based upon an independent appraisal, was allocated to in-process
research and development, resulting in an immediate charge to the Company's
operations as of the date of acquisition. The amount allocated to in-process
research and development represented technology which had not reached
technological feasability and did not have an alternative future use. The
Company was continuing development of the software applications and hardware
design of this in-process development as of December 31, 1998. Management
estimates the development of this in-process development to be completed during
1999 and for some features in 2000.
Manufacturing
The Company's manufacturing operations are located at facilities in
Maynard, 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.
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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 these 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. 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.
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 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 only with SkyConnect, Inc. In the market for long-form video products,
the Company competes with various computer companies offering video server
platforms such as Hewlett-Packard Company and Silicon Graphics, Inc., and more
traditional movie application providers like The Ascent Entertainment Group,
Panasonic Company, and Lodgenet Entertainment. In addition, the SeaChange
Advertising 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., LAN
International USA, Inc., Visiontel, Inc. and various suppliers of sales,
scheduling and billing software products. In the television broadcast market,
the Company competes against Tektronix, Inc., Hewlett-Packard Company, Sony
Corporation, and ASC Incorporated. The Company expects the competition in each
of these markets to intensify in the future.
12
<PAGE>
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 competition
levels 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.
Proprietary Rights
The Company's success and its ability to compete is dependent, in part,
upon its proprietary rights. The Company has been granted one U.S. patent for
its MediaCluster technology and has filed a foreign patent application for the
same technology. In addition, the Company has other patent applications in
process for other technologies. In addition, the Company 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 all of these patents will be issued or that, if issued, the
validity of such patents 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.
A version of the SeaChange Advertising and Management Software in limited
distribution was 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 December 31, 1998, the Company employed 310 persons, including 102 in
research and development, 107 in customer service and support, 32 in selling and
marketing, 42 in manufacturing and 27 in finance and administration. One of the
Company's employees is represented by a collective bargaining arrangement. The
Company believes that its relations with its employees are good.
CERTAIN RISK FACTORS
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
13
<PAGE>
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.
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, (xiv) the risks
associated with international sales as the Company expands its markets, and (xv)
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.
Seasonality. The Company has experienced significant variations in the
revenue, expenses and operating results from quarter to quarter and such
variations are likely to continue. The Company believes that fluctuations in the
number of orders being placed from quarter to quarter is principally
attributable to the buying patterns and budgeting cycles of television operators
and broadcast companies, the primary buyers of the digital advertising systems
and broadcast systems, respectively. The Company expects that there will
continue to be fluctuations in the number and value of orders received. As a
result, the Company's results of operations have in the past and likely will, at
least in the near future, fluctuate in accordance with such purchasing activity.
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, 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 affect 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 future revenues are lower than expectations.
Management of Growth. The Company has experienced fluctuation in revenues
and expansion of its operations which have placed significant demands on the
Company's management, administrative and operational resources. 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 customer sevice 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
14
<PAGE>
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.
Product Concentration. Sales of the SeaChange SPOT System have historically
accounted for a large percentage of the Company's revenues, and this product and
related enhancements are expected to continue to account for a significant
portion of the Company's revenues in 1999. 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.
Highly Competitive Markets. The market for digital video, movie and
broadcast products is highly competitive. The Company currently competes against
suppliers of both analog tape-based and digital systems in the digital
advertisement insertion market and against both computer companies offering
video server platforms and more traditional movie application providers in the
movie system market. In the television broadcast market, the Company competes
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.
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 effect on the
Company's business, financial condition and results of operations.
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 introduced broadcast
products during the quarter ended June 30, 1998 for use by television
broadcasters. These broadcast products will be directed toward a market that the
Company has not significantly addressed. There can be no assurance that the
Company will be successful in marketing and selling broadcast 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.
15
<PAGE>
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
its Guestserve and Broadcast MediaCluster Products and is developing its ITV
MediaCluster product for introduction. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these 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.
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 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.
Significant Concentration of Customers. The Company's customer base is
highly concentrated among a limited number of large customers, and, therefore, a
limited number of customers account for a significant percentage of the
Company's revenues in any year. In 1996, 1997 and 1998, revenues from the
Company's five largest customers represented approximately 76%, 68% and 54%,
respectively, of the Company's total revenues. In 1996, 1997 and 1998 four,
three and two customers, respectively, each accounted for more than 10% of the
Company's revenues. The same two customers accounted for more than 10% of the
Company's revenues in each 1996, 1997 and 1998. 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.
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
16
<PAGE>
Optivision, Inc. 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.
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.
Lengthy Sales Cycle. Digital video, movie and broadcast 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, movie and broadcast products
are 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.
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.
17
<PAGE>
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. However, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such claims will not be successful.
Risks Associated with International Sales. International sales accounted
for approximately 5%, 12% and 13% of the Company's revenues in 1996, 1997 and
1998, respectively. 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.
Concentration of Ownership. The Company's officers, directors and their
affiliated entities, and other holders of 5% or more of the Company's
outstanding capital stock, together beneficially owned approximately 58.9% of
the outstanding shares of Common Stock of the Company as of March 5, 1999. 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 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.
Year 2000 Issue. Although the Company does not expect that the Year 2000
issue will have a material effect on the Company's results of operations or
financial condition, the Company is potentially exposed to Year 2000 issues with
respect to internal software and external product offerings. If the Company's
internal systems or its products fail to operate properly as a result of Year
2000, the Company's results of operations and financial condition will be
materially and adversely impacted. The Company continues to evaluate the Year
2000 issue. For a discussion of the Company's Year 2000 readiness and risks
associated with the Year 2000 issue, see "Year 2000 Issue/Readiness Disclosure
Statement," particularly the subsection headed "Risks Associated with Year 2000
Issue" which appears in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this Report on Form 10-K.
18
<PAGE>
ITEM 2. Properties
The Company's corporate headquarters, which is also its principal
administrative, selling, marketing, customer service and support and product
development facility, is located in Maynard, Massachusetts and consists of
approximately 80,000 square feet under a lease which expires on March 31, 2005
with annual base rent of $379,000. The Company also leases approximately 29,000
square feet in a facility in Novato, California that is used for the development
and manufacture of certain movie products under a lease which expires in June,
2001, with an annual base rent of $393,000. 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. The Company also
leases small research and development and/or sales and support offices in
Atlanta, Georgia, Burlingame and San Francisco, California, Denver, Colorado,
Orlando, Florida, St. Louis, Missouri and Valbonne, France.
ITEM 3. 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.
ITEM 4. Submission of Matters To A Vote Of Securities Holders
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1998 to a vote of security holders of the Company through the
solicitation of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SEAC." The following table sets forth the high and low closing sale
prices for the Common Stock for the periods indicated, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1998
First Quarter $ 8.500 $ 6.625
Second Quarter 13.000 5.938
Third Quarter 11.750 5.750
Fourth Quarter 8.750 5.750
Year ended December 31, 1997
First Quarter 30.875 14.750
Second Quarter 28.250 17.000
Third Quarter 28.750 14.500
Fourth Quarter 14.625 6.813
</TABLE>
On March 5, 1999, the last reported sale price of the Common Stock on the
Nasdaq National Market was $8.625. As of March 5, 1999, there were approximately
159 stockholders of record of the Company's Common Stock, as shown in the
records of the Company's transfer agent. The Company believes that the number of
beneficial holders of the Company's Common Stock exceeds 2,500. The Company has
not paid any cash dividends on its capital stock since its inception, and does
not expect to pay cash dividends on its Common Stock 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.
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<PAGE>
ITEM 6. Selected 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the five years ended December 31, 1994, 1995, 1996,
1997 and 1998 and the consolidated balance sheet data at December 31, 1994,
1995, 1996, 1997 and 1998 are detailed below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- -------- ------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues
Systems........................................... $5,037 $21,999 $45,745 $60,414 $58,033
Services.......................................... 116 1,204 3,521 7,473 13,737
Other............................................. 537 -- -- -- --
------ ------- ------- ------- -------
5,690 23,203 49,266 67,887 71,770
------ ------- ------- ------- -------
Costs of revenues
Systems........................................... 3,406 14,917 27,133 34,740 35,772
Services.......................................... 176 1,641 4,030 7,607 13,241
Other............................................. 304 -- -- -- --
------ ------- ------- ------- -------
3,886 16,558 31,163 42,347 49,013
------ ------- ------- ------- -------
Gross profit....................................... 1,804 6,645 18,103 25,540 22,757
------ ------- ------- ------- -------
Operating expenses:
Research and development.......................... 885 2,367 5,393 11,758 15,763
Selling and marketing............................. 443 1,609 4,254 6,049 8,231
General and administrative........................ 273 858 2,064 3,744 5,816
Restructuring of operations....................... -- -- -- -- 676
Write-off of acquired in-process
research and development......................... -- -- -- 5,290 --
------ ------- ------- ------- -------
1,601 4,834 11,711 26,841 30,486
------ ------- ------- ------- -------
Income (loss) from operations...................... 203 1,811 6,392 (1,301) (7,729)
Interest income, net............................... 7 113 353 657 223
------ ------- ------- ------- -------
Income (loss) before income taxes.................. 210 1,924 6,745 (644) (7,506)
Provision (benefit) for income taxes............... 55 713 2,483 1,776 (2,789)
------ ------- ------- ------- -------
Net income (loss).................................. $ 155 $ 1,211 $ 4,262 $(2,420) $(4,717)
====== ======= ======= ======= =======
Basic earnings (loss) per share (1)................ $.09 $.33 $.82 $(.24) $(.38)
====== ======= ======= ======= =======
Diluted earnings (loss) per share (1).............. $.02 $.11 $.36 $(.24) $(.38)
====== ======= ======= ======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital.......................... $ 154 $ 3,493 $26,593 $24,490 $22,326
Total assets............................. 3,494 13,595 46,035 51,950 55,386
Long-term liabilities.................... -- -- -- -- 1,027
Deferred revenue......................... 152 767 2,192 3,851 5,495
Total liabilities........................ 2,977 8,644 14,205 17,468 24,733
Redeemable convertible preferred stock... -- 4,008 -- -- --
Total stockholders' equity............... 517 943 31,830 34,482 30,653
</TABLE>
- --------------
(1) For an explanation of the determination of the number of shares used in
computing net income (loss) per share see Notes to Consolidated Financial
Statements.
ITEM 7. 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 related Notes included
elsewhere in this Annual Report on Form 10-K. 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. Readers are
cautioned that such statements are only predictions and that actual results or
events may differ materially. In evaluating such statements, readers should
specifically consider the risk factors set forth in this Annual Report on Form
10-K, particularly the matters set forth under the caption ''Certain Risk
Factors,'' in Item 1 "Business", which could cause actual results to differ
materially from those indicated by such forward-looking statements.
21
<PAGE>
Overview
The Company develops, markets, licenses and sells digital advertising
insertion, movie and broadcast systems and related services and movie content to
television operators, telecommunications companies, the hospitality and
commercial property markets and broadcast television companies. Revenues from
systems sales are recognized upon shipment provided that there are no
uncertainties regarding customer acceptance and collection of the related
receivables is probable. If such 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.
Revenue from content fees, primarily movies, is recognized in the period earned
based on noncancelable agreements.
The Company has experienced fluctuations in the number of orders being
placed from quarter to quarter. The Company believes this is principally
attributable to the buying patterns and budgeting cycles of television operators
and broadcast companies, the primary buyers of digital advertising insertion
systems and broadcast systems, respectively. The Company expects that there will
continue to be fluctuations in the number and value of orders received and that
at least in the near future, the Company's revenue and results of operations
will reflect these fluctuations.
The Company's results are 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 upon its costs as well as in consideration of the
prices of competitive products and services in the marketplace. The costs of
the Company's products primarily consist of the costs of components and
subassemblies that have generally declined over time. As a result of the growth
of the Company's business, operating expenses of the Company have increased in
the areas of research and development, selling and marketing, customer service
and support and administration.
On December 10, 1997, the Company acquired all of the outstanding capital
stock of IPC Interactive Pte. Ltd. ("IPC") which was renamed to SeaChange Asia
Pacific Operations Pte. Ltd. ("SC Asia"). SC Asia provides interactive
television network systems to the hospitality and commercial property markets.
The transaction was accounted for under the purchase method and, accordingly,
the results of operations of the Company include the operating results of SC
Asia from the date of acquisition.
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 Operations. Gross profit shown for systems and
services revenues at the bottom of the table is stated as a percentage of
related revenues.
22
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues:
Systems
Digital advertising insertion.............. 92.4 % 82.5 % 61.4 %
Movies..................................... .5 6.5 13.6
Broadcast.................................. -- -- 5.9
Services..................................... 7.1 11.0 19.1
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Systems
Digital advertising insertion.............. 54.6 47.7 37.0
Movies..................................... .5 3.5 9.5
Broadcast.................................. -- -- 3.4
Services..................................... 8.2 11.2 18.4
----- ----- -----
63.3 62.4 68.3
----- ----- -----
Gross profit................................. 36.7 37.6 31.7
----- ----- -----
Operating expenses:
Research and development............... 10.9 17.3 22.0
Selling and marketing.................. 8.6 8.9 11.5
General and administrative............. 4.2 5.5 8.1
Restructuring of operations........... .9
Write-off of acquired in-
process research and
development........................... -- 7.8 --
----- ----- -----
23.7 39.5 42.5
----- ----- -----
Income (loss) from operations................ 13.0 (2.0) (10.8)
Interest income, net......................... .7 1.0 .3
----- ----- -----
Income (loss) before income taxes............ 13.7 (1.0) (10.5)
Provision (benefit) for income taxes......... 5.0 2.6 (3.9)
----- ----- -----
Net income (loss)............................ 8.7 % (3.6)% (6.6)%
===== ===== =====
Gross profit:
Systems
Digital advertising insertion.............. 40.9 % 42.2 % 39.8 %
Movies..................................... -- 46.3 % 30.0 %
Broadcast.................................. -- -- 42.7 %
Services..................................... (14.5)% (1.8)% 3.6 %
</TABLE>
Years ended December 31, 1996, 1997 and 1998
Revenues
Systems. The Company's systems revenues consist of sales of its digital
video insertion, movie and broadcast system products. Systems revenues
increased 32% from $45.7 million in 1996 to $60.4 million in 1997, and decreased
4% to $58.0 million in 1998. The increased systems revenues in 1997 compared to
1996 resulted from the increase in the number of the Company's digital video
insertion systems sold to television operators primarily in the United States
and the sale of approximately $4.4 million of movie systems compared to $232,000
in 1996. The decreased systems revenues in 1998 compared to 1997 resulted from
a decrease of approximately $11.9 million in digital advertising insertion
systems revenues, offset by an increase of $5.3 million in movie systems
revenues and an increase $4.2 million in broadcast systems revenues. The
decrease in digital advertising insertion systems revenues is primarily
attributable to a decrease in the volume of digital video insertion systems sold
due to a shift in spending by U.S. cable operators on these products. U.S. cable
operators have shifted their spending patterns to buy expansions to existing
systems and to buy smaller scale digital ad insertion systems. The increase in
1998 of movie systems revenues of approximately $5.3 million is primarily
attributable to an increase in the volume of movie systems sold as a result of
the acquisition of SC Asia. The increase in 1998 of approximately $4.2 million
in broadcast systems is attributable to the initial introduction of the product
during the quarter ended June 30, 1998. The Company expects future systems
revenue growth, if any, to come principally from its broadcast products.
23
<PAGE>
For the years ended December 31, 1996, 1997 and 1998, certain customers
accounted for more than 10% of the Company's total revenues. Individual
customers accounted for 29%, 17%, 13% and 12% of total revenues in 1996; 24%,
18% and 10% of total revenues in 1997; and 24% and 15% of total revenues in
1998. The Company believes that revenues from current and future large
customers will continue to represent a significant proportion of total revenues.
International sales accounted for approximately 5%, 12% and 13% of total
revenues in the years ended December 31, 1996, 1997 and 1998, respectively. The
Company expects that international sales will continue to increase as a
percentage of the Company's business in the future. As of December 31, 1998, all
sales of the Company's products were made in United States dollars. The Company
does not expect to change this practice in the foreseeable future. Therefore,
the Company has not experienced, nor does it expect to experience in the near
term, any material impact from fluctuations in foreign currency exchange rates
on its results of operations or liquidity. If this practice changes in the
future, the Company will reevaluate its foreign currency exchange rate risk.
Services. The Company's services revenues consist of fees for
installation, training, product maintenance, technical support services and
movie content fees. The Company's services revenues increased 112% from
approximately $3.5 million in 1996 to $7.5 million in 1997, and increased 84% to
$13.7 million in 1998. 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 and additional
service revenues in the form of movie content fees as a result of the
acquisition of SC Asia.
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of
purchased components and subassemblies, labor and overhead relating to the final
assembly and testing of complete systems and related expenses. Costs of systems
revenues increased 28% from $27.1 million in 1996 to $34.7 million in 1997, and
increased 3% to $35.8 million in 1998. In 1996 and 1997, 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 various components. In 1998, the increases in costs of systems
revenues reflect increased manufacturing labor and overhead costs incurred to
support changes in the product mix, including the introduction of the broadcast
products.
Systems gross profit as a percentage of systems revenues was 40.7%, 42.5%
and 38.4% in 1996, 1997 and 1998, respectively. The increase in systems gross
profit in 1997 in digital advertising insertion systems resulted from lower
costs of certain purchased components and subassemblies for systems, the Company
achieving certain manufacturing efficiencies as a result of increased volume of
systems and design improvements in the second generation video insertion
product. The increase in systems gross profit in movie systems is attributable
to Company manufacturing and selling a greater number of movie systems, thereby
achieving certain manufacturing efficiencies as a result of increased volume of
systems. The decrease in systems gross profit in 1998 is attributable to a
shift in the mix of system sales and higher manufacturing labor and overhead
costs. The decrease in gross profit of digital advertising insertion systems is
primarily attributable to revenues including a greater percentage of smaller
scale digital ad insertion systems and expansions to existing systems which have
higher costs on certain purchased components and the overall higher
manufacturing labor and overhead costs. The decrease in gross profit of movie
systems is primarily attributable to higher costs on certain purchased
components, specifically set-top boxes, and overall higher manufacturing labor
and overhead costs. The gross profit of the broadcast products, introduced in
1998, offset the decreases in the gross profit of the movie and digital
advertising insertion systems products. The gross profits in 1996, 1997 and 1998
were impacted by increases of approximately $694,000, $1.7 million and $2.0
million, respectively, in the Company's inventory valuation allowance. The
Company evaluates inventory levels and expected usage on a periodic basis and
provides a valuation allowance for estimated inactive, obsolete and surplus
inventory.
Services. Costs of services revenues consist primarily of labor, materials
and overhead relating to the installation, training, product maintenance and
technical support services provided by the Company and costs associated with
providing movie content. Costs of services revenues increased 89% from
24
<PAGE>
approximately $4.0 million in 1996 to $7.6 million in 1997, and increased 74% to
$13.2 million in 1998, primarily as a result of the costs associated with the
Company hiring and training additional service personnel to provide worldwide
support for the growing installed base of digital ad insertion, movie and
broadcast systems and costs associated with providing movie content. Costs of
services exceeded services revenues by 14.5% and 1.8% in 1996 and 1997,
respectively. Services gross profit as a percentage of services revenue was
3.6% in 1998. Improvements in the services gross profit in 1997 and 1998,
reflects the increases in the installed base of systems under service contracts.
Also, the services gross profit in 1998 includes gross profit generated from the
movie content fees as a result of the acquisition of SC Asia. The Company
expects that it will continue to experience fluctuations in gross profit as a
percentage of services revenue as a result of the timing of revenues from
product and maintenance support and other services to support the growing
installed base of systems and the timing of costs associated with the Company's
ongoing investment required to build a service organization to support the
installed base of systems and new products.
Research and Development. Research and development expenses consist
primarily of compensation of development personnel, depreciation of equipment
and an allocation of related facilities expenses. Research and development
expenses increased 118% from approximately $5.4 million in 1996 to $11.8 million
in 1997, and increased 34% to $15.8 million in 1998. The increases in the dollar
amounts in 1997 and 1998 were primarily attributable to the hiring and
contracting of additional development personnel which reflects the Company's
continuing investment in new products and in 1998, the additional resources
acquired with IPC. All internal software development costs to date have been
expensed by the Company. The Company expects that research and development
expenses will continue to increase in dollar amount as the Company continues its
development and support of new and existing products.
Selling and Marketing. Selling and marketing expenses consist primarily of
compensation expenses, including sales commissions, travel expenses and certain
promotional expenses. Selling and marketing expenses increased 42% from
approximately $4.3 million in 1996 to $6.0 million in 1997, and increased 36% to
$8.2 million in 1998. The increases in the dollar amounts were attributable to
the hiring of additional selling and marketing personnel, increased
international selling efforts and expanded promotional activities to support the
movie and broadcast products. In 1997, selling expenses were also higher due to
an increase in commission expenses relating to the higher revenue levels.
General and Administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facilities expenses. General and administrative expenses increased 81%
from $2.1 million in 1996 to approximately $3.7 million in 1997, and increased
55% to approximately $5.8 million in 1998. The increases in the dollar amounts
were primarily attributable to increased staffing and related costs to support
the Company's expanded operations and the acquisition of SC Asia. The Company
does not expect that general and administrative expenses will increase in dollar
amount in the foreseeable future.
Write-off of Acquired In-Process Research and Development. In connection
with the acquisition of IPC, the Company acquired certain technology that can be
used with the Company's video server technology to provide interactive
television network systems to the hospitality and commercial property markets.
As discussed in Note 5 to the consolidated financial statements, the Company
recorded a charge to operations of $5,290,000 for the write-off of in-process
research and development, the value of which was determined based upon an
independent appraisal. In addition, the Company recorded intangible assets of
$1,635,000 that included approximately $850,000 of software. Of the acquired
technology, the capitalized amount reflects the allocation of the purchase price
to the software technology deemed technologically feasible, including the
operating system and software for the distribution of movies over the network.
Acquired technology, including software to provide certain new interactive
features and functions over the network, included in the in-process write-off
reflects the purchase price allocated to technology currently under development
and not considered technologically feasible at the time of the acquisition and
with no alternative future use. The Company was continuing the development of
the software applications and hardware design of this in-process development as
of December 31, 1998. Management estimates the development of this in-process
development to be completed during 1999 and for some features in 2000.
25
<PAGE>
Restructuring of Operations. In March 1998, the Company recorded a charge
of $676,000 for the restructuring of operations as part of a planned
consolidation of the operations of SC Asia. The charge for restructuring
included $569,000 related to the termination of 13 employees, a provision of
$60,000 related to the planned vacating of premises and $47,000 of compensation
expense associated with stock options for certain terminated employees. At
March 31, 1998, the Company had notified all terminated employees. All
restructuring charges were paid as of December 31, 1998.
Interest Income. Interest income was approximately $353,000, $657,000 and
$262,000 in 1996, 1997 and 1998, respectively. The increase in 1997 in interest
income primarily resulted from interest earned on a higher invested balance
primarily due to the net proceeds of $24.1 million from the initial public
offering of the Company's Common Stock in November 1996. The decrease in
interest income in 1998 primarily resulted from lower average invested balances
in 1998.
Provision for Income Taxes. The Company's effective tax rate was 36.8% in
1996. The Company's effective tax rate for 1997 was significantly impacted by
the write-off of the acquired in-process research and development which due to
the tax-free nature of the transaction to IPC stockholders, is not deductible
for tax purposes by the Company. Accordingly, in 1997 the Company recorded a
tax provision of approximately $1.8 million despite a book pre-tax operating
loss. The Company's effective tax benefit rate was 37.2% in 1998 due to the
taxable loss in 1998.
The Company had net deferred tax assets of $1,091,000 and $1,967,000 at
December 31, 1997 and 1998, respectively. The Company has made the determination
it is more likely than not that it will realize the benefits of the net deferred
tax assets. As a result of the acquisition of IPC, the Company acquired deferred
tax assets of $3.4 million, consisting primarily of net operating loss
carryforwards. As discussed in Note 7 of the consolidated financial statements,
the Company maintains a valuation allowance on the acquired net deferred tax
assets.
26
<PAGE>
Quarterly Results of Operations
The following table presents certain unaudited quarterly information for
the eight quarters ended December 31, 1998. 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 Annual Report. 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, 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, Sept. 30, Dec. 31,
--------- -------- --------- --------- ---------- --------- ---------- ---------
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- --------- ---------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Financial Data (Unaudited):
Revenues
Systems.................................... $16,796 $20,184 $13,188 $10,246 $14,807 $13,207 $14,240 $15,779
Services................................... 1,256 1,668 2,063 2,486 3,362 3,373 3,548 3,454
------- ------- ------- ------- ------- ------- ------- -------
18,052 21,852 15,251 12,732 18,169 16,580 17,788 19,233
------- ------- ------- ------- ------- ------- ------- -------
Costs of revenues
Systems.................................... 9,457 11,079 7,889 6,315 8,967 8,223 8,897 9,685
Services................................... 1,386 1,622 1,953 2,646 3,043 3,108 3,755 3,335
------- ------- ------- ------- ------- ------- ------- -------
10,843 12,701 9,842 8,961 12,010 11,331 12,652 13,020
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................................ 7,209 9,151 5,409 3,771 6,159 5,249 5,136 6,213
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses
Research and development................... 2,416 2,750 3,159 3,433 4,003 3,900 3,897 3,963
Selling and marketing...................... 1,268 1,842 1,431 1,508 1,845 2,081 1,928 2,377
General and administrative................. 930 866 792 1,156 1,562 1,721 1,174 1,359
Restructuring of operations -- -- -- -- 676 -- -- --
Write-off of acquired in-process
research and development.................. -- -- -- 5,290 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
4,614 5,458 5,382 11,387 8,086 7,702 6,999 7,699
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.............. 2,595 3,693 27 (7,616) (1,927) (2,453) (1,863) (1,486)
Interest income, net....................... 200 187 136 134 103 76 20 24
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.......... 2,795 3,880 163 (7,482) (1,824) (2,377) (1,843) (1,462)
Provision (benefit) for income taxes....... 1,062 1,475 61 ( 822) (709) (769) (770) ( 541)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).......................... $ 1,733 $ 2,405 $ 102 $(6,660) $(1,115) $(1,608) $(1,073) $ ( 921)
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share............. $ .19 $ .24 $ .01 $ (.61) $ (.10) $ (.13) $ (.08) $ (.07)
Diluted earnings (loss) per share........... $ .13 $ .18 $ .01 $ (.61) $ (.10) $ (.13) $ (.08) $ (.07)
Gross profit
Systems.................................... 43.7% 45.1% 40.2% 38.4% 39.4% 37.7% 37.5% 38.6%
Services................................... (10.4)% 2.8% 5.3% (6.4)% 9.5% 7.9% (5.8)% 3.4%
</TABLE>
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.
The Company has also experienced significant variations in its quarterly
systems gross margins. Changes in pricing policies, the product mix, the timing
and significance of new product introductions and product enhancements, and
fluctuations in the number of systems so affects manufacturing efficiencies
and, accordingly, the gross profits. Quarterly services gross margins have
historically fluctuated significantly because installation and training service
revenue varies by quarter while the related costs are relatively consistent by
quarter.
27
<PAGE>
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, 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 future 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, therefore, should not be relied upon as indications
of future performance.
Liquidity and Capital Resources
From inception through November 1996, the Company funded its operations
primarily through cash provided by operations and the private sale of equity
securities. In November 1996, in connection with the initial public offering of
the Company's Common Stock, the Company received net proceeds of $24.1 million.
Cash, cash equivalents and marketable securities decreased $7.2 million
from $12.3 million at December 31, 1997 to $5.1 million at December 31, 1998.
Working capital decreased from approximately $24.5 million at December 31, 1997
to approximately $22.3 million at December 31, 1998.
Net cash used in operating activities was approximately $1.9 million, $9.2
million and $7.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The net cash used in operating activities during 1998 was the
result of the net loss adjusted for noncash expenses including depreciation and
amortization, deferred income taxes, inventory valuation allowance and the
changes in certain assets and liabilities. The significant net changes in assets
and liabilities that used cash in operations include increases in accounts
receivable, inventories and income taxes receivable. The net increase in
accounts receivable in 1998 of approximately $6.4 million is attributable to the
increase in revenues in the fourth quarter of 1998 compared to the same period
in 1997. The net increase in inventories in 1998 of approximately $2.4 million
is principally attributable to the increase in the number of product lines.
Income taxes receivable is attributable to the Company carrying back the taxable
loss in 1998 that results in a refund of income taxes.
Net cash used in investing activities was approximately $3.2 million and
$10.8 million for the years ended December 31, 1996 and 1997, respectively. Net
cash provided by investing activities was approximately $5.5 million in the year
ended December 31, 1998. Investment activity consisted primarily of 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.
Net cash provided by financing activities was approximately $22.3 million
and $4.1 million for the years ended December 31, 1996 and 1998, respectively.
Net cash used in financing activities was approximately $454,000 in the year
ended December 31, 1997. In 1996, the cash provided by financing activities
consisted primarily of net proceeds of $24.1 million from the initial public
offering of the Company's Common Stock in November 1996 offset by the purchase
of $2.0 million of treasury stock. In 1997, the cash used in financing
represented repayment of IPC's line of credit of approximately $700,000 and
payment of loans to related parties of approximately $437,000, offset by
$683,000 received in connection with the issuance common stock pursuant to the
both the exercise of stock options and purchases under the employee stock
purchase plan. In 1998, the cash provided by financing included $1.2 million and
$2.0 million borrowings under the equipment line of credit and line of credit,
respectively, and by $914,000 received in connection with the issuance of common
stock pursuant to both the exercise of stock options and purchases under the
employee stock purchase plan.
28
<PAGE>
The Company has a $6.0 million revolving line of credit and a $3.0 million
equipment line of credit with a bank. The revolving line of credit expires in
October 1999 and the equipment line of credit expires in June 1999. Borrowings
under the lines of credit are secured by substantially all of the Company's
assets. Loans made under the revolving line of credit generally bear interest
at a rate per annum equal to the bank's base rate plus .5% (8.25 % at December
31, 1998). Loans made under the equipment loan bear interest at a rate per
annum equal to the bank's base rate plus 1.0% (8.75 % at December 31, 1998). 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 including the maintenance of total liabilities, excluding
deferred revenue, to net worth of at least .80 to 1.0. At December 31, 1998 the
Company was in compliance with all covenants. As of December 31, 1998, the
Company had borrowed $2.0 million and $1.2 million against the line of credit
and the equipment line of credit, respectively.
The Company believes that existing funds together with available borrowings
under the line of credit and equipment line facility are adequate to satisfy its
working capital and capital expenditure requirements for the foreseeable future.
The Company had no material capital expenditure commitments as of
December 31, 1998.
Year 2000 Issue/Year 2000 Readiness Disclosure
Overview. The Company is completing its process of analyzing and addressing
what is known as the Year 2000 Issue. The Year 2000 Issue has arisen because
many existing computer programs use only two digits to identify a year in the
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century and, accordingly, could misconstrue
dates such as "00" as the year 1900 rather than 2000. The failure of computer
programs and systems to properly recognize dates beginning in the year 2000
could adversely affect the Company's business activities.
The Company's Year 2000 Compliance Program. The Company is executing its
Year 2000 Compliance Program, the purpose of which is: to identify important
systems that are not yet Year 2000 compliant; to initiate replacement or
remedial action to assure that key systems will continue to operate in the Year
2000 and to test the replaced or remediated systems; to identify and contact key
suppliers, vendors, customers and business partners to evaluate their ability to
maintain normal operations in the Year 2000; and to develop appropriate
contingency plans for dealing with foreseeable Year 2000 complications. The
Company's Year 2000 Committee has made significant progress toward the
completion of these goals. The Committee continues to execute the Company's
Year 2000 Compliance Program and reports the results and status of the Company's
Year 2000 efforts to the Board of Directors. The Company expects to
substantially complete its Year 2000 Compliance Program activities by the end of
1999.
Information Technology Systems. The Company's critical internal information
technology ("IT") systems consist of its Electronic Mail system, Corporate
Communications system, Manufacturing database, desktop and file management
systems, Software Development tools and I/S Management tools. The Company also
uses a Call Center Management software tool for use in the Company's customer
service department. The Company has contacted the vendors of these systems and
obtained assurances that these IT systems are currently in material Year 2000
compliance. The Company continues to upgrade older versions of these systems
that may not be compliant and intends to finish these upgrades to achieve
material Year 2000 compliance. The Company is in the process of obtaining
written statements confirming such compliance from these vendors. The Company is
still in the process of evaluating other areas of its existing internal IT
systems at this time and will seek further assurances from its vendors as
necessary. The Company plans to test its critical IT systems during 1999. The
Company intends to evaluate the need for contingency plans for these internal IT
systems given the assurances of compliance the Company has received for these
systems. While the Company will work diligently with all of its IT system
providers, there is no guarantee that these IT system providers will meet Year
2000 compliance. The failure of any such IT system to be Year 2000 compliant
could have a negative effect on the business activities of the Company.
29
<PAGE>
Non-Information Technology Systems. The Company is conducting an assessment
of its non-information technology systems (such as building security, voice
mail, telephone and other systems containing embedded microprocessors) and is in
the process of determining the nature and extent of any work that may be
required to make any non-IT systems Year 2000 compliant. The Company has made
Year 2000 compliance inquiries to the vendors of these systems, and intends to
track the responses to its inquiries and have the inquiry process completed
during the first half of 1999.
Third Party Suppliers, Vendors and Customers. The Company's Year 2000
Compliance Program also includes an investigation of the Year 2000 compliance of
its major suppliers, vendors, customers and business partners. For example, all
of the Company's products and services incorporate third party software and
hardware. The Company is in the process of evaluating its product components.
The Company has identified and contacted most of its third party suppliers of
hardware and software components regarding Year 2000 compliance and has
collected compliance statements from most of these suppliers. The Company has
learned that some features or functions of such third party components are not
Year 2000 compliant. However, in certain cases the Company does not use such
features or functions in its products and, to that extent, the Company believes
the non-compliance of such features and functions will not have a negative
impact on its products. In those cases where the non-compliance of third party
components does affect features or functions used by the Company in its
products, the Company intends to install upgrades (most of which are currently
available) to achieve material compliance. In addition, the Company is
completing the process of testing its application software. To date, the
Company has found only a few minor problems with its application software, and
has already created patches to this software. Given the number of components
and the complexity of the software incorporated in the Company's products and
services, the Company believes that in the course of conducting its Year 2000
Compliance Program it could reasonably discover that the Year 2000 problem may
affect its software or components. However, the Company regularly develops
software updates to its product offerings as a natural course of business and
the Company does not expect that these Year 2000 updates will be excessively
complex or expensive to implement. Still, there can be no assurances that there
will be no service interruption on the part of any of the Company's third party
suppliers due to the Year 2000 problem and this could have a material adverse
effect on the Company.
Year 2000 Costs and Expenses. To date, the costs associated with the Year
2000 Issue and the Company's Year 2000 Compliance Program have not been
material. The Company will incur costs that include internal resources,
software and equipment upgrades and replacement. Based on currently available
information, the Company believes that the expense associated with its ongoing
efforts will not be material and will be funded through operations, but the
Company has not completed its evaluation of its non-IT systems and its third
party relationships. If unforeseen compliance efforts are required or if
present compliance efforts are not completed on time, or if the cost of any
required updating, modification or replacement of the Company's systems or
equipment exceeds the Company's estimates, the Year 2000 Issue could result in
material costs and have a material adverse effect on the Company.
Contingency Plans. At the present time, the Company has not felt it
necessary to formulate any contingency plans for addressing problems due to the
Year 2000 Issue. The Company has been assured that its critical internal IT
systems are compliant by the vendors of those systems and the Company will
evaluate the need for contingency plans for internal IT systems given those
assurances. The Company is currently in the process of evaluating the Year 2000
Issue with respect to its non-IT systems and with respect to its major
suppliers, vendors, customers and business partners. As this evaluation process
proceeds, the Company will formulate appropriate contingency plans. The Company
expects that any required contingency planning will be completed no later than
the end of 1999.
Risks Associated with Year 2000 Issue. Various statements in this
discussion of Year 2000 are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed above under
"Factors That May Affect Future Results." These statements include statements
of the Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance.
30
<PAGE>
These forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified; the failure of software vendors to deliver
the upgrades and repairs to which they have committed; the wide variety of
information technology systems and components, both hardware and software, that
must be evaluated; any inaccuracy in the assessment of the cost and financial
exposure of the Company with respect to current and older versions of the
Company's products; the failure of software vendors to deliver upgrades and
repairs to which they have committed; and the large number of vendors and
customers with which the Company interacts. The Company's assessments of the
effects of Year 2000 on the Company are based, in part, upon information
received from third parties and the Company's reasonable reliance on that
information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company reasonably relied must be considered as a
risk factor that might affect the Company's Year 2000 efforts. The Company is
attempting to reduce the risks by utilizing an organized approach, extensive
testing, and allowance of ample contingency time to address issues identified by
tests.
Effects of Inflation
Management believes that financial results have not been significantly
impacted by inflation and price changes.
31
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company faces exposure to financial market risks, including adverse
movements in foreign currency exchange rates and changes in interest rates.
These exposures may change over time as business practices evolve and could have
a material adverse impact on the Company's financial results. The Company's
primary exposure has been related to local currency revenue and operating
expenses in Europe and Asia. Historically, the Company has not hedged specific
currency exposures as gains and losses on foreign currency transactions have not
been material to date. At December 31, 1998, the Company had $3,226,000
outstanding related to variable rate U.S. dollar denominated shor-term debt.
The carrying value of these short-term borrowings approximates fair value due to
the short maturities of these instruments. Assuming a hypothetical 10% adverse
change in the interest rate, interest expense on these short-term borrowings
would increase by $40,000.
The carrying amounts reflected in the consolidated balance sheet of cash
and cash equivalents, trade receivables, and trade payables approximates fair
value at December 31, 1998 due to the short maturities of these instruments.
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. The Company's cash and marketable securities include cash
equivalents, which the Company considers investments to be purchased with
original maturities of three months or less given the short maturities and
investment grade quality of the portfolio holdings at December 31, 1998, a sharp
rise in interest rates should not have a material adverse impact on the fair
value of the Company's investment portfolio. As a result, the Company does not
currently hedge these interest rate exposures.
ITEM 8. Financial Statements and Supplementary Data
The Company's Financial Statements and Schedules, together with the
auditors' reports thereon, appear at pages F-1 through F-20, and S-1 through
S-2, respectively, of this Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning the directors of the Registrant is hereby
incorporated by reference from the information contained under the heading "
Election of Directors" in the Registrant's definitive proxy statement related to
the Registrant's 1998 Annual Meeting of Stockholders which will be filed with
the Commission within 120 days after the close of the fiscal year (the
"Definitive Proxy Statement").
Certain information concerning directors and executive officers of the
Registrant is hereby incorporated by reference to the information contained
under the heading "Occupations of Directors and Executive Officers" in the
Registrant's Definitive Proxy Statement.
Item 11. Executive Compensation
Information concerning executive compensation is hereby incorporated by
reference to the information contained under the heading "Compensation and Other
Information Concerning Directors and Officers" in the Definitive Proxy
Statement.
32
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Managment
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the information contained
under the heading "Securities Ownership of Certain Beneficial Owners and
Management" in the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
hereby incorporated by reference to the information contained under the heading
"Certain Relationships and Related Transactions" in the Definitive Proxy
Statement.
33
<PAGE>
ITEM 14. Exhibits and Financial Statement Schedules
PART IV
(a)(1) INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant are filed
as part of this report:
<TABLE>
Page
----
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheet as of December 31, 1997 and 1998 F-2
Consolidated Statement of Operations for the years ended December 31, 1996, 1997 and 1998 F-3
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule of the Registrant is filed as
part of this report:
<TABLE>
<S> <C>
Page
----
Schedule I Report of Independent Accountants on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts and Reserves S-2
</TABLE>
Schedules not listed above have been omitted because the information requested
to be set forth therein is not applicable or is shown in the accompanying
Consolidated Financial Statements or notes thereto.
(a)(3) INDEX TO EXHIBITS
See attached Exhibit Index of this Annual Report on Form 10-K.
(b) EXHIBITS
The Company hereby files as part of this Form 10-K the Exhibits listed in
Item 14 (a) (3) above. Exhibits which are incorporated herein by reference
can be inspected and copied at the public reference facilities maintained
by the Securities and Exchange Commision (the "Commission"), 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commision's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048, and at the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the Commissiion, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition the Company is
required to file electronic versions of certain of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains the report, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is
traded on the Nasdaq National Market. Reports and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc. 1801 K Street, N.W., Washington, D.C. 20006.
(d) FINANCIAL STATEMENT SCHEDULES The Company hereby files as part of this Form
10-K the consolidated financial statements schedules listed in Item 14 (a)
(2) above, which are attached hereto.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, SeaChange International, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: MARCH 22, 1999
SEACHANGE INTERNATIONAL, INC.
by: /s/ William C. Styslinger, III
----------------------------------
William C. Styslinger, III
President, Chief Executive Officer,
Chairman of the Board and Director.
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William C. Styslinger, III and William L.
Fiedler, jointly and severally, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ William C. Styslinger, III President, Chief Executive Officer, March 22, 1999
- --------------------------------- Chairman of the Board and Director
William C. Styslinger, III (Principal Executive Officer)
/s/ William L. Fiedler Vice President, Finance and March 22, 1999
- --------------------------------- Administration, Chief Financial
William L. Fiedler Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/ Martin R. Hoffmann Director March 22, 1999
- ---------------------------------
Martin R. Hoffmann
/s/ Edward J. McGrath Director March 22, 1999
- ---------------------------------
Edward J. McGrath
/s/ Paul Saunders Director March 22, 1999
- ---------------------------------
Paul Saunders
/s/ Carmine Vona Director March 22, 1999
- ---------------------------------
Carmine Vona
</TABLE>
35
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certification of Incorporation (incorporated by reference to the
Registrant's Annual Report on Form 10-K filied March 28, 1997).
3.2 Amended and Restated By-laws of the Company (incorporated by reference to the Registrant's
Annual Report on Form 10-K filed March 28, 1997).
4.1 (1) Form of Stock Restriction Agreement (incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-12233).
4.2 (1) Form of Stock Restriction Agreement Amendment (incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-1, Registration No. 333-12233).
10.1 (1) Amended and Restated 1995 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, Registration No. 333-12233).
10.2 (1) 1996 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Registrant's Registration Statement on From S-1, Registration No. 333-12233).
10.3 * Lease Agreement dated May 28, 1998 between Robert Quirk, Trustee of Maynard Industial Properties
Associates Trust and the Company.
10.4 * Sublease agreement dated June 20, 1996 between Harding Lawson Associates, Inc. and the Company.
10.5 * Loan and Security Agreement dated November 10, 1990 between Silicon Valley Bank and the Company.
10.7 License Agreement dated May 30, 1996 between Summit Software Systems, Inc. and the Company
(incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on From S-1,
Registration No. 333-12233).
10.8 Stock Purchase Agreement, dated December 10, 1997, by and among the Company, IPC Interactive Pte.
Ltd. and the shareholders of IPC Interactive Pte. Ltd. (incorporated by reference to Exhibit 10.12
to the Registrant's Annual Report on Form 10-K filed March 31, 1998.)
10.9 Registration Rights Agreement, dated December 10, 1997, by and among the Company, IPC Interactive Pte.
Ltd. and the shareholders of IPC Interactive Pte. Ltd. (incorporated by reference to Exhibit 10.13 to
the Registrant's Annual Report on Form 10-K filed March 31, 1998.)
10.10 Escrow Agreement, dated December 10, 1997, by and among the Company, IPC Interactive Pte. Ltd. and
the shareholders of IPC Interactive Pte. Ltd.and State Street Bank and Trust Company (incorporated
by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K filed March 31, 1998.)
21.1* List of Significant Subsidiaries
23.1* Consent of PricewaterhouseCoopers LLP.
27.1* Financial Data Schedule (For SEC Edgar Filing Only; Intentionally Omitted).
---------------------------
* Filed herewith.
</TABLE>
36
<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 operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of SeaChange
International, Inc. and its subsidiaries at December 31, 1997 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statement 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
financial 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 examing, 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.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
F-1
<PAGE>
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---- ----
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,973 $ 5,115
Marketable securities 9,310 --
Accounts receivable, net of allowance for doubtful
accounts of $559 at December 31, 1997 and
$870 at December 31, 1998 12,535 18,975
Inventories 13,713 16,157
Income taxes receivable 1,131 2,117
Prepaid expenses 1,205 1,701
Deferred income taxes 1,091 1,967
------------------------
Total current assets 41,958 46,032
Property and equipment, net 8,303 7,981
Other assets 81 176
Goodwill and intangibles, net 1,608 1,197
------------------------
$51,950 $55,386
========================
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ -- $ 2,000
Current portion of equipment line of credit
and obligations under capital lease -- 555
Accounts payable 8,765 10,103
Accrued expenses 2,718 3,374
Customer deposits 2,049 1,704
Deferred revenue 3,851 5,495
Income taxes payable 85 475
------------------------
Total current liabilities 17,468 23,706
------------------------
Long-term equipment line of credit and
obligations under capital lease -- 1,027
------------------------
Commitments (Note 11)
Stockholders' Equity
Common stock, $.01 par value; 50,000,000
shares authorized; 13,593,594 shares and
13,736,892 shares issued at December 31,
1997 and 1998, respectively 136 138
Additional paid-in capital 31,218 32,177
Retained earnings (accumulated deficit) 3,114 (1,603)
Treasury stock, 9,000 shares -- --
Cumulative translation adjustment 14 (59)
------------------------
Total stockholders' equity 34,482 30,653
------------------------
$51,950 $55,386
========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Operations
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
Revenues
Systems $ 45,745 $ 60,414 $ 58,033
Services 3,521 7,473 13,737
--------------------------------------
49,266 67,887 71,770
--------------------------------------
Costs of revenues
Systems 27,133 34,740 35,772
Services 4,030 7,607 13,241
--------------------------------------
31,163 42,347 49,013
--------------------------------------
Gross profit 18,103 25,540 22,757
--------------------------------------
Operating expenses
Research and development 5,393 11,758 15,763
Selling and marketing 4,254 6,049 8,231
General and administrative 2,064 3,744 5,816
Restructuring of operations -- -- 676
Write-off of acquired
in-process research and
development -- 5,290 --
--------------------------------------
11,711 26,841 30,486
--------------------------------------
Income (loss) from operations 6,392 (1,301) (7,729)
Interest income, net 353 657 223
--------------------------------------
Income (loss) before income taxes 6,745 (644) (7,506)
Provision (benefit) for income taxes 2,483 1,776 (2,789)
--------------------------------------
Net income (loss) $ 4,262 $ (2,420) $ (4,717)
======================================
Basic earnings (loss) per share $ .82 $ (.24) $ (.38)
======================================
Diluted earnings (loss) per share $ .36 $ (.24) $ (.38)
======================================
Shares used in calculating:
Basic earnings per share 5,187,993 10,276,711 12,420,397
======================================
Diluted earnings per share 11,745,866 10,276,711 12,420,397
======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statments.
F-3
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Series A convertible Common Stock
preferred stock -------------------------------------- Retained
-------------------- Additional earnings
Number Number Par paid-in (accumulated
of shares Amount of shares value capital deficit)
------------------- --------- ----- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 11,808 $ -- 9,625,740 96 $ 374 $ 1,272
Purchase of
treasury stock -- -- -- -- -- --
Sale of common stock,
net of
issuance costs -- -- 1,810,000 18 24,052 --
Conversion of preferred
stock into
common stock (11,808) 2,260,856 23 3,985 --
Issuance of common stock
pursuant to exercise
of stock options -- -- 9,223 -- 9 --
Compensation expense
associated
with stock
issuance -- -- -- -- 126 --
Issuance of common stock
pursuant to
purchased
research and development -- -- 9,615 -- 144 --
Retirement of treasury
stock -- -- (856,200) (8) (2,523) --
Net income -- -- -- -- -- 4,262
--------------------------------------------------------------------------
Comprehensive income
Balance at
December 31, 1996 -- -- 12,859,234 129 26,167 5,534
Purchase of treasury stock -- -- (9,000) -- -- --
Compensation expense
associated
with stock issuance -- -- -- -- 45 --
Issuance of common stock
pursuant to
exercise
of stock options -- -- 88,999 1 203 --
Issuance of common stock
in connection
with employee stock
purchase plan -- -- 29,361 -- 479 --
Issuance of common stock
in connection
with acquisition
of IPC Interactive,
Pte. Ltd. -- -- 625,000 6 4,324 --
Translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- (2,420)
-----------------------------------------------------------------------------
Comprehensive loss
Balance at
December 31, 1997 -- -- 13,593,594 136 31,218 3,114
Issuance of common stock
pursuant to
exercise
of stock options -- -- 90,527 2 506 --
Issuance of common stock
in connection
with employee
stock purchase plan -- -- 52,771 -- 406 --
Compensation expense
associated with stock
issuance -- -- -- -- 47 --
Translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- (4,717)
-----------------------------------------------------------------------------
Comprehensive loss
Balance at
December 31, 1998 -- $ -- 13,736,892 $138 $32,177 $(1,603)
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Cumulative receivable Total
translation Treasury from stockholders' Comprehensive
Adjustment stock stockholders equity income (loss)
----------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $ -- $ (4) $ (795) $ 943
Purchase of
treasury stock -- (2,527) 795 (1,732)
Sale of common stock,
net of issuance costs -- -- -- 24,070
Conversion of preferred
stock into common stock -- -- -- 4,008
Issuance of common stock
pursuant to
exercise of stock options -- -- -- 9
Compensation expense
associated with stock
issuance -- -- -- 126
Issuance of common stock
pursuant to
purchased
research and development -- -- -- 144
Retirement of treasury
stock -- 2,531 -- --
Net income -- -- -- 4,262 $ 4,262
-----------------------------------------------------------------------------------------------
Comprehensive income 4,262
========
Balance at
December 31, -- -- -- 31,830
1996
Purchase of -- -- -- --
treasury stock
Compensation expense
associated
with stock
issuance -- -- -- 45
Issuance of common stoc
pursuant to
exercise
of stock -- -- -- 204
options
Issuance of common stoc
in connection
with employee
stock purchase -- -- -- 479
plan
Issuance of common stoc
in connection
with
acquisition
of IPC -- -- -- 4,330
Interactive,
Pte. Ltd.
Translation 14 -- -- 14 14
adjustment
Net loss -- -- -- (2,420) (2,420)
-----------------------------------------------------------------------------------------------
Comprehensive loss (2,406)
========
Balance at
December 31, 14 -- -- 34,482
1997
Issuance of common
stock pursuant to
exercise
of stock -- -- -- 508
options
Issuance of common stock
in connection
with employee
stock purchase -- -- -- 406
plan
Compensation expense
associated
with stock
issuance -- -- -- 47
Translation (73) -- -- (73) (73)
adjustment
Net loss -- -- -- (4,717) (4,717)
------------------------------------------------------------------------------------------------
Comprehensive loss (4,790)
========
Balance at
December 31, $(59) $ -- $ -- $30,653 $(4,790)
1998
================================================================================================
The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Cash Flows
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 4,262 $ (2,420) $ (4,717)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,436 2,802 4,789
Inventory valuation allowance 694 1,730 2,016
Compensation expense associated with stock and stock options 126 45 47
Write-off of acquired in-process research and development -- 5,290 --
Research and development expense associated with common
stock issuance 144 -- --
Deferred income taxes (424) (516) (876)
Changes in assets and liabilities, net of the effect of the
acquisition of IPC Interactive Pte. Ltd. in 1997:
Accounts receivable (4,091) (4,381) (6,440)
Inventories (9,134) (7,069) (4,376)
Income taxes receivable -- (1,131) (986)
Prepaid expenses and other assets (468) (339) (591)
Accounts payable 4,165 (1,164) 1,265
Accrued expenses (126) (109) 656
Customer deposits 817 (3,260) (345)
Deferred revenue 1,425 1,273 1,644
Income taxes payable (720) 85 390
-------- -------- --------
Net cash used in operating activities (1,894) (9,164) (7,524)
-------- -------- --------
Cash flows from investing activities
Purchase of software (450) -- --
Purchases of property and equipment (2,792) (2,158) (3,766)
Proceeds from sale and maturity of marketable securities -- 8,966 10,212
Purchases of marketable securities -- (18,276) (902)
Cash acquired related to the acquisition of IPC Interactive
Pte. Ltd., net of transaction costs -- 665 --
-------- -------- --------
Net cash provided by (used in) investing activities (3,242) (10,803) 5,544
-------- -------- --------
Cash flows from financing activities
Proceeds from borrowings under equipment line of credit -- -- 1,226
Proceeds from borrowings under line of credit -- -- 2,000
Repayment of line of credit -- (700) --
Repayment of obligation under capital lease -- -- (18)
Proceeds from sale of common stock, net 24,079 683 914
Purchase of treasury stock (2,023) -- --
Notes payable to related parties -- (437) --
Repayments of loans from stockholders 290 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 22,346 (454) 4,122
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 17,210 (20,421) 2,142
Cash and cash equivalents, beginning of year 6,184 23,394 2,973
-------- -------- --------
Cash and cash equivalents, end of year $ 23,394 $ 2,973 $ 5,115
======== ======== ========
</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 (IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Income taxes paid $ 3,854 $ 1,691 $ 132
Interest paid $ -- $ -- $ 35
Supplemental disclosure of noncash activity:
Transfer of items originally classified as inventories to
fixed assets $ 1,726 $ 1,829 $ 584
Transfer of items originally classified as fixed assets to
inventories $ -- $ -- $ 668
Purchase of treasury stock in lieu of cash payment of notes
receivable from stockholders $ 505 $ -- $ --
Equipment acquired under capital lease $ -- $ -- $ 374
Acquisition of all of the outstanding shares of IPC
Interactive Pte. Ltd. (Note 5):
Fair value of assets acquired (including intangible
assets and in-process research and development) -- $ 12,396 --
Fair value of common shares issued -- (4,330) --
Transaction costs -- (475) --
-------- -------- --------
Liabilities assumed -- $ 7,591 --
======== ======== ========
</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 computer systems to digitally manage, store and
distribute video. Through December 31, 1998, substantially all of the
Company's revenues were derived from the sale of digital video insertion,
movie and broadcast systems and related services and content to cable
television operators, broadcast and telecommunications companies in the
United States and internationally.
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 subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenues from the sales of systems are recognized upon shipment provided
that there are no uncertainties regarding customer acceptance and collection
of the related receivables is probable. If such 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, if billed in
advance, and recognized ratably over the period of the related agreements,
generally twelve months. Revenue from content fees, primarily movies, is
recognized in the period earned based on noncancelable agreements. Customer
deposits represent advance payments from customers for systems.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable and marketable securities.
To minimize this risk, the Company evaluates customers' financial condition,
requires advance payments from certain of its customers and maintains
reserves for potential credit losses. At December 31, 1997 and 1998, the
Company had an allowance for doubtful accounts of $559,000 and $870,000,
respectively, to provide for potential credit losses and such losses to date
have not exceeded management's expectations. The Company invests its excess
cash in marketable securities, such as money market funds and municipal
securities with strong credit ratings.
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, the
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. The Company invests its excess cash in money market funds,
municipal securities and corporate debt securities that are subject to
minimal credit and market risk. Cash equivalents are classified as
available-for-sale and are carried at market value, and any unrealized gains
or losses are recorded as a part of stockholders' equity.
F-7
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Property and Equipment
Property and equipment consist of office and computer equipment, leasehold
improvements, demonstration equipment, deployed assets 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
marketing and selling activities. 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. Deployed assets consist primarily of hardware
owned and operated by the Company and installed at customer locations.
Deployed assets are depreciated over the life of the related service
agreements ranging from 3 to 7 years. Maintenance and repair costs are
expensed as incurred. Significant improvements are capitalized and
depreciated. Upon retirement or sale, the cost of the assets disposed of,
and the related accumulated depreciation, are removed from the accounts, and
any resulting gain or loss is included in the determination of net income.
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, movie and
broadcast systems. 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 and thereby adversely
affect the Company's revenue and profits.
Goodwill and Intangible Assets
Goodwill and assembled workforce are amortized on a straight-line basis over
five to seven years. Software acquired in connection with acquisitions is
amortized over the greater of the amount computed using (a) the ratio that
current gross revenues for related products bear to total current and
anticipated future gross revenues for that product or (b) on a straight-line
basis over the estimated remaining life of the software. The Company
reviews goodwill and intangible assets for any impairment in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-Lived Assets to be Disposed Of, ("SFAS 121").
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.
Stock Compensation
Employee stock awards under the Company's compensation plans are accounted
for in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, ("SFAS 123") and related interpretations. Nonemployee
stock awards are accounted for in accordance with Emerging Issues Task Force
Issue No. 96-18.
F-8
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Foreign Currency Translation
The Company has determined that the functional currency of its foreign
subsidiaries is the local currency. Accordingly, assets and liabilities are
translated to U.S. dollars at current exchange rates as of each balance
sheet date. Income and expense items are translated using average exchange
rates during the year. Cumulative currency translation adjustments are
presented as a separate component of stockholders' equity. Transaction
gains and losses and unrealized gains and losses on intercompany receivables
are recognized in the Statement of Operations and have not been material to
date.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs
were $328,000, $659,000 and $624,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
Earnings Per Share
Earnings per share are presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") which
requires the presentation of "basic" earnings per share and "diluted"
earnings per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average shares of common
stock outstanding during the period. For the purposes of calculating
diluted earnings per share the denominator includes both the weighted
average number of shares of common stock outstanding during the period and
the weighted average number of potential common stock, such as stock options
and restricted stock.
For the years ended December 31, 1997 and 1998, 468,311 and 240,644 common
shares issuable upon the exercise of stock options, respectively, and
2,661,825 and 1,194,488 shares of unvested restricted common stock,
respectively, are antidilutive because the Company recorded a net loss for
the years and, therefore, have been excluded from the diluted earnings per
share computations.
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the years indicated:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average number of shares
outstanding 5,187,993 10,276,711 12,420,397
Shares attributable to series A redeemable
convertible preferred stock 1,476,000 - -
Shares attributable to series B redeemable
convertible preferred stock 568,607 - -
Shares attributable to unvested restricted
common stock 4,109,925 - -
Dilutive stock options 403,341 - -
---------- ---------- ----------
Shares used in calculating diluted
earnings per share 11,745,866 10,276,711 12,420,397
========== ========== ==========
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"). SFAS 133 will become
effective in January 2000. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income,
F-9
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. To date the
Company has not utilized derivative instruments or hedging activities and,
therefore, the adoption of SFAS 133 is not expected to have a material
impact on the Company's financial position or results of operations.
3. Consolidated Balance Sheet Detail
Cash, cash equivalents and marketable securities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------- ----------
1997 1998
----------- ----------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 917,000 $2,090,000
Money market funds 506,000 2,005,000
Municipal securities 1,550,000 1,020,000
----------- ----------
2,973,000 5,115,000
Marketable securities:
Municipal securities 9,310,000 --
----------- ----------
$12,283,000 $5,115,000
=========== ==========
</TABLE>
Marketable securities are classified as available-for-sale securities and
are carried at fair market value, which approximates amortized cost. The
contractual maturities of all available-for-sale securities classified as
cash equivalents are less than three months. Gross unrealized gains and
losses on securities for the years ended December 31, 1996, 1997 and 1998,
the cost of which is based upon the specific identification method, were not
significant.
<TABLE>
<CAPTION>
Inventories consist of the following:
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Components and assemblies $11,932,000 $14,592,000
Finished products 1,781,000 1,565,000
----------- -----------
$13,713,000 $16,157,000
=========== ===========
<CAPTION>
Property and equipment consist of the following:
Estimated December 31,
useful life ----------- -----------
(years) 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Office furniture and equipment 5 $ 1,332,000 $ 1,565,000
Computer and demonstration equipment 3 8,140,000 9,089,000
Deployed assets 3-7 497,000 1,788,000
Service and spare components 5 2,000,000 2,584,000
Leasehold improvements 1-7 304,000 758,000
----------- -----------
12,273,000 15,784,000
Less -- Accumulated depreciation and amortization 3,970,000 7,803,000
----------- -----------
$ 8,303,000 $ 7,981,000
=========== ===========
</TABLE>
F-10
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Depreciation expense was $1,246,000, $2,515,000 and $3,833,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
Accrued expenses consist of the following:
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Accrued software license fees $ 630,000 $1,206,000
Accrued sales and use taxes 338,000 733,000
Other accrued expenses 1,750,000 1,435,000
---------- ----------
$2,718,000 $3,374,000
========== ==========
</TABLE>
4. Segment Information
The Company has four reportable segments: digital advertising insertion,
movies and broadcast systems and services. The digital advertising
insertion systems segment provides products to digitally manage, store and
distribute digital video for television operators and telecommunications
companies. The movie systems segment comprises products to provide long-
form video storage and delivery for the pay-per-view markets for the
hospitality and commercial property markets. The broadcast systems segment
provides products for the storage, archival, on-air playback of advertising
and other video programming for the broadcast television industry. The
service segment provides installation, training, product maintenance and
technical support for the above systems and content which is distributed by
the movie product segment. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
The Company does not measure the assets allocated to the segments. The
Company measures results of the segments based on the respective gross
profits. There were no intersegment sales or transfers. Long-lived assets
are principally located in the United States. The following summarizes the
revenues and cost of revenues by reportable segment:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1996 1997 1998
--------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues
Digital advertising insertion $45,513 $55,977 $44,088
Movies 232 4,437 9,722
Broadcast - - 4,223
Services 3,521 7,473 13,737
--------------- ---------------- ------------------
$49,266 $67,887 $71,770
--------------- ---------------- ------------------
Costs of revenues
Digital advertising insertion $26,901 $32,356 $26,551
Movies 232 2,384 6,801
Broadcast - - 2,420
Services 4,030 7,607 13,241
--------------- ---------------- ------------------
$31,163 $42,347 $49,013
--------------- ---------------- ------------------
</TABLE>
F-11
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
The following summarizes revenues by geographic locations:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1996 1997 1998
--------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues
United States $46,875 $59,855 $62,343
Canada and South America - 2,696 691
Europe 2,391 4,481 4,272
Rest of world - 855 4,464
--------------- ---------------- ------------------
$49,266 $67,887 $71,770
=============== ================ ==================
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, certain customers
accounted for more than 10% of the Company's revenues. Individual customers
accounted for 29%, 17%, 13% and 12% of revenues in 1996; 24%, 18% and 10% in
1997; and 24% and 15% in 1998.
5. Acquisition and Restructuring of Operations
Acquisition
On December 10, 1997, the Company exchanged 625,000 shares of its common
stock for all of the outstanding capital stock of IPC Interactive Pte. Ltd.
("IPC") which was renamed to SeaChange Asia Pacific Operations Pte. Ltd.
("SC Asia"). SC Asia provides interactive television network systems to the
hospitality and commercial property markets. The total purchase price,
including transaction costs, was $4,805,000. The acquisition was accounted
for under the purchase method. Accordingly, the purchase price was
allocated to the estimated fair value of the acquired assets and liabilities
based upon an independent appraisal. A portion of the purchase price was
allocated to in-process research and development, resulting in an immediate
charge to the Company's operations of $5,290,000 at the date of
acquisition. The amount allocated to in-process research and development
represented technology which had not reached technological feasibility and
had no alternative future use. The appraisal also valued intangibles,
including assembled workforce and software. Goodwill and intangibles, net
of related accumulated amortization totaled $1,608,000 and $1,197,000 at
December 31, 1997 and 1998, respectively. Amortization expense was $27,000
and $411,000 for the years ended December 31, 1997 and 1998, respectively.
The consolidated results of operations include the operating results of IPC
from the date of acquisition.
The purchase price was allocated to the acquired assets and liabilities
as follows:
<TABLE>
<CAPTION>
<S> <C>
Tangible assets $ 5,471,000
Assumed liabilities (7,591,000)
Intangible assets:
In-process research and development 5,290,000
Software 850,000
Assembled workforce 280,000
Goodwill 505,000
-----------
$ 4,805,000
===========
</TABLE>
F-12
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Included in assumed liabilities were a line of credit of $700,000 and notes
payable to related parties of $437,000. The notes payable to related
parties were due to two companies owned by new shareholders of the Company
as a result of the acquisition. The Company paid these assumed liabilities
in full and canceled the line of credit prior to December 31, 1997.
The following unaudited pro forma data summarizes the consolidated results
of the Company and IPC as if the acquisition had occurred on February 1,
1996 (inception of IPC) and excludes the $5,290,000 charge for in-process
research and development. The unaudited pro forma information is not
necessarily indicative either of results of operations that would have
occurred had the purchase been made at the beginning of the periods
presented, or of future results of operations of the combined companies.
<TABLE>
<CAPTION>
Pro forma for the year ended December 31,
-----------------------------------------
1996 1997
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $60,372,000 $75,573,000
Net income (loss) $ 1,085,000 $(3,403,000)
Basic earnings (loss) per share $ .19 $ (.31)
Diluted earnings (loss) per share $ .09 $ (.31)
</TABLE>
Restructuring of Operations
In March 1998, the Company recorded a charge of $676,000 for the
restructuring of operations as part of a planned consolidation of the
operations of SC Asia. The charge for restructuring included $569,000
related to the termination of 13 employees, a provision of $60,000 related
to the planned vacating of premises and $47,000 of compensation expense
associated with stock options for certain terminated employees. At March 31,
1998, the Company had notified all terminated employees. All restructuring
charges were paid as of December 31, 1998.
6. Lines of Credit
The Company has a $6.0 million revolving line of credit and a $3.0 million
equipment line of credit with a bank. The revolving line of credit expires
in October 1999 and the equipment line of credit expires in June 1999.
Borrowings under the lines of credit are secured by substantially all of the
Company's assets. Loans made under the revolving line of credit generally
bear interest at a rate per annum equal to the bank's base rate plus .5%
(8.25 % at December 31, 1998). Loans made under the equipment loan bear
interest at a rate per annum equal to the bank's base rate plus 1.0% (8.75%
at December 31, 1998). 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 including the maintenance
of total liabilities, excluding deferred revenue, to net worth of at least
.80 to 1.0. At December 31, 1998 the Company was in compliance with all
covenants. As of December 31, 1998, borrowings against the line of credit
were $2.0 million. As of December 31, 1998, borrowings against the equipment
line of credit were $1,226,000. Maturities of the equipment line of credit
are $491,000, $491,000 and $244,000 in 1999, 2000 and 2001, respectively.
F-13
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current provision (benefit):
Federal $2,346,000 $1,920,000 $(1,913,000)
State 561,000 371,000 -
---------- ---------- -----------
2,907,000 2,291,000 (1,913,000)
---------- ---------- -----------
Deferred benefit:
Federal (324,000) (394,000) (124,000)
State (100,000) (121,000) (752,000)
---------- ---------- -----------
(424,000) (515,000) (876,000)
---------- ---------- -----------
$2,483,000 $1,776,000 $(2,789,000)
========== ========== ===========
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 769,000 $ 1,299,000
Allowance for doubtful accounts 209,000 320,000
Deferred revenue 96,000 126,000
Software 176,000 111,000
Accrued expenses - 153,000
State net operating loss carryforwards - 398,000
Acquired net operating loss carryforwards and
basis differences 3,361,000 3,361,000
----------- -----------
4,611,000 5,768,000
Valuation allowance (3,361,000) (3,361,000)
----------- -----------
Total deferred tax assets 1,250,000 2,407,000
----------- -----------
Deferred tax liabilities:
Property and equipment 157,000 430,000
Other 2,000 10,000
----------- -----------
Total deferred tax liabilities 159,000 440,000
----------- -----------
Net deferred income taxes $ 1,091,000 $ 1,967,000
=========== ===========
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations. Under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the benefit associated with future deductible temporary differences
is recognized if it is more likely than not that the benefit will be
realized. The measurement of deferred tax assets is reduced by a valuation
allowance if, based upon the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
The valuation allowance of $3,361,000 at December 31, 1997 and 1998 relates
to net operating loss carryforwards and tax basis differences acquired in
the Company's purchase of SC Asia. These acquired deferred tax assets may
only be utilized to offset future taxable income attributable to SC Asia.
In addition, the recognition of these deferred tax assets are subject to
Internal Revenue Code change in ownership rules which may limit the amount
that can be utilized to offset future taxable income. The Company believes
that the valuation allowance is appropriate given the weight of objective
evidence, including the historical operating results of IPC. Any tax
benefits subsequently recognized related to these assets will first reduce
the remaining balance in goodwill and then other acquired intangible assets.
F-14
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Based on the weight of available evidence, the Company believes its
remaining deferred tax assets will be realizable. The amount of the
deferred tax asset considered realizable is subject to change based on
future events. The Company will assess the need for the valuation allowance
at each balance sheet date based on all available evidence.
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $11,278,000 which expire at various dates
through 2013 and foreign net operating loss carryforwards of approximately
$1,436,000 which do not expire.
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 December 31,
-------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Statutory U.S. federal tax rate $2,293,000 $ (91,000) $(2,552,000)
State taxes, net of federal tax benefits 304,000 165,000 (496,000)
Other - 145,000 355,000
Research and development tax credits (135,000) (334,000) (316,000)
Foreign Sales Corporation exempt income (20,000) - -
Nondeductible expenses, including write-off of
acquired in-process research and
development in 1997 41,000 1,891,000 220,000
---------- ---------- -----------
$2,483,000 $1,776,000 $(2,789,000)
========== ========== ===========
</TABLE>
The Company's effective tax rate was 36.8% in 1996. The Company's effective
tax rate for 1997 was significantly impacted by the write-off of acquired
in-process research and development which, due to the tax-free nature of the
transaction to IPC stockholders, is not deductible for tax purposes by the
Company. Accordingly, in 1997 the Company recorded a tax provision of
$1,776,000 despite a book pre-tax operating loss. The Company's effective
tax benefit rate was 37.2% in 1998.
8. Common Stock
Initial Public Offering
On November 5, 1996, the Company sold 1,810,000 shares of common stock to
the public in the Company's initial public offering at a price of $15.00 per
share. Proceeds to the Company, net of offering expenses, amounted to
$24,070,000. Upon the closing of the initial public offering all outstanding
convertible preferred stock of the Company automatically converted into a
total of 2,260,856 shares of common stock of the Company.
Stock Split
On September 6, 1996, the Board of Directors authorized a 3-for-2 stock
split of the Company's common stock, which became 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 1996.
F-15
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Restriction Agreements
Certain common shares are subject to stock restriction and repurchase
agreements under which the Company may 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
December 31, 1998, 652,500 of such shares are unvested.
Treasury Stock
In 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. In December 1996, the Board of Directors voted to retire all
shares of treasury stock held at December 31, 1996.
In 1997, the Company repurchased 9,000 shares of its common stock from an
employee of the Company. The shares were held 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 stockholder. Compensation expense recorded in
1997 as a result of this transaction was $45,000.
Reserved Shares
At December 31, 1998, the Company had 2,008,895 shares of common stock
reserved for issuance upon the exercise of common stock options and the
purchase of stock under the Employee Stock Purchase Plan.
9. Convertible Preferred Stock
Stock Authorization
The Board of Directors is 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 dividend rights, voting rights, redemption rights and sinking fund
provisions, liquidation preferences, conversion rights and preemptive
rights.
10. Stock Plans
Employee Stock Purchase Plan
In September 1996, the Company's Board of Directors adopted and the
stockholders approved an employee stock purchase plan (the "Stock Purchase
Plan"), effective January 1, 1997, 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 Stock Purchase Plan. The purchase price of the stock is
85% of the lesser of the average market price of the common stock on the
first or last business day of each six-month plan period. During 1997 and
1998, 29,361 and 52,771 shares of common stock, respectively, were issued
under the Stock Purchase Plan.
F-16
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
1995 Stock Option Plan
The 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 and determining 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 are initially exercisable during any one calendar
year.
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. Under the Director Option Plan, participating directors
receive an option to purchase 3,375 shares of common stock per annum.
Options granted under the Director Option Plan vest as to 33-1/3% of the
shares underlying the option immediately upon the date of the grant, and
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.
Transactions under the 1995 Stock Option Plan and the Director Option Plan
during the years ended December 31, 1996, 1997 and 1998 are summarized as
follows:
F-17
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1996 1997 1998
----------------- ------------------- ------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 327,120 $ .92 739,334 $ 5.87 1,143,057 $11.40
Granted 472,510 8.79 585,536 18.03 889,729 7.43
Exercised (9,223) .85 (88,999) 2.30 (90,752) 5.56
Cancelled (51,073) 2.22 (92,814) 17.81 (532,818) 14.98
======== ========= =========
Outstanding at
period end 739,334 $5.87 1,143,057 $11.40 1,409,216 $ 8.01
======== ========= =========
Options exercisable
at period end 115,224 205,198 315,643
Weighted average fair value
of options granted
during the period $4.33 $11.00 $ 9.72
</TABLE>
The following table summarizes information about employee and director stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding at December 31, 1998
--------------------------------------------
Weighted
average
remaining Weighted
Number contractual average
outstanding life (years) exercise price
-------------- ------------ --------------
<S> <C> <C> <C>
Range of exercise prices
$ .50 59,328 6.65 $ 0.50
1.23 to 1.36 101,121 3.88 1.31
4.20 to 6.00 415,513 9.51 5.76
6.67 to 9.38 643,382 8.92 8.24
10.19 to 15.00 105,683 8.56 11.51
15.50 to 21.50 22,314 8.30 19.33
28.75 to 33.75 61,875 7.75 28.96
--------------
1,409,216
==============
</TABLE>
<TABLE>
<CAPTION>
Options exercisable at December 31, 1998
------------------------------------------
Weighted
Number average
Range of exercise prices exercisable exercise price
<S> <C> <C>
$0.50 31,621 $ 0.50
1.23 to 1.36 57,651 1.31
4.20 to 6.00 41,849 4.96
6.67 to 9.38 127,986 7.92
10.19 to 15.00 27,516 11.34
15.50 to 21.50 6,833 19.32
28.75 to 33.75 22,187 28.95
----------
315,643
==========
</TABLE>
Fair Value Disclosures
The Company applies APB 25 in accounting for employee stock awards.
Compensation expense of $126,000, $45,000 and $47,000 has been recorded for
the years ended December 31, 1996, 1997 and 1998, respectively. Had
compensation expense for the Company's employee stock plans been determined
based on the fair value at the grant dates, as prescribed in SFAS 123, the
Company's net income (loss) and earnings (loss) per share would have been as
follows:
F-18
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)
As reported $4,262,000 $(2,420,000) $(4,717,000)
Pro forma $4,205,000 $(3,290,000) $(6,601,000)
Basic earnings (loss) per share
As reported $ .82 $ (.24) $ (.38)
Pro forma $ .81 $ (.32) $ (.53)
Diluted earnings (loss) per share
As reported $ .36 $ (.24) $ (.38)
Pro forma $ .36 $ (.32) $ (.53)
</TABLE>
For options granted prior to the Company's initial filing of its
Registration Statement on Form S-1 on September 18, 1996, the fair value of
each option grant was estimated on the date of grant using the minimum value
method. The fair value of each option granted subsequent to the initial
filing was estimated on the date of grant assuming a weighted average
volatility factor of 67%. Additional weighted average assumptions used for
grants during the years ended December 31, 1996, 1997 and 1998 included:
dividend yield of 0.0% for all periods; risk-free interest rates of 5.36% to
6.49% for options granted during the year ended December 31, 1996, 5.70% to
6.75% for options granted during the year ended December 31, 1997 and 6.00%
for options granted during the year ended December 31, 1998; and an expected
option term of 5 years for all periods.
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.
Stock Option Repricing
On January 23, 1998, the Compensation and Option Committee of the Board of
Directors of the Company ("Committee") determined that, because certain
stock options held by employees of the Company had an exercise price
significantly higher than the fair market value of the Company's common
stock, such stock options were not providing the desired incentive to
employees. Accordingly, the Committee granted those employees whose options
were between $15.00 and $24.63 per share an opportunity to cancel their
existing options for new options on a 1-for-1 basis, with a new five-year
vesting schedule beginning on January 23, 1998. Employees whose options were
above $24.63 were offered an opportunity to cancel their existing options
for new options on a 2-for-3 basis, with no change in their original vesting
schedule. As a result of this stock option repricing, new options were
granted to purchase 212,779 shares of common stock and the average exercise
price of such options was reduced from $22.19 per share to $8.25 per share,
the fair market value of the Company's common stock at the close of the
market on January 22, 1998. With the exception of one executive officer, the
Company's directors and executive officers were not eligible to participate
in this stock option repricing. During the execution of the stock option
repricing plan, the Company's stock price was below $8.25 per share and,
therefore, no compensation charge was recorded as a result of the stock
option repricing.
11. Commitments
The Company leases its operating facilities and certain office equipment
under noncancelable capital and operating leases which expire at various
dates through 2005. Rental expense under operating leases was approximately
$251,000,
F-19
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
$542,000 and $1,294,000 for the years ended December 31, 1996,
1997 and 1998, respectively. Future commitments under minimum lease
payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
Year ended December 31, 1999 $ 90,000 $1,460,000
2000 90,000 1,402,000
2001 90,000 1,143,000
2002 90,000 675,000
2003 66,000 524,000
Thereafter - 649,000
--------
Minimum lease payments 426,000
Less: Amount representing interest 70,000
--------
$356,000
--------
</TABLE>
The Company had noncancelable purchase commitments for inventories of
approximately $3,000,000 at December 31, 1998.
In the ordinary course of business, the Company is subject to various types
of litigation. In the opinion of management, all litigation currently
pending or threatened will not have a material adverse effect on the
Company's financial position or results of operations.
12. Employee Benefit Plan
The Company sponsors a 401(k) retirement savings plan ( the "Plan").
Participation in the Plan is available to full-time employees who meet
eligibility requirements. Eligible employees may contribute up to 15% of
their annual salary, subject to certain limitations. The Company matches
contributions up to 25% of the first 6% of compensation contributed by the
employee to the Plan. During 1997 and 1998, the Company contributed $68,000
and $189,000, respectively, to the Plan. Prior to 1997, the Company did not
make contributions to the Plan.
F-20
<PAGE>
SEACHANGE INTERNATIONAL, INC.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of SeaChange International, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 29, 1999 appearing on page F-1 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14 (a)(2) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 29, 1999
S-1
<PAGE>
Schedule II
SEACHANGE INTERNATIONAL, INC.
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Charged to
beginning of costs and Deductions and Balance at end
period expenses write-offs Other of period
-------------------- ----------------- --------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1996 $ 40,000 $ 133,000 $ - $ - $ 173,000
Year ended December 31, 1997 173,000 485,000 (174,000) 75,000 559,000
Year ended December 31, 1998 $ 559,000 $ 497,000 $ (186,000) $ - $ 870,000
Inventory Valuation Allowance:
Year ended December 31, 1996 $ 56,200 $ 693,800 $ - $ - $ 750,000
Year ended December 31, 1997 750,000 1,730,000 (1,076,000) 100,000 1,504,000
Year ended December 31, 1998 $1,504,000 $2,016,000 $ (919,000) $ - $2,601,000
</TABLE>
S-2
<PAGE>
EXHIBIT 10.3
LEASE AGREEMENT
<TABLE>
<S> <C>
ARTICLE 1 - BASIC LEASE TERMS................................. 1
ARTICLE 2 - DEMISED PREMISES AND COMMON AREAS................. 3
ARTICLE 3 - TERM.............................................. 4
1. Primary Term............................................... 4
2. Extended Term.............................................. 4
3. Early Termination Right.................................... 4
ARTICLE 4 - BASE RENT......................................... 5
1. Primary Term............................................... 5
2. Extended Term.............................................. 6
3. Late Payment Of Base Rent And Additional Rent.............. 7
ARTICLE 5 - USE............................................... 7
ARTICLE 6 - OPERATING COSTS, CAPITAL EXPENDITURES, LANDLORD
REPAIRS AND REAL ESTATE TAXES................................. 8
ARTICLE 7 - UTILITIES AND SERVICES............................ 16
ARTICLE 8 - CONDITION OF THE PREMISES, LANDLORD AND TENANT
IMPROVEMENTS.................................................. 17
1. Condition Of The Premises.................................. 17
2. Landlord Improvements And Repairs: Hvac And Air Quality.... 18
3. Airquality Monitoring...................................... 19
4. Landlord Improvements - General............................ 19
5. Default By Landlord........................................ 20
6. Tenant Improvements........................................ 20
7. Installation Of Tenant's Microwave Dishes On Roof.......... 23
8. Elevator And Lobby......................................... 23
ARTICLE 9 - ALTERATIONS, ADDITIONS AND IMPROVEMENTS........... 23
ARTICLE 10 - COMPLIANCE WITH LAWS............................. 23
ARTICLE 11 - DAMAGE AND DESTRUCTION........................... 25
ARTICLE 12 - CONDEMNATION..................................... 26
ARTICLE 13 - INSURANCE........................................ 27
ARTICLE 14 - INDEMNITY........................................ 28
ARTICLE 15 - SUBLETTING AND ASSIGNMENT........................ 29
ARTICLE 16 - TENANT'S PROPERTY................................ 30
ARTICLE 17 - SIGNS............................................ 30
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE 18 - PARKING AND LOADING............................... 31
ARTICLE 19 - TENANT'S DEFAULT.................................. 32
ARTICLE 20 - LANDLORD'S DEFAULT................................ 33
ARTICLE 21 - NOTICE/AUTHORITY.................................. 33
ARTICLE 22 - LANDLORD'S ACCESS................................. 34
ARTICLE 23 - QUIET ENJOYMENT................................... 34
ARTICLE 24 - HOLDING OVER...................................... 34
ARTICLE 25 - SUBORDINATION..................................... 34
ARTICLE 26 - MEMORANDUM OF LEASE............................... 36
ARTICLE 27 - SURRENDER OF PREMISES............................. 36
ARTICLE 28 - ESTOPPEL CERTIFICATE.............................. 36
ARTICLE 29 - MECHANICS' LIENS.................................. 37
ARTICLE 30 - HAZARDOUS SUBSTANCES.............................. 37
ARTICLE 31 - SECURITY DEPOSIT.................................. 38
ARTICLE 32 - EXPANSION RIGHT................................... 38
ARTICLE 33 - ADDITIONAL PROVISIONS............................. 39
</TABLE>
LIST OF EXHIBITS
Exhibit A: Schedule of Space
Exhibit A-1: Plan of the Demised Premises
Exhibit A-2: Building Complex Space Allocation
Exhibit B: Landlord's Services
Exhibit C: Site Plan (showing Building Complex, parking areas and loading docks)
Exhibit C-1: Parking and Loading Plan
<PAGE>
1
THIS LEASE is executed on May 29, 1998 and made effective as of April 1,
1998, between Maynard Industrial Properties Associates Trust, a Massachusetts
Nominee Trust under declaration of trust dated December 10, 1990 and recorded
with the Middlesex South Registry of Deeds in Book 21018, Page 326, with an
address at 124 Acton Street, Maynard, Massachusetts 01754 ("Landlord") and
SeaChange International, Inc., a Delaware Corporation, with an address at 124
Acton Street, Maynard, Massachusetts 01754 ("Tenant").
ARTICLE 1 - Basic Lease Terms
1. Reference in this Lease to any of the terms listed below shall be
deemed to incorporate and be a reference to the data set forth next to such term
in this Article.
(a) Additional Rent: See Article 6
---------------
(b) Address of the Demised Premises: 124 Acton Street, Maynard,
-------------------------------
Massachusetts 01754
(c) Annual Base Rent: See Section 4.1
----------------
(d) Base Rent: The net rent due Landlord for the use of the Demised
---------
Premises without any markup or add-on for utility expenses, operating
expenses or real estate taxes associated with the Property shown on
the schedule of Base Rent in Article 4.
(e) Building: The three story building commonly known as Building No.3, as
--------
well as that certain area located in the so called Connector Building
referred to in Exhibit A attached hereto, located on the Land
containing a total of 79,822 rentable square feet. In the event that
Tenant exercises its Expansion Right pursuant to Section 32.4, the
word "Building" shall also include Building No.1, for purposes of
Articles 6, 10, 11, 12, 13, 30, and Exhibit B.
(f) Building Complex: The Building and all other buildings (currently
----------------
Building No.1, Building No.2 and the balance of the Connector
Building) located on the Land collectively containing a total of
126,622 rentable square feet.
(g) Building No. 1: The one-story building located within the Building
--------------
Complex on the Land containing a total of 21,189 rentable square feet.
(h) Commencement Date: as of April l, 1998
-----------------
(i) Date of Execution: The date, which shall be inserted above, on which
-----------------
this Lease is fully executed by both parties.
(j) Demised Premises: See Article 2 and Exhibits A and A-1, subject to
----------------
increase if Tenant exercises its Expansion Right.
<PAGE>
2
(k) Early Termination Right: See Section 3.3
-----------------------
(l) Expansion Right: See Article 32
---------------
(m) Expiration Date: The end of the 84th full calendar month following the
---------------
Commencement Date, unless the Term is extended pursuant to Article 3
hereof.
(n) Extended Term: See Article 3
-------------
(o) Land: The parcel of land located at 124 Acton Street, Maynard,
----
Massachusetts, shown on a plan of land dated January 28, 1974 by
Colburn Engineering, recorded as plan 44 of 1975 at the end of Book
12751 in the Middlesex South Registry of Deeds and all rights and
easements appurtenant thereto.
(p) Landlord: Maynard Industrial Properties Associates Trust
--------
(q) Landlord's Address: 124 Acton Street, Maynard, Massachusetts 01754
------------------
(r) Landlord Improvements: See Article 8.2
---------------------
(s) Landlord Work: See Section 8.1
-------------
(t) Primary Term: See Article 3
------------
(u) Property: The Land and all site improvements and parking areas located
--------
thereon together with the Building Complex.
(v) Real Estate Tax Arrearage: See Section 6.11
-------------------------
(w) Security Deposit: See Article 3l.
----------------
(x) Tenant: SeaChange International, Inc.
------
(y) Tenant's Address: 124 Acton Street, Maynard, Massachusetts 01754
----------------
(z) Tenant's Improvements: See Article 8.6
---------------------
(aa) Term: Primary and/or Extended Term as the context may require
----
(bb) Use: See Article 5
---
2. The Exhibits listed below are attached hereto and are incorporated in
this Lease by reference herein.
(a) Exhibit A; Schedule of Space
(b) Exhibit A-1; Plan of the Demised Premises
<PAGE>
3
(c) Exhibit A-2; Building Complex Space Allocation
(d) Exhibit B; Landlord's Services
(e) Exhibit C; Site Plan (showing Building Complex, parking areas and
loading docks)
(f) Exhibit C-l; Parking and Loading Plan
ARTICLE 2-Demised Premises and Common Areas
In consideration of the Base Rent, Additional Rent and agreements herein
reserved and contained on the part of Tenant to be paid, performed, and
observed, the Landlord does hereby demise and lease to Tenant, and Tenant leases
from Landlord, for the term hereinafter set forth, upon and subject to the terms
and conditions of this Lease, the Demised Premises. The Demised Premises shall
initially consist of the Initial Demised Premises shown on Exhibit A and Exhibit
A-1 and shall be increased to include the First Additional Premises as defined
and for the periods shown on Exhibit A; Schedule of Space and shown on Exhibit
A-1; Plan of the Demised Premises and may be further increased in accordance
with Article 32.
Appurtenant to such leasing are the right of ingress and egress to the
Demised Premises, and, during Period 1 shown on Exhibit A, the right in common
with others to use the elevator and common passageways and stairways in the
Building, and the right to access the first floor manufacturing space through
other space on the first floor as shown on Exhibit A-1 and the right to access
the third floor space through other space on the third floor as shown on Exhibit
A-1, which other space is currently under the control of Landlord. During Period
1, Tenant shall also have as appurtenant to such lease, the right to use the
vestibule and lobby on the first floor of the Building, which Landlord
represents are currently under lease to and/or occupied and used by Andataco,
Inc., in connection with its lease of space in Building No.2. If at any time
prior to the commencement of Period 1A such tenant vacates or removes some or
all of its furniture from the lobby and/or vestibule, Tenant shall have the
right to the exclusive use of such area, including the right to place its
furniture and other personal property therein and to install telephone lines and
electric and computer lines therein connecting to other space leased by Tenant.
If Tenant wishes to exercise this right, it shall do so by written notice
thereof to Landlord and from and after the date set forth in such notice, such
space shall be added to the Demised Premises leased hereunder and the Base Rent
shall be increased in the amount of $4.75 per square foot contained within the
lobby and/or vestibule, as appropriate. Landlord shall notify Tenant in advance
if such area or areas are likely to become vacant. Beginning with Period 1A, all
such areas (i.e. the above-described elevator, passageways, stairways, vestibule
and lobby, as well as the balance of the First Additional Premises) shall be
included within the Demised Premises.
Also appurtenant to such leasing is the right to pass over and park on that
portion of the Land owned by Landlord and designated by Landlord for parking and
the exclusive right to use the loading docks indicated on Exhibit A-1 according
to the schedule of increased space shown on Exhibit A and as further set forth
in Article 18 hereof. Tenant may use the Demised Premises for the purposes and
uses defined below in Article 5.
<PAGE>
4
Tenant shall also have as appurtenant to such leasing the right, upon
request (which may be verbal) to Landlord's Property Manager, and subject to
such reasonable and timely conditions as the Property Manager may impose, to
access to the roof of the Building, and to the roof of Building No.1 in the
event that Tenant exercises its Expansion Right under Section 32(b), in
connection with the installation, maintenance, repair and/or replacement of
Tenant's equipment on the roof of each such Building. Any such installation,
repair or replacement shall be subject to the provisions of Section 8.6, Section
8.7 and Article 9 if applicable.
Tenant shall have the right to add to the Demised Premises all or a portion
of the First Additional Premises ("Early Space") prior to July 1, 1998. If
Tenant wishes to exercise this right, it shall do so by written notice thereof
to Landlord, and from and after the date set forth in such notice, or, if later,
the date on which Landlord has performed Landlord Work with respect to any such
Early Space located on the third floor of Building No.3, such Early Space shall
be added to the Demised Premises leased hereunder. In such event, Base Rent
shall be due with respect to such space during Period 1, at the rate of $4.75
per square foot per annum, subject to the provisions of Section 4.1 relating to
the New Third Floor Space. The parties hereby acknowledge that the
"demonstration room" on the first floor of Building No.3, and the adjacent
corridor, and an additional area on the first floor of Building No.3 known as
the "former marketing area," containing, together, a total of 3,692 square feet,
was added to the Demised Premises as Early Space pursuant to such a notice as of
May 1, 1998.
ARTICLE 3 - Term
1. Primary Term: The Primary Term of this Lease shall be for Seven (7)
Years commencing on the Commencement Date and ending on the Expiration Date
except as otherwise provided hereinafter.
2. Extended Term: Tenant shall have the option to extend this Lease for a
period of Three (3) Years commencing on the Expiration Date and ending on the
third anniversary after the Expiration Date provided that Tenant shall give to
Landlord written notice of the exercise of this option no later than nine months
prior to the Expiration Date and that Tenant shall not then be in default beyond
any applicable grace and/or cure periods of any provision of this Lease. This
Lease shall be extended upon the same terms, covenants and conditions, except as
may otherwise be provided in Section 4.2 herein.
3. Early Termination Right: If Landlord does not (i) timely perform all of
its obligations under Section 6.11(a) by July 7, 1998 and/or (ii) deliver to
Tenant, on or before July 8, 1998, the Tax Payment Notice as required pursuant
to Section 6.11(b), and/or (iii) deliver to Tenant, on or before July 15, 1998,
the Building Permit Notice pursuant to Section 6.11(c)), Tenant shall have the
option to terminate this Lease (the "Early Termination Right") on or before
January 31, 1999 provided that Tenant shall give to Landlord written notice of
the exercise of its Early Termination Right at least one hundred twenty (120)
days prior to the proposed termination date specified in such notice (the
"Termination Date"). If such notice is timely given, the Lease shall terminate
on the Termination Date.
<PAGE>
5
ARTICLE 4 - Base Rent
1. Primary Term: Commencing on the Commencement Date and thereafter on or
before the first day of each calendar month during the Term, Tenant shall pay to
Landlord, at Landlord's address stated above, or at such other place or address
as Landlord may, from time to time, direct as provided for in Article 21, fixed
monthly Base Rent in the following amounts:
(a) Period 1: Commencement Date through June 30, 1998 - Seventeen Thousand
Two Hundred Twenty-Six Dollars and Twenty-Seven Cents ($17,226.27) per
full calendar month. This amount is based on an Annual Base Rent rate
of Four Dollars and Seventy-Five Cents ($4.75) per square foot for
Forty-Three Thousand Five Hundred Nineteen square feet (43,519 SF). No
Base Rent or Additional Rent shall be payable with respect to Two
Thousand One Hundred Twenty (2,120 SF) square feet of storage space
within the Demised Premises on the third floor of Building No.3.
Notwithstanding the foregoing, (i) the monthly payments of Base Rent
shall be reduced pursuant to Subsection (f) below and (ii) if any
Early Space is added to the Demised Premises pursuant to Section 2,
Additional Rent during Period 1 shall be increased accordingly, and
Base Rent shall be due with respect to such Early Space unless it is
part of the New Third Floor Premises, as further set forth in
Subsection (e) below.
(b) Period 1A: July 1, 1998 through December 31, 1998 - Twenty-Three
Thousand Four Hundred Sixty-Two Dollars and Twenty-Three Cents
($23,462.23) per full calendar month. This amount is based on an
Annual Base Rent rate of Four Dollars and Seventy-Five Cents ($4.75)
per square foot for Fifty-Nine Thousand Two Hundred Seventy Three
square feet (59,273 SF). No Base Rent shall be payable with respect to
Twenty Thousand Five Hundred Forty-Nine (20,549SF) square feet of
space within the First Additional Premises on the third floor of
Building No.3 (the "New Third Floor Premises"), including any portion
thereof which is added to the Demised Premises as Early Space, for a
period of six (6) months. Notwithstanding the foregoing, the above
monthly payments of Base Rent shall be reduced pursuant to Subsection
(f) below. No Additional Rent shall be payable with respect to the New
Third Floor Premises until the Landlord has completed the Landlord
Work described in Paragraph 8.1(a) below; except that Tenant shall pay
Additional Rent for any New Third Floor Premises which is delivered to
Tenant at its request as Early Space with Landlord Work completed.
(c) Period 2: January 1, 1999 through the Expiration Date:
(i) January 1, 1999 through March 31, 1999 - Thirty-One Thousand Five
Hundred Ninety-Six and Twenty-One Cents ($31,596.21) per full calendar
month. This amount is based on an Annual Base Rent rate of Four
Dollars and Seventy-Five Cents ($4.75) per square foot for Seventy-
Nine Thousand Eight Hundred and Twenty-Two square feet (79,822 SF),
subject to the provisions of Subsection (e) below;
<PAGE>
6
(ii) April 1, 1999 through March 31, 2002- Thirty Nine Thousand Nine
Hundred Eleven Dollars ($39,911) per full calendar month. This amount
is based on an Annual Base Rent rate of Six Dollars ($6.00) per square
foot for Seventy-Nine Thousand Eight Hundred and Twenty-Two square
feet (79,822 SF); and
(iii) April 1, 2002 through the Expiration Date - Forty-Three Thousand
Two Hundred Thirty-Six Dollars and Ninety-Two Cents ($43,236.92) per
full calendar month. This amount is based on an Annual Base Rent rate
of Six Dollars and Fifty Cents ($6.50) per square foot for Seventy
Nine Thousand Eight Hundred Twenty Two square feet (79,822 SF).
(d) The monthly Base Rent for any partial month at the beginning or end of
the Term shall be prorated at the rate of 1/30 of the then current
installment of Base Rent for each day in such partial month.
(e) The monthly Base Rent for Period 1A identified above shall not
commence until Landlord has delivered the space in the condition
identified in Article 8.1. Further, Tenant shall be entitled to six
(6) months free Base Rent with respect to all of the New Third Floor
Space, beginning on the date any such space is added to the Demised
Premises, whether as Early Space or otherwise. Thus, for example, if
600 square feet of New Third Floor Space is added to the Demised
Premises on June 1, 1998 and 1,200 square feet is added on July 1,
1998 and the balance is added on August 1, 1998, the Base Rent for the
first such space shall begin on December 1, 1998, the second such
space on January 1, 1999 and the third such space on February 1, 1999.
(f) The monthly Base Rent for each of the months of May, June, July,
August, September and October, 1998 shall be reduced by a credit in
the amount of $2,417.72 each month (for a total reduction of
$14,506.33) in order to reimburse Tenant for its previous payment of
$31,772.60 as Base Rent for the month of April, 1998, or an excess
payment of $14,506.33. Accordingly, for the months of May and June
1998 the amount to be paid monthly for Base Rent shall be $14,808.55
and for the months of July 1998 through October, 1998, the amount to
be paid monthly for Base Rent shall be $21,044.51.
----------
2. Extended Term: The Annual Base Rent for the Extended Term shall be
Ninety-Five Percent (95%) of the Fair Market Rental Value ("FMRV") at the
commencement of such Extended Term. The FMRV shall be determined as follows:
(a) Upon receipt by Landlord of Tenant's written notice exercising its
option to extend the Lease as provided above in Article 3.2, Landlord
shall within ten (10) days provide Tenant with a proposed rent
schedule for Annual Base Rent for the Extended Term.
<PAGE>
7
(b) Landlord and Tenant shall schedule a meeting no later than fifteen
(15) days after receipt by Landlord of Tenant's written notice
exercising its option, to mutually agree on a rent schedule for the
Extended Term.
(c) If Landlord and Tenant are unable to agree on a rent schedule, then
within five (5) days of the meeting each shall name and appoint a duly
qualified and licensed real estate appraiser or appraisal firm of
recognized competence and experience in central and eastern
Massachusetts. The fees of each appraiser shall be paid by the
appointing party. If for any reason either Landlord or Tenant do not
appoint an appraiser by 5:00 PM on the fifth (5th) day, or if the
fifth (5th) day falls on a Saturday, Sunday or a holiday, by 5:00 PM
of the next business day, then the party making their appointment may
request the President of the Greater Boston Real Estate Board or a
presiding Justice of the Middlesex Superior Court appoint a second
appraiser. The fee of the second appraiser shall be paid by the non-
appointing party.
(d) Within ten (10) days of their appointment, the two appraisers shall
appoint a third appraiser of comparable qualifications. If the two
appraisers cannot agree on a third, then either Landlord or Tenant can
follow the above procedure for the appointment of the third appraiser.
The fee of the third appraiser shall be divided equally between the
parties.
(e) The three appraisers shall complete their assignments and establish
the FMRV for the Demised Premises for the period of the Extended Term
within thirty (30) days after the appointment of the third appraiser.
If all three appraisers are unable to agree on the FMRV, then the
three appraisal reports shall be compared and the percent variance
between values calculated. The two appraisals with the least variance
between the values shall be added together and the sum divided by two
(2), which quotient shall represent the FMRV for the Demised Premises.
The FMRV shall be expressed in dollars per square foot per year.
(f) The Annual Base Rent for the Extended Term is calculated by
multiplying the FMRV as determined by ninety-five percent (95% or
.95).
3. Late Payment of Base Rent and Additional Rent: The Base Rent and the
Additional Rent shall be considered late if the payment is not received by
Landlord by 5:00 PM on the first day of each month during the Term. Landlord
shall assess and Tenant agrees to pay Landlord, as Additional Rent, a late fee
equal to five (5%) percent of the then monthly rental payment due for both Base
Rent and Additional Rent if payment is made after the fifth day of the month.
ARTICLE 5 - Use
Tenant may use the Demised Premises (i) for general and executive offices;
(ii) for research and development; (iii) for the manufacture and assembly of
products; (iv) for testing and inspection of assembled products; (v) for the
warehousing of both raw materials and finished
<PAGE>
8
goods related to Tenant's business; and (vi) for corporate sales, training and
demonstration purposes related to Tenant's business ("Permitted Uses"). Tenant
may use the Demised Premises for such other business use in which Tenant might
engage in the future provided that Tenant receives the prior written approval of
Landlord which approval shall not be unreasonably withheld or delayed. It shall
be the Tenant's responsibility to insure that its intended use of the Demised
Premises is in compliance with all laws, codes and regulations throughout the
Primary Term and any Extended Term of this Lease.
ARTICLE 6 - Operating Costs, Capital Expenditures, Landlord Repairs and Real
Estate Taxes
1. During the term of this Lease, Tenant shall pay to Landlord as
Additional Rent "Tenant's Proportionate Share," hereinafter defined, of the
following Operating Costs ("Operating Costs") actually incurred by Landlord
pursuant to the discharge of its obligation to manage the Property under this
Lease. Notwithstanding the foregoing, Tenant shall not be obligated to pay for
any costs incurred by Landlord, its agents, employees and/or contractors arising
from the operation, maintenance and repair of those systems, structures and
improvements on the Property serving only Building No. 1 (unless, pursuant to
Article 32 Building No. 1 shall have been added to the Demised Premises) and/or
Building 2 and/or not benefiting the Demised Premises. "Tenant's Proportionate
Share" shall mean the percentage determined by taking the actual amount of space
occupied by Tenant during the Term for which Tenant is to be charged Additional
Rent and dividing it by the total amount of space in the Building Complex which
percentage is shown on Exhibit A-2; Building Complex Space Allocation. Landlord
shall provide to Tenant the services outlined below and shown on Exhibit B;
Landlord's Services attached hereto, and those set forth in Sections 6.5, 7.1,
7.6 and in Article 8.
Notwithstanding the foregoing, if any of the services provided by Landlord,
the costs of which are included as Operating Costs under this Section 6.1,
benefit only the Demised Premises or benefit the Demised Premises and some, but
not all, of the balance of the Building Complex (such as, by way of example,
costs relating to the elevator at Building No. 3, and certain of the expenses
referred to in subsections (g), (h), (i), and (k) in the next following
paragraph), Tenant shall pay a share of such costs equal to the percentage
determined by taking the actual amount of space occupied by Tenant during the
Term for which Tenant is to be charged Additional Rent and dividing it by the
total amount of space within the Building Complex affected or benefited by such
services.
Operating Costs for which Tenant shall pay Tenant's Proportionate Share
include the following:
(a) All necessary repairs, maintenance, operation and replacements, which
are not capital expenditures, of the parking areas, sidewalks and
grounds including, without limitation, all exterior lighting,
landscaping including lawn mowing, edging and weeding and mulching of
flower beds, edging of walkways and pruning of shrubs, and snow
removal from all walks, driveways and parking areas
<PAGE>
9
on the Land including the cost of materials and supplies in connection
with any such maintenance, repair, operation and replacements;
(b) The reasonable and customary management fee for Landlord or Landlord's
managing agent in the amount of 3% of the aggregate Base Rent for all
tenants at the Building Complex for each calendar year in the term;
(c) The cost of Common Area support space including a property management
office (577 SF) and telecom room (215 SF) located in the Connector
Building, and a transformer room (146 SF) located in Building No. 2,
each of which is shown on Exhibit A-1 and identified on Exhibit A-2;
(d) The cost of materials and supplies used in connection with the
management of the Property;
(e) The contract wage of an independent contractor or the salary of the
employee(s) to the extent engaged in the operation and maintenance of
the Demised Premises including overtime at the hourly rate 150% of
such employee's hourly wage (the current hourly overtime rate being
$39), but not bonuses, payroll taxes, workmen's compensation insurance
and the Landlord's share as employer of employee benefits, including,
but not limited to, contributions to life insurance, hospitalization
insurance and pension plans;
(f) The premium for Landlord's "All Risk" property insurance and
Landlord's Comprehensive General Liability Insurance for the Demised
Premises as required by Article 13;
(g) Service costs for the elevator within and serving Building No. 3;
(h) Cost of repair, maintenance, operation and replacements which are not
capital expenditures made with respect to the Demised Premises, its
systems including HVAC units and utility lines contained therein and
the two (2) HVAC units serving Tenant's second floor computer room
located on top of the roof of the Connector Building and related
utility lines, including, without limitation, the cost of refuse
removal and janitorial services, except that notwithstanding the
foregoing, it is agreed that (x) any obligations of Landlord stated in
Article 8 shall be done at Landlord's sole cost without any
reimbursement from Tenant unless such repair is increased as a result
of alterations or improvements performed by Tenant and (y) Landlord
will pursue any warranty or guaranty available before including any
such expense as an Operating Cost;
(i) Cost of all supplies and materials used in connection with the
operation, repair and maintenance of the Demised Premises, including,
without limitation, bathroom and cleaning supplies, light bulbs,
ballasts, fuses, and other electrical supplies, paper and paper goods;
<PAGE>
10
(j) Real Estate Taxes, betterments and special assessments (exclusive of
any portion of the Real Estate Tax Arrearage, except for Tenant's
Proportionate Share of Real Estate Taxes for Fiscal Year 1998 not
previously paid by it); and
(k) Utility expenses for those utilities serving Common Areas or serving
the Demised Premises as described in Article 7 below.
Operating Costs shall not include the following:
(a) Rent, additional rent or other charges payable under any ground lease
or superior lease affecting the Building Complex or the Land;
(b) Leasehold improvements made in connection with the preparation of any
portion of the Property for occupancy by a new or existing tenants;
(c) Any expansion of the rentable area of the Building, Property or the
parking areas serving the Building or Property except if such
expansion directly benefits Tenant;
(d) Costs, expenses or charges properly chargeable or attributable to a
particular tenant or tenants of the Building (if the Building is a
multi-tenant building) or Property;
(e) Any utility or other service used or consumed in premises leased to
any tenant or occupant of the Property;
(f) Efforts to lease portions of the Property or to procure new tenants
for the Property, including advertising expenses, leasing commissions
and attorney's fees;
(g) Negotiations or disputes with any tenant of the Property;
(h) Landlord's general overhead not directly related to the management or
operations of the Property, except to the extent included in the
management fee described above;
(i) Repairs and replacements arising out of a fire or other casualty,
except a reasonable deductible under insurance carried by Landlord, or
out of an exercise of eminent domain affecting the Building or
Property or any of the parking areas serving the Building or Property,
(j) Landlord's or Landlord's managing agent's breach or violation of a
law, lease or other obligation, including fines, penalties and
attorneys' fees;
(k) Fees for licenses, permits or inspections that are not part of
Landlord's required maintenance of the Building or Property under this
Lease or result from the act or
<PAGE>
11
negligence of Landlord, Landlord's managing agent or any other tenant
of the Property;
(l) Environmental testing, remediation and compliance except for any
testing or remediation specifically requested by Tenant (the work
performed by Landlord pursuant to Article 8 of this Lease shall not be
deemed requested by Tenant for purposes of this Subparagraph (1));
(m) Any repairs necessary to cure defects in the construction of any
portion or in any component of the Building Complex, in the building
systems or in the Landlord Improvements, Landlord Work or any other
construction by Landlord provided that Tenant or its contractors have
not done anything to result in the need for such repairs;
(n) Any items with respect to which Landlord receives reimbursement from
insurance proceeds or from a third party;
(o) Costs incurred by Landlord in connection with its obligations under
Article 8 of this Lease; and
(p) Any costs of repair and/or replacements arising out of or relating to
any action or inaction of the Landlord or its employees, contractors
or agents.
2. Landlord shall reasonably estimate the Operating Costs for each
calendar year wholly or partially included within the Term of this Lease. Prior
to the execution hereof, Landlord shall send notice of said estimate to Tenant
for the remaining portion of the first such calendar year and thereafter at
least thirty (30) days prior to the commencement of each subsequent calendar
year. During each calendar year thereafter included in the Term, Tenant shall
pay, as Additional Rent, one twelfth of the applicable estimate each month to
Landlord together with the fixed monthly Base Rent. If Landlord does not give
Tenant such estimate within the time period stated above, then Tenant shall
continue to make estimated payments based upon the preceding year's estimate and
within thirty (30) days after receipt of the new estimate for the current
calendar year, Tenant shall commence payment of the new estimated monthly amount
and shall pay in a lump sum any retroactive amounts due from the beginning of
the new calendar year, except that if such retroactive amount exceeds $25,000,
Tenant shall have the right to pay it in installments over a three (3) month
time period.
It is agreed between the parties that Landlord may revise its estimate
of Operating Costs once a calendar year to reflect increased costs and shall
give notice to Tenant thereof no later than the tenth (10th) day of the month
preceding the month in which said increased Operating Costs will be applicable.
All payments made hereunder shall be paid to Landlord as stated in this Lease.
3. Within one hundred twenty (120) days after the expiration of each
calendar year included in the Term, Landlord shall provide Tenant with a written
statement, in sufficient detail for verification by Tenant, comparing the actual
Operating Costs for the preceding calendar year
<PAGE>
12
against the estimate of Operating Costs for the current calendar year. Within
thirty (30) days after the delivery of such statement, including any statement
delivered after the expiration or termination of this Lease, Tenant shall pay to
Landlord the difference, if any, between the amount paid by Tenant as estimated
Operating Costs and the amount owed by Tenant for the actual Operating Costs for
such lease year, provided, however, that if Landlord does not furnish Tenant
with a statement within six (6) months after the end of the billing period for
Operating Costs, Tenant shall not be obligated to pay such amount. If Tenant's
payment of the estimated Operating Costs was greater than the amount owed by
Tenant for the actual Operating Costs, then Landlord shall pay same to Tenant
within thirty (30) days after delivery of such a statement.
Tenant shall notify Landlord within sixty (60) days after receipt of
Landlord's statement of its intention to inspect Landlord's books and records
with respect to Landlord's maintenance and operation of the Property for the
purpose of verifying the actual Operating Costs and their inclusion and Landlord
shall promptly thereafter provide Tenant with access to such records. Tenant,
its accountant, or a qualified consultant engaged by Tenant, at Tenant's sole
cost, shall conduct and conclude its inspection of Landlord's books and records
with respect to Landlord's maintenance and operation of the Property within
thirty (30) days after Tenant's notice and access and shall be entitled, at its
expense, to make copies thereof. If such inspection reveals that Tenant's
payment of the estimated Operating Costs was greater than the amount owed by
Tenant for the actual Operating Costs, then Landlord shall pay same to Tenant
within sixty(60) days after receipt by Landlord of a written notice from Tenant
identifying the nature and amount of any overpayment.
4. If, during the Term of this Lease, Landlord shall make
(i) a Capital Expenditure, hereinafter defined, for an improvement
which produces a cost savings in operating the Land and/or Demised Premises and
of which Landlord has given information reasonably satisfactory to Tenant
demonstrating a cost savings greater than Tenant's Proportionate Share of the
Annual Amortization of such improvement as stated in the following sentence; or
(ii) a Capital Expenditure to the Property which benefits the Demised
Premises and/or to the Demised Premises, which is required: a) to comply with
changes in laws applicable to the Property and/or the Demised Premises, or b) as
a result of an alteration or improvement performed by Tenant, except for any
such Capital Expenditure made as a result of an obligation of Landlord pursuant
to this Lease, which shall be done at Landlord's sole expense without any
reimbursement from Tenant; then Tenant shall pay Tenant's Proportionate Share of
the Annual Amortization of such Capital Expenditure. The Annual Amortization
shall be determined by dividing the cost of the original Capital Expenditure
plus an interest factor, reasonably determined by Landlord as being the interest
rate then being charged for long-term mortgages by institutional lenders on like
properties within the locality in which the Demised Premises are located, by the
number of years of the useful life of the Capital Expenditure in accordance with
GAAP.
<PAGE>
13
With respect to the payment of Tenant's Proportionate Share of the
Annual Amortization, Tenant shall commence payment as Additional Rent of one
twelfth (1/12th) of the annual amount shown in Landlord's notice given pursuant
to the immediately preceding sentence with the next and each succeeding
installment of rent becoming due during the Term, provided that the item for
which the expenditure was made has been fully completed on the date of Tenant's
first payment and further provided that Tenant has received notice of such
amount at least fifteen (15) days prior to the month in which payment is first
due or if not so received, then Tenant's payment shall commence as of the
following month. For purposes of this Lease, a "Capital Expenditure" is defined
as the acquisition of a prior non-existing asset or the acquisition of a
replacement of a pre-existing asset not acquired in the ordinary course of
business and not characterized as an operating cost or expense within generally
accepted accounting principles, provided that the acquired asset must enhance
the value of the real estate over its useful life, be permanently affixed to the
real estate and excludes all personal property, removable trade fixtures and
repairs to existing assets.
5. Notwithstanding any provisions in this Lease to the contrary, Landlord
shall perform all maintenance, repairs and replacements necessary to keep in
good condition and working order and in compliance with all applicable laws,
ordinances and regulations (a) the roof, foundation, columns and other
structural elements of the Building, (b)the heating, ventilating, air
conditioning, plumbing, electrical, life safety and other mechanical systems and
equipment serving the Building, (c) the parking areas on the Land (including
snow removal), (d) the driveways and walkways necessary for access to the
Building or the Demised Premises or such parking areas (including snow removal),
(e) the entrances (including snow removal), necessary for access to the Building
and Demised Premises, (f) the loading docks and passenger elevators in the
Building, (g) the lavatories in the Demised Premises, and (h) any common areas
and facilities provided by Landlord from time to time. When Landlord performs
maintenance, repair and replacement work, Landlord shall take care not to
unreasonably interfere with Tenant's use of the Demised Premises. If Tenant's
use of the Demised Premises is materially adversely affected for more than three
(3) consecutive business days as a result of Landlord's breach of its repair
obligations as set forth herein, then Tenant shall be entitled to an equitable
abatement of rent for each such consecutive business days that Tenant's use is
materially adversely affected.
6. As used herein, Real Estate Taxes shall mean general real estate taxes
levied against the Property but not any special assessments or taxes in the
nature of improvement or betterment assessments which shall be governed solely
by Paragraph 6.9. Real Estate Taxes shall also exclude, without limitation, any
income, franchise, gross receipts, corporation, capital levy, excess profits,
revenue, rent, inheritance, devolution, gift, estate, payroll or stamp tax by
whatsoever authority imposed or howsoever designated or any tax upon the sale,
transfer and/or assignment of Landlord's title or estate which at any time may
be assessed against or become a lien upon all or any part of the Demised
Premises, or this leasehold. In addition, Real Estate Taxes shall exclude any
liens or taxes, penalties or interest which are levied or assessed against the
Property for a period of time prior to the commencement of the Term or one
levied or assessed for a period during the Term on account of late payment not
caused by Tenant, or any related fees or costs, and shall also exclude all or
any portion of the Real Estate Tax Arrearage,
<PAGE>
14
except for Tenant's Proportionate Share of Real Estate Taxes for Fiscal Year
1998 not previously paid by it.
7. If at any time during the Term the laws concerning the methods of real
property taxation prevailing at the commencement of the Term are changed so that
a tax or excise on rents or any other such tax, however described, is levied or
assessed against Landlord as a direct substitute in whole or in part for any
Real Estate Taxes, Tenant shall pay before delinquency (but only to the extent
that it can be ascertained that there has been a substitution and that as a
result Tenant has been relieved from the payment of Real Estate Taxes it would
otherwise have been obligated to pay) the substitute tax or excise on rents.
8. Tenant shall pay monthly, as part of the Additional Rent described in
Paragraph 6.2 above, Tenant's Proportionate Share of all Real Estate Taxes as
estimated by Landlord based on the tax bill for the current tax year to be
assessed against the Property for each fiscal tax year or such other tax period
as may be defined by the appropriate governmental authority having jurisdiction
or portion thereof included within the Term, and which are during such Term,
levied, or imposed upon or become a lien or liens upon the Property or any part
thereof. This part of the Additional Rent payment shall be one twelfth of the
applicable annual estimate.
Real Estate Taxes for the tax year in which the Term of this Lease
commences and for the tax year in which such Term expires shall be apportioned
between Landlord and Tenant in accordance with the number of days thereof
falling within the Term of this Lease.
9. Landlord shall pay when due all special assessments and betterment
assessments for municipal improvements levied against the Property or any part
thereof during the Term. Landlord may elect to either i) pay the assessments in
full, or ii) pay in installments over the period of time and upon the terms
offered by the assessing authority.
Tenant shall pay Tenant's Proportionate Share of any such assessments
which shall be calculated as follows: 1) using Tenant's Proportionate Share as
identified in Exhibit A -Schedule of Space and Exhibit A-2 - Building Complex
Space Allocation, 2) multiplied by the amount of the assessment attributable to
the Property, 3) divided by the maximum number of installments allowed or
allowable by the assessing authority, 4) multiplied by the interest rate
(monthly or annual) as stated by the assessing authority. Payment of any such
installment of an assessment shall be made in accordance with the Article 6.8
above.
10. Landlord is solely responsible for the timely payment of Real Estate
Taxes and any special assessments or betterment assessments to the Town of
Maynard. So long as no lien will be placed against the Property, Landlord, at
its sole election and its sole cost, may contest the amount of real estate taxes
to be paid, file for an abatement of real estate taxes paid, file an appeal of
the decision of the local Board of Assessors to the State Appellate Tax Board or
file a suit in a court having jurisdiction over such matters. Should Landlord
receive an abatement or an award from the court for amounts levied or assessed
for a period falling within the Term, then Landlord shall pay to Tenant Tenant's
Proportionate Share of such amount after deduction of expenses incurred in
connection therewith.
<PAGE>
15
11. Landlord acknowledges that it currently owes real estate taxes and
water and sewer charges due with respect to the Property (collectively,
"Outstanding Taxes") for periods of time prior to the commencement of the Term,
as well as interest, fees, penalties and costs relating to such Outstanding
Taxes, and taxes and water and sewer charges for Fiscal Year 1998 (all such
amounts, as well as any assessments or other amounts, outstanding with respect
to the Property for any period of time prior to the Date of Execution, including
penalties and interest, collectively, referred to as the "Real Estate Tax
Arrearage"). As a material inducement to Tenant's willingness to execute this
Lease, Landlord has agreed (a) to pay to the Town of Maynard, or other
appropriate entity, the entire Real Estate Tax Arrearage on or before July 7,
1998; and (b) to provide to Tenant on or before July 8, 1998 written
verification of its payment in full of all such amounts, as well as written
verification from the Town of Maynard that it has accepted such amounts as
payment in full (such written verification referred to as the "Tax Payment
Notice"); and (c) to provide to Tenant on or before July 15, 1998 written
verification from the Town of Maynard of Tenant's and Landlord's ability to
obtain a building, occupancy, or other local permit or license for performing
alterations or improvements at, and/or the occupancy by Tenant of, the Demised
Premises (collectively, "Permits") and of the removal of any conditions or
restrictions on (or the denial, suspension or revocation of) the issuance of any
Permits resulting from the Real Estate Tax Arrearage (such written verification
referred to as the "Building Permit Notice"). In the event that Landlord has not
timely performed all of its obligations under this Section 6.11, Tenant shall be
entitled to exercise its Early Termination Right pursuant to Section 3.3.
Notwithstanding the foregoing, Landlord shall be entitled to seek relief against
the Town of Maynard with respect to such amounts so long as such actions or
litigation shall not affect Landlord's obligations in subsections (a) - (c)
above or Tenant's ability to obtain any Permits.
12. If the Term or Extended Term includes any partial calendar year, the
Additional Rent for such calendar year shall be prorated according to the
fraction of total days in such calendar year that are included in the Term or
Extended Term. If the Term or Extended Term begins on a day other than the first
day of a calendar month or ends on a day other than the last day of a calendar
month, then the monthly installment of Additional Rent for the month in which
the Term begins or ends shall be prorated at the rate of 1/30 of the then
current installment of Additional Rent for each day in such month.
ARTICLE 7- Utilities and Services
1. Landlord shall supply to the Building Complex, of which the Demised
Premises is a part, at no cost to Tenant, except as it may otherwise be provided
Sections 6.1,6.2 and 7.2 in this Lease, the following services, which shall be
available 24 hours per day, 7 days per week: gas, hot and cold running water for
lavatory, cooking and drinking purposes, sewer services, heating, ventilating
and air conditioning ("HVAC"), and electricity for lighting and the operation of
Tenant's business equipment and machines. HVAC service shall be provided 8 a.m.
to 6 p.m. Monday through Friday throughout the entire Demised Premises, and at
other hours to portions of the Demised Premises, at Tenant's request, through
the energy management system at the Property (the "EMS"). The Landlord shall
provide that the heating system serving the Demised Premises shall heat all
areas of the Demised Premises to an inside temperature of seventy (70) degrees
Fahrenheit when the outside temperature is zero (0) degrees Fahrenheit or above,
and
<PAGE>
16
that the air-conditioning equipment will be of sufficient capacity to cool the
Demised Premises to seventy-five (75) degrees Fahrenheit plus or minus two (2)
degrees with a relative humidity of fifty percent (50%) plus or minus five
percent (5%) and the outside temperature is ninety-five (95) degrees dry bulb,
seventy-three (73) degrees wet bulb.
2. Tenant shall be responsible for the payment of all utility expenses
for those utilities serving the Demised Premises associated with the use and
occupancy of the Demised Premises including water, sewer, electricity, fuel oil
or gas. Tenant will be charged by Landlord for its actual usage of utilities as
part of the Operating Costs and which Tenant shall pay monthly as part of the
Additional Rent, described in Paragraph 6.2. Landlord represents that gas, water
and sewer service for Building No.3 are currently separately metered and that
Landlord shall, at its sole cost and expense, separately sub-meter the electric
utilities provided to Building No.3 and connect such submeter to the EMS, on or
before July 1, 1998. For any utility service provided to all or any portion of
the Demised Premises which are separately metered or submetered, Tenant shall be
charged for its actual usage as shown on such meter or sub-meter, without mark-
up.
For any period during which any utility service provided to all or any
portion of the Demised Premises is not separately metered or sub-metered, Tenant
shall pay for such utility service, as follows. If such utility service is
provided to all tenants at the Building Complex, Tenant's share shall be
Tenant's Proportionate Share. If such utility service is provided to some, but
not all, tenants at the Building Complex, Tenant's share shall be a fraction,
the numerator of which is the square feet of the Demised Premises at the time
such service is provided and the denominator of which is the total square feet
of the premises to which such service is provided. Notwithstanding the
foregoing, if Tenant's usage significantly increases on a per square foot basis
over its current usage with respect to utilities which are not separately
metered or sub-metered, Landlord may reasonably adjust Tenant's share.
3. Tenant shall make its own arrangements with any utility company not
servicing the Demised Premises for any utilities that it desires that are
currently not being provided by Landlord (Landlord is not aware of any such
utility), and shall pay when due any and all charges for services supplied to
Tenant by the respective utility. In the event that Landlord is notified that a
lien will be placed against the Demised Premises as a result of Tenant's failure
to pay any such utility charge, then Landlord shall immediately notify Tenant of
the impending lien and to protect the real estate Landlord may pay such charges,
notify Tenant thereof and the same shall be paid by Tenant as Additional Rent
with the next installment of Base Rent becoming due.
4. In no event shall Landlord be responsible for charges for any
utilities consumed by Tenant at the Demised Premises.
5. Landlord shall use reasonable efforts to work with the utility
providers to restore any service which becomes unavailable. If, however, such
unavailability of any utility service has a material adverse effect on Tenant's
use and occupancy of the Demised Premises for more than ten (10) consecutive
business days, then after the tenth (10th) day Tenant shall be entitled to
<PAGE>
17
an abatement of fifty percent (50%) of the Base Rent as prorated on a per diem
basis for each consecutive day that Tenant's use is so affected.
6. Landlord shall provide property management services for the Property
and the Demised Premises as provided for in Article 6 above and shown on Exhibit
B. Tenant is responsible for Tenant's Proportionate Share of the cost of said
services, the amount of which shall be identified on the Operating Cost estimate
to be delivered to Tenant as provided for in Article 6.2 above and paid monthly
as part of Additional Rent. The property management services to be rendered by
Landlord set forth in this Article shall be provided between the hours of 8 AM
and 5 PM Monday through Friday. If Tenant requires any property management
services to be performed after said hours, including Saturdays, Sundays and
holidays, Tenant shall notify Landlord of such requirement no later than 3 PM on
any week day and by 3 PM on Friday for after hours service on Saturday and/or
Sunday. The cost for such additional service shall be as provided for in Article
6.1 above
ARTICLE 8 - Condition of the Premises, Landlord and Tenant Improvements
1. Condition of the Premises:
(a) Tenant agrees to take and Landlord agrees to deliver the Demised
Premises according to Exhibit A; Schedule of Space, upon the Commencement of
this Lease, in the "as is, where is" condition, subject to Landlord's
obligations under this Article 8 and 6.5 hereof. On such date or the dates
identified in Exhibit A; Schedule of Space, or such earlier occupancy date as
provided in Article 2, the Demised Premises shall be free of all occupants and
their personal property, in good basic operating condition and repair, broom
clean and in compliance with applicable building, life and safety codes.
(b) In addition to the foregoing, Landlord shall, on or before July 1,
1998 (a) insure that Andataco, Inc., and any other persons, currently using the
vestibule and lobby on the first floor of the Building have vacated and ceased
all use of or operation within such areas, as well as any access to or through
the lobby and vestibule, removing all signage and leaving the same in broom
clean, good condition and (b) construct a demising wall in the loading dock area
of the Connector Building, separating the Demised Premises from the remainder of
the Connector Building, as previously agreed. Landlord further agrees that it
shall, on or prior to June 1, 1998, remove from the third floor portion of the
First Additional Premises, all equipment, supplies, materials and all other
personal property.
(c) Subject to the provisions of Article 2 relating to Early Space,
Landlord will, prior to August 1, 1998, perform the following improvements in
the third floor portion of the First Additional Premises ("Landlord Work"):
install new carpeting and ceiling tiles; paint walls; refurnish existing light
fixtures; demolition of certain demising walls as shown on a plan prepared by
John Brennan, architect, previously approved by Landlord and Tenant; and clean
and paint bathrooms. The quality and type of materials and workmanship will be
similar to the Initial Demised Premises. Landlord will have no obligation to
install any hard wall partitions or to modify the HVAC, electrical or
telecommunications system as part of Landlord Work.
2. Landlord Improvements and Repairs: HVAC and Air Quality:
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18
Landlord shall promptly and diligently make whatever improvements are
necessary to correct air quality problems with respect to the Demised Premises,
including addressing the problems identified in the Envirohealth Report issued
May 19, 1997. Such improvements shall include, but are not limited to:
(a) HVAC System
(1) Landlord shall provide ventilation of the Demised Premises that
meets or exceeds the Standards for Acceptable Indoor Air Quality
(ASHRAE 62-1989) established by the American Society of Heating,
Refrigeration and Air-Conditioning Engineers, as such Standards
may be amended from time to time (the "Standards"). If the
ventilation system serving the Demised Premises fails to provide
adequate ventilation according to the Standards, Landlord shall
promptly and diligently make such repairs or replacements to the
ventilation system as are necessary to comply with the Standards.
(2) Prior to the date hereof, Landlord has installed four (4) new
HVAC units on the roof of Building No.3. The specifications for
the new units includes:
a. Economizers pre-set to provide fresh air (outside) make up
at approximately fifteen percent (15%),
b. Power exhausts to provide proper pressure stabilization and
air exchange.
c. Humidity controls to provide for humidity levels between
forty-five and sixty percent (45% to 60%).
(3) The cost of the new HVAC units and the cleaning of the HVAC duct
work and their installation shall be at Landlord's sole cost and
expense and shall not be amortized and payable by Tenant as
Additional Rent as provided for in Article 6.4 above.
(4) Landlord shall, throughout the Term of the Lease, be responsible
for the inspection, repair and maintenance of the HVAC system
serving the Demised Premises, including the two (2) units which
are located on the roof of the Connector Building, which serve
the Tenant's second floor computer room. Tenant shall pay
Tenant's Proportionate Share of said expenses as provided for in
Article 6 above. In the event that the new HVAC units serving
Building No.3 described above (as well as the new HVAC unit
located on the roof of Building No.3 and serving Tenant's third
floor computer room) require repairs or replacements during the
Term or Extended Term, Landlord shall first seek coverage or
reimbursements for said repairs or replacements from any warranty
or
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19
guaranty that may be in effect at that time before seeking
reimbursement from Tenant. Landlord represents that all such new
units are covered by a five (5) year warranty. It is understood
by both parties that normal preventive maintenance practices
including but not limited to oiling of motors, changing belts and
replacing filters are not covered by a new HVAC unit warranty.
(b) HVAC Duct Cleaning:
After the installation of the new HVAC units, Landlord engaged a
qualified consultant to clean the HVAC ducts in Building No.3 as
recommended in the EnviroHealth Report (#809-849b), issued May 19,
1997. During this process, the consultant installed after-filters in
the supply grills to enhance the collection of airborne dust
particles.
3. Air Quality Monitoring:
Landlord shall (a) at Landlord's sole expense, within a reasonable
amount of time following the HVAC duct cleaning (as set forth below), and at
three (3) year intervals thereafter, and (b) at Tenant's request and at Tenant's
sole expense, at other times, engage an indoor air quality professional, subject
to Tenant's approval which approval shall not be unreasonably withheld or
delayed, to inspect the HVAC system and/or conduct air quality tests, if
appropriate. Landlord shall promptly correct any problems identified by such air
quality professional. Landlord shall require such air quality professional to
provide copies of any and all reports and test data to Tenant. The first such
inspection and testing (which shall include the HVAC duct work and HVAC
machinery pans and sumps) shall be performed at Landlord's expense, and all
reports and test data delivered to Tenant by September 1, 1998.
4. Landlord Improvements - General:
Landlord in making any improvements, alterations, construction or
other work, including Landlord Work, shall cause all work to be done in a good
and workmanlike manner using materials equal to or better than those used in the
construction of the Demised Premises and shall comply with or cause compliance
with all applicable building codes, health and safety regulations and zoning
laws and with any direction given by any public officer pursuant to such codes,
regulations and laws. Landlord shall obtain or cause to be obtained and maintain
in effect, as necessary, all building permits, licenses, temporary and permanent
certificates of occupancy and any other governmental approvals which may be
required in connection with the making of the improvements, alterations,
construction or other work.
5. Default by Landlord:
In the event that Tenant notifies Landlord of any defaults on its
obligations under this Article, and Landlord shall fail to cure the same within
fifteen (15) days after receipt of such notice (or, as to a default under
Subsection 2(a)(4) which is not within Landlord's control, forty
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20
(40) days after receipt of such notice, Tenant shall have the right to terminate
the Lease, upon fifteen (15) days written notice to Landlord.
6. Tenant Improvements:
(a) Prior to making any initial improvements to any portion of the Demised
Premises ("Tenant Improvements"), Tenant shall give Landlord notice of
its intentions and submit plans and specifications of the proposed
Tenant Improvements to Landlord, for approval, which approval shall
not be unreasonably withheld or delayed. Landlord acknowledges that
the Tenant Improvements may include the following work:
. Upgraded cafeteria.
. Relocation of demonstration room and training room.
. Exercise room with shower.
. Relocation of existing and/or construction of new laboratories.
. Enlarge third floor computer room, including additional air
conditioning and installation of condenser(s) on roof.
. Installation of a new card reader security system, separate from
the current Andataco system, including electrical and low voltage
wiring. This may include expansion of the current system in the
manufacturing area of the first floor of the Demised Premises.
Landlord's approval shall be deemed given if Landlord does not respond
to Tenant's request for approval within fifteen (15) days from the
receipt of such request. In the event that Landlord withholds approval
for the proposed Tenant Improvements, Landlord shall state in writing
its reasons in sufficient detail to permit Tenant to modify its plans
in order to receive approval.
(b) At the time Landlord grants or is deemed to grant approval of any
Tenant Improvements, Landlord shall inform Tenant of any of the Tenant
Improvements that would (i) materially diminish the value of the
Demised Premises for use by a tenant for the Permitted Uses or (ii)
require unusual expenses to readapt the Demand Premises for use by a
tenant for the Permitted Uses or (iii) would be unique to Tenant's
particular business operations (except for the air handlers in
Tenant's computer rooms), and must be removed at the end of the Term.
If Landlord does inform Tenant of any such removal requirements, then
Tenant may either remove or leave such Tenant Improvements as it
decides. Tenant's responsibility upon removal of any such Tenant
Improvement is to repair any damage caused by the removal and not to
restore the Demised Premises.
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21
(c) Tenant Improvements may be done by any contractor chosen by Tenant and
approved by Landlord which approval shall not be unreasonably withheld
or delayed. Said contractor must be licensed, carry the kinds or
insurance and in the amounts set forth in subparagraph (f) below, and
must not interfere with Landlord's performance of its obligations
under this Lease.
(d) If Tenant retains Landlord to perform any of the work of making
Tenant. Improvements for Tenant, Landlord shall obtain bids from three
(3) independent general contractors. If Landlord acts as its own
general contractor, it shall obtain three (3) bids from three (3)
independent subcontractors for each discipline (mechanical,
electrical, etc.). Landlord shall make its recommendation as to each
bidder, however, Tenant shall have the right to choose the successful
bidder in either event. If Landlord acts as its own general
contractor, Landlord shall not receive more than ten percent (10%)
overhead and profit based on the total cost of construction.
(e) Tenant in making any Tenant Improvements shall cause all work to be
done in a good and workmanlike manner using materials equal to or
better than those used in the construction of the Demised Premises and
shall comply with or cause compliance with all applicable building
codes, health and safety regulations and zoning laws and with any
direction given by any public officer pursuant to such codes,
regulations and laws. Tenant shall obtain or cause to be obtained and
maintain in effect, as necessary, all building permits, licenses,
temporary and permanent certificates of occupancy and any other
governmental approvals which may be required in connection with the
making of the Tenant Improvements. Landlord shall cooperate with
Tenant in the obtaining thereof and shall execute any documents
reasonably required in the furtherance of such purpose, provided any
such cooperation shall be without expense and/or liability to
Landlord.
(f) Tenant shall have its contractor procure and maintain in effect during
the term of such Tenant Improvements, the following insurance
coverages with an insurance company or companies with a Best's rating
of A- or better and authorized to do business in the Commonwealth of
Massachusetts.
(1) Workmen's Compensation Insurance-Statutory limits for the
Commonwealth of Massachusetts.
(2) Employer's Liability insurance meeting the requirements of
Massachusetts law.
(3) Comprehensive General Liability - at least $1,000,000.00 Combined
Single Limit, including Personal Injury, Contractual and
Products/Completed Operations Liability and Property Damage.
Coverage must include the following:
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22
(a) premises - operations
(b) elevators and hoists
(c) independent contractor
(d) contractual liability assumed under this contract
(e) completed operations - products
(f) explosion, underground and collapse (XCU) coverage
(4) Comprehensive Auto Liability - at least $1,000,000.00 Combined
Single Limit, including each person Bodily Injury, must include
the following:
(a) owned vehicles
(b) leased vehicles
(c) hired vehicles
(d) non-owned vehicles
Tenant shall insure that Landlord receives a certificate of insurance
for each contractor selected by Tenant to work on the Tenant
Improvements. Said certificate of insurance shall contain a provision
to provide Landlord with thirty (30) days prior notice of any material
change in, cancellation or non-renewal of any policy.
(g) All Tenant Improvements shall be at Tenant's sole cost and expense.
(h) Tenant may make additional alterations, additions and improvements in
accordance with Article 9 below.
7. Installation of Tenant's Microwave Dishes on Roof:
Prior to the date hereof, Tenant has installed on the roof of Building
No.3 two (2) microwave dishes. Landlord hereby acknowledges its consent to such
installation. Landlord also acknowledges Tenant's intention, either as part of
its initial improvements to the First Additional Premises or as subsequent
alterations to install additional microwave dishes on the roof of Building No.3,
which installation may include roof penetration, and on the roof of the Building
No.1, in the event that Tenant exercises its Expansion Right under Section
32(b), but without roof penetration. Any such microwave dish shall be for
reception and not transmission and shall be used only by Tenant or its
affiliates or its successors or assigns and not third parties and shall meet all
applicable Town requirements. Landlord hereby consents to Tenant's installation
of such dishes so long as Tenant complies with the provisions of Article 2,
Section 8.6 and Article 9 if applicable.
8. Elevator and Lobby:
Landlord agrees that it will not construct any improvements on or near
the outside of Building 3, including, without limitation, a new elevator and
lobby. Landlord shall have access to the interior of the Demised Premises during
the last nine (9) months of the Term (or Extended Term) solely for measuring and
preparing plans for alterations to be performed by
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23
Landlord after the expiration of the Term (or Extended Term), so long as there
is no disruption of or interference with Tenant's operations.
ARTICLE 9 - Alterations, Additions and Improvements
Upon completion of the initial Tenant Improvements to any portion of the
Demised Premises, Tenant may, from time to time, at its own cost and expense and
without the consent of Landlord make alterations, additions or improvements
(collectively herein called "Alterations") of a non-structural nature to the
Demised Premises which cost in any one instance is Ten Thousand and 00/100
Dollars ($10,000.00) or less, provided Tenant first notifies Landlord in writing
of any such Alterations. If Tenant desires to make any structural Alterations
costing any amount or any non-structural Alterations which costs in any one
instance exceed Ten Thousand and 00/100 Dollars ($10,000.00), Tenant must first
give Landlord notice of its intentions and submit plans and specifications of
the proposed Alterations to Landlord, for approval, which approval shall not be
unreasonably withheld or delayed. With respect to all of the other aspects of
any proposed Alterations, including Landlord approvals, selection of
contractors, the Landlord as contractor, materials and workmanship, licenses and
permits, and the insurances to be carried, the provisions of Article 8.4(a)
through (g) above apply. Such alterations may include, without limitation, some
or all of the items referred to in Section 8.6(a).
ARTICLE 10 - Compliance with Laws
1. Tenant shall be responsible throughout the Term or Extended Term for
procuring all licenses and permits for the Demised Premises required for the
operation of Tenant's business including Tenant's sign. Tenant agrees that it
shall do nothing, during the Term or Extended Term, in its use and occupancy of
the Demised Premises which would cause the Demised Premises to be in non-
compliance with any applicable governmental laws, codes, ordinances, rules and
regulations to the extent the same apply to Tenant's use and occupancy of the
Demised Premises as opposed to laws of general applicability. In the event that
Tenant receives notice of non-compliance with laws relating to Tenant's use and
occupancy, as provided for in Article 5, by any governmental authority having
jurisdiction over the Property, Tenant shall diligently pursue remediation of
the problem and shall correct the non-compliance within the period of time
prescribed by the governmental authority unless it is determined that such
remediation and correction work falls within the Landlord's responsibilities and
obligations under this Lease whereupon Tenant shall provide Landlord with
written notice of the non-compliance and identify Landlord's responsibilities
and obligations under the Lease.
2. Tenant shall have the right, at its expense, to contest, by appropriate
legal proceedings conducted in good faith with due diligence, the validity or
applicability, in whole or in part, of any governmental laws, codes, ordinances,
rules and regulations pursuant to which such notice of non-compliance was
issued, and, so long as such proceedings are being conducted in good faith and
with due diligence Tenant may defer compliance therewith pending the outcome of
that contest provided that such deferral shall not: i) result in any deprivation
in the use of the Property by any party entitled thereto; or ii) result in any
criminal or civil liability on the part of the Landlord. Landlord shall, upon
request by Tenant, cooperate with any such
<PAGE>
24
contest provided that Tenant shall pay all actual out-of-pocket costs incurred
by Landlord in connection therewith.
3. In the event that a capital expenditure is required to make an
Alteration to the Demised Premises so that it is in compliance with all
statutes, codes, regulations and other laws as a result of Tenant's use of the
Demised Premises (excluding any Capital Expenditures which fall within
Landlord's responsibilities and obligations under this Lease included in Article
6 and 8), Tenant shall be responsible for making any such expenditure and
Alteration. Upon receipt of notice of non-compliance by any governmental
authority having jurisdiction over the Demised Premises, Tenant shall diligently
pursue remediation of the problem and shall correct the noncompliance within the
period of time prescribed by the governmental authority. The provisions of
Article 8.6 and 9 above apply in the remediation of any non-compliance. Landlord
agrees to cooperate fully with Tenant in correcting the item(s) of non-
compliance.
4. In the event that Landlord receives notice of non-compliance with any
law, ordinance, code, rule or regulation relating to the Land and/or Building
(and any systems therein) and/or the Property by any governmental authority
having jurisdiction over the Property, Landlord shall diligently pursue
remediation of the problem at its expense subject to the provisions of Article
6.4 and shall correct the non-compliance within the period of time prescribed by
the governmental authority.
ARTICLE 11 - Damage and Destruction
1. In the event of damage or destruction to all or part of the Demised
Premises or Building by fire or other casualty (collectively, a "casualty"), or
if Tenant's access ("Access") to or use and occupancy of the Building, Demised
Premises, parking area or Common Areas of the Property is interfered with due to
a casualty, Tenant shall notify Landlord thereof as soon as possible after
Tenant becomes aware thereof.
2. Landlord or Landlord's managing agent shall have a period of thirty
(30) calendar days from receipt of Tenant's notice pursuant to the first
paragraph of this Article to give Tenant a good faith estimate ("Estimate") of
the time required to repair the casualty and restore Access and/or Tenant's use
and occupancy of the Building, Common Areas, and the Demised Premises to their
condition existing immediately prior to the Casualty. The Estimate shall be
based on the following information, if available: Landlord's own estimate, at
least one independent contractor, and a report from the insurance adjuster
representing the insurance company insuring the Property. If the Estimate is for
a period equal to or more than ninety (90) days, the Casualty is hereby deemed
substantial. If the Estimate is for a period of less than ninety (90) days, the
Casualty is hereby deemed partial.
3. If the Demised Premises, or the Building, suffers a partial Casualty
and Tenant's use and occupancy of the Demised Premises and/or Access can be
restored within ninety (90) days, Landlord shall completely repair and restore
same. If Landlord does not substantially complete the repair and restoration
within the Estimate period plus ten (10) days (measured from the date of
Tenant's receipt of the Estimate), Tenant has the right to terminate this Lease
on ten (10) days written notice to Landlord provided that any delay in the
completion of the work on the
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25
part of Landlord must be within Landlord's control, or 40 days written notice if
such delay is not within Landlord's control.
4. If there is a substantial Casualty to the Demised Premises, the
Building, or the Access and Tenant's use and occupancy cannot be restored within
ninety (90) days, either Landlord or Tenant has the right to terminate this
Lease on ten (10) days written notice to Landlord after Tenant's receipt of the
Estimate. If neither party terminates this Lease, then Landlord shall proceed to
promptly repair and restore such damage, destruction or hindrance to Access.
5. From the date of such partial or substantial Casualty, a proportionate
part of the Base Rent and Additional Rent, according to the nature and extent of
the interference with Tenant's use and occupancy of or Access to the Demised
Premises shall be equitably abated until the repair and restoration have
occurred. In the event this Lease is terminated as hereunder provided, Tenant
shall pay the Base Rent and Additional Rent prorated to the date of such partial
or substantial Casualty and thereafter, Tenant shall be relieved of all further
liability for the payment thereof.
6. Notwithstanding anything to the contrary in this Lease, if the Estimate
is for a period extending beyond the remainder of the Term, either Landlord or
Tenant may terminate this Lease upon ten (10) days written notice to the other,
provided, however, that Landlord may not exercise this right if Tenant has
previously exercised or provides immediate exercise of the extension option
contained in this Lease and within the prescribed time frame defined in Article
3.2 above.
7. In the event that the Demised Premises or the Building suffers either
partial or substantial Casualty, the parties have not exercised their respective
rights to terminate this Lease, and Landlord has proceeded to repair and restore
the damage or destruction caused by a Casualty at its own cost and expense, then
Landlord shall be entitled to recover the cost of the repair and restoration
from the following sources:
(a) The insurance proceeds up to the limit of coverage.
(b) Any cost not covered by insurance including costs resulting from a
shortfall in insurance coverage and/or the cost of any deductibles
shall be the responsibility of the party deemed to be at fault, either
by a willful or negligent act, as determined in the appropriate
judicial forum.
ARTICLE 12 - Condemnation
1. In the event of a taking by condemnation or by the exercise of the
power of eminent domain by a public or quasi-public authority or entity or
conveyance in lieu thereof (all hereinafter referred to as "Taking") of the
entire Demised Premises, or of the entire Building or of the entire parking area
serving the Building, or of the entire Access thereto, either by fee title or
easement, either party may terminate this Lease by giving written notice to the
other party, and this Lease shall terminate on the date that title vests in the
Taking authority or that such Taking
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26
authority takes physical possession so as to deprive Tenant of the use thereof
without the necessity for any further act or notice by either party hereto.
2. In the event of a partial taking of the Demised Premises, the Building,
the parking area serving the Building, or the Access thereto, either by fee
title or easement, that, in Tenant's judgment reasonably exercised, results in a
material interference in the conduct of Tenant's business operations, Tenant
shall have the right to terminate this Lease upon written notice to Landlord
within thirty (30) days of the Taking. The effective date of the termination
shall be the later of the Taking or fifteen (15) days after the date of such
notice.
Notwithstanding the foregoing, if the parking area serving the
Building is the subject of the Taking resulting in a reduction of the number of
parking spaces available to Tenant, Landlord may suspend the effectiveness of
such notice by giving its own notice to Tenant within ten (10) days of receipt
of Tenant's termination notice that Landlord shall provide substitute parking
spaces equal to the number taken with sixty (60) days of the Taking.
3. In the event this Lease is not terminated as a result of a Taking: (i)
Base Rent and Additional Rent payable hereunder shall abate from the earlier
date of vesting of title or the date of possession by such Taking authority
whether or not there is divestiture of title; such abatement of Base Rent and
Additional Rent shall be in proportion to the amount of the Demised Premises or
Building or Property subject to a Taking and shall be permanent in the case of
divestiture of title; and there shall be no abatement of Base Rent and
Additional Rent for the Taking of parking spaces; and (ii) Landlord shall
commence the work of repairing and restoring the Building to a complete
architectural unit and useable by Tenant as allowed under this Lease, the work
of restoring the remainder of the Demised Premises as nearly as possible to
their condition existing immediately prior to the Taking, and to restore Access
to the Building and Demised Premises or provide alternative Access thereto, all
such work to be commenced within thirty (30) days of possession by the Taking
authority and completed within ninety (90) days ("Work Date") of the effective
date of such possession. If Landlord does not substantially complete the repair
and restoration within the time herein provided, Tenant has the right to
terminate this Lease by giving notice to Landlord within fifteen (15) days of
the Work Date effective on the date specified in the notice, which date shall
not be more that fifteen (15) days from the date of the notice to Landlord
provided that any delay in the completion of the work, on the part of Landlord
must be within Landlord's control.
4. In the event of a Taking, Tenant shall, within ten (10) days of the
effective date of the termination of this Lease or the effective date of the
abatement of Base Rent and Additional Rent, as the case may be, receive a refund
from Landlord of the appropriate Base Rent and Additional Rent amount paid by
Tenant prior to the effective date of termination or abatement for any period
subsequent to the effective date of termination or abatement.
ARTICLE 13 - Insurance
1. Tenant shall obtain and keep in force throughout the Term, at its own
expense, Comprehensive General Liability Insurance including a contractual
liability endorsement, with respect to the Demised Premises, with a combined
single limit of at least $2,000,000. Tenant
<PAGE>
27
shall also obtain and keep in force a property damage policy insuring Tenant's
personal property on a full replacement cost basis.
2. Landlord shall obtain and maintain in force throughout the Term "all-
risk" property insurance upon the Building, on a full replacement cost basis.
Landlord may include the Building in a so-called "blanket" policy, but the
Building shall be specifically listed and its full replacement cost separately
stated. Landlord shall obtain and maintain in force throughout the Term a
Comprehensive General Liability Insurance policy insuring Landlord, with a
combined single limit of at least $2,000,000. Tenant shall pay its proportionate
share of Landlord's insurance policies as provided for in Article 6.1(f).
3. All policies shall be issued by responsible insurance companies with a
Best's rating of A- or better and authorized to do business in the Commonwealth
of Massachusetts. Landlord and Tenant shall, on the Commencement Date of the
Primary Term (and thereafter within thirty (30) days after either party's
request), deliver a certificate of such policy to the other evidencing the
coverage hereunder.
4. Landlord and Tenant each hereby waive all claims and rights of recovery
against each other and their respective officers, directors, employees,
contractors, servants and agents, for any loss, damage or destruction of the
real or personal property of Landlord or Tenant, regardless of cause or origin
to the extent of any recovery from any insurance policy. Landlord and Tenant
agree that any policies obtained on or after the date hereof shall include a
clause or endorsement to the effect that any such waiver of subrogation shall
not adversely affect or impair such policies or prejudice the rights of the
insured to recover thereunder.
ARTICLE 14 - Indemnity
1. Tenant shall, upon timely receipt of written notice, defend, indemnify,
and save harmless Landlord, its employees, contractors, business invitees and
agents, from and against any and all suits, claims, demands, loss, costs,
damages, and expenses, including reasonable attorneys' fees and litigation
costs, arising from injury or death of any person or damage to property (other
than property of Landlord or Tenant in and about the Demised Premises)
arising from the negligent acts or omissions or willful acts or omissions of
Tenant, its employees, contractors, business invitees or agents.
In the event that Landlord is notified of a claim, action or
proceeding, or becomes aware of an occurrence, which may result in
indemnification by Tenant of Landlord as provided above, Landlord shall give
prompt written notice to Tenant and provide complete information known by
Landlord. Landlord shall immediately forward to Tenant every demand, notice,
summons or other process received by Landlord or its representatives.
Tenant has the obligation to defend any claim, action, or proceeding
wherein Landlord is entitled to indemnification under the provisions of this
Article. Tenant may not settle any such claim, action, or proceeding without
Landlord's consent or approval which approval shall not be unreasonably withheld
or delayed. Landlord agrees to cooperate fully with Tenant in the defense or
settlement of any claim, action or proceeding.
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28
2. Landlord shall, upon timely receipt of written notice, defend,
indemnify, and save harmless Tenant, its employees, contractors, business
invitees and agents, from and against all loss, costs, damages, and expenses,
including reasonable attorneys' fees and litigation costs, arising from injury
or death of any person or damage to property (other than that of Landlord or
Tenant in and about the Demised Premises) arising from the negligent acts or
omissions, or willful acts or omissions, of Landlord, its employees,
contractors, business invitees or agents.
In the event that Tenant is notified of a claim, action or proceeding, or
becomes aware of an occurrence, which may result in indemnification by Landlord
of Tenant as provided above, Tenant shall give prompt written notice to Landlord
and provide complete information known by Landlord. Tenant shall immediately
forward to Landlord every demand, notice, summons or other process received by
Tenant or its representatives.
Landlord has the obligation to defend any claim, action, or proceeding
wherein Tenant is entitled to indemnification under the provisions of this
Article. Landlord may not settle any such claim, action, or proceeding without
Tenant's consent or approval which approval shall not be unreasonably withheld
or delayed. Tenant agrees to cooperate fully with Landlord in the defense or
settlement of any claim, action or proceeding.
3. The indemnities and duties to defend contained in this Article shall
not survive the termination of this Lease, and upon such date all obligations of
each party to indemnify and defend shall cease, except with respect to claims
which arose on or prior to the termination date.
ARTICLE 15 - Subletting and Assignment
1. Landlord hereby grants to Tenant the right to sublet all or any portion
of the Demised Premises throughout the Term provided Tenant first obtains
Landlord's consent to such subletting in writing except in the case of an
Affiliate Transfer (hereinafter defined), which consent shall not be
unreasonably withheld or delayed. However, Landlord shall have the right to
reasonably approve the subtenant and the proposed lease transaction except if an
Affiliate Transfer. If Landlord withholds or refuses consent, the reasons for
such refusal shall be stated in detail in writing.
2. If Tenant requests Landlord's consent to a sublet of all of the Demised
Premises, Landlord shall have the right to recapture the Demised Premises.
Landlord shall exercise this right, if at all, within thirty (30) days of
Tenant's request for consent of the sublet. If Landlord exercises this right,
the Lease shall terminate on the effective date of the proposed subletting of
the entire Demised Premises and thereafter, Landlord and Tenant shall be
released from and relieved of any further obligation under this Lease, and all
sums payable by Tenant hereunder shall be prorated to that date.
3. In the event Landlord does not respond to the written request for such
consent or exercise its right of recapture within thirty (30) days of the date
of such request from Tenant, Landlord's consent is hereby deemed given.
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4. In the event that Tenant sublets all or a portion of the Demised
Premises, after receiving Landlord's consent, and the Base Rent to be charged to
subtenant by Tenant results in an increase over Tenant's then current Base Rent,
(a) Tenant shall first be entitled to use the amount of the increase over
the Base Rent specified in this Lease to recover any qualifying
expenses incurred by Tenant to sublease the Demised Premises. Expenses
that qualify for recovery include: (i) legal and brokerage fees
specifically related to the sublease (ii) any free rent that Tenant is
obligated to provide, due to real estate market conditions, to induce
subtenant to sign a sublease; and (iii) any capital spent for
additional leasehold improvements to retrofit the Demised Premises and
required by subtenant as an inducement to sign a sublease. Expenses
that do not qualify for recovery include: (i) capital expended by
Tenant for its own Tenant Improvements either initially or during the
Term of this Lease; (ii) Cash grants, awards, contributions or
allowances given directly to subtenant with no specific purpose as an
inducement to sign a sublease, (iii) capital expended on behalf of
subtenant for the purchase of any personal property including trade
fixtures and equipment; and (iv) any loans and/or the interest thereon
provided by Tenant to subtenant to sign a sublease.
(b) After Tenant has recovered all of its qualifying expenses, Landlord
and Tenant shall share equally the amount of the increase over the
Base Rent specified in this Lease as profit.
5. Tenant shall remain liable for any and all obligations as specified in
this Lease with Landlord.
6. In no event shall Tenant be allowed to assign this Lease, except that,
Tenant shall have the right, without the prior consent of Landlord, to assign
this Lease and to sublet all or any portion of the Demised Premises to any
person or entity (a) controlling, controlled by, or under common control with
Tenant, (b)acquiring all or substantially all of the assets of Tenant or (c)
with or into which Tenant merges or consolidates (an "Affiliate Transfer").
Tenant shall be obligated to notify Landlord in writing thirty (30) days in
advance of the Affiliate Transfer as to the person or entity taking the
assignment or sublet and the effective date of the Affiliate Transfer.
ARTICLE 16 - Tenant's Property
1. Tenant shall have the right at the expiration or sooner termination of
this Lease, or at any time during the Term to remove from the Demised Premises
all fixtures, machinery, office equipment, signs, moveable partitions and other
property (including buss ducts) (collectively called "Tenant's Property") which
it may have installed, either freestanding or affixed to the realty, in the
Demised Premises. Tenant shall be responsible to repair any damage resulting
thereby reasonable wear and tear, damage due to fire or other casualty, and
alterations made by Tenant as permitted herein excepted.
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2. Upon the expiration or sooner termination of this Lease, Tenant shall
have the right to remove Tenant's Property and surrender the Demised Premises in
accordance with Section 16.1 above and Article 27 of this Lease. Within fifteen
(15) days after the expiration or sooner termination of this Lease if Tenant has
not removed Tenant's Property from the Demised Premises, it shall be deemed
abandoned by Tenant
ARTICLE 17 - Signs
Landlord hereby grants to Tenant the right to install and maintain Tenant's
business sign currently located on the exterior of the Building No.3, in
accordance with all local laws and regulations, now and in the future. Landlord
shall remove the IPL Systems, Inc. sign from Building No.3 on or before July 1,
1998. Tenant's sign may be lighted at Tenant's discretion and expense, if
permitted by law. Tenant shall also have the right to maintain its current sign,
and, upon placement by Landlord of a sign kiosk or directory located at the
intersection of Acton Street and Route 27, Tenant shall replace such sign with a
new sign to be installed on such kiosk or directory in a location of its choice.
It shall be Tenant's responsibility to secure the necessary local permits for
the erection of the sign(s). Landlord shall cooperate with Tenant in any permit
applications, as may be required by the permit granting authority. Tenant
assumes full responsibility for its sign and agrees to maintain it and keep it
in good appearance. Tenant agrees that its Comprehensive General Liability
Insurance policy as provided for in Article 13 above shall include coverage for
Tenant's sign.
ARTICLE 18 - Parking and Loading
1. During Period 1, Tenant shall be allowed:
(a) To use up to two hundred eighteen (218) unassigned regular parking
spaces in the parking area at the rear of the Building and two (2)
handicap parking spaces at the rear of the Building Complex, as
shown on Exhibit C-1.
(b) The exclusive use of one loading dock in the Connector Building
containing three hundred eighty-five feet (385 SF)
2. During Period lA, through the end of the Term, Tenant shall be allowed:
(a) The exclusive use of the parking area east of the Building
comprised of twelve (12) regular parking spaces,
(b) The exclusive use of the visitor parking spaces adjacent to the
north side of the Building currently comprised of 7 regnlar
parking spaces. Landlord shall restripe these spaces to provide
three (3) regular parking spaces and three (3) handicapped parking
spaces prior to July 1, 1998.
(c) The nonexclusive use of two hundred two (202) regular parking
spaces in the parking area at the rear of the Building Complex.
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(d) The exclusive use of the two loading docks in the Connector
Building shown on Exhibit A-1.
3. If Tenant shall exercise its Expansion Right, Tenant shall be allowed
the use of an additional 40 parking spaces at the Property, consisting of two
(2) handicap and thirty-eight (38) unassigned regular parking spaces.
All such areas and spaces are as shown on Exhibit C-1.
4. For the purpose of this Article,
(a) A regular parking space shall mean a parking space that has been
measured and laid out, according to local zoning regulations, to
accommodate a vehicle of standard design and construction and
equipped for drivers without disabilities.
(b) A handicap parking space shall mean a parking space that has been
measured and laid out, according to local zoning regulations, to
accommodate a vehicle of standard design and construction that has
been modified or a vehicle of special design and construction that
has been equipped for drivers with disabilities.
ARTICLE 19 - Tenant's Default
1. The following shall constitute a default by Tenant:
(a) Tenant fails to pay Base Rent and Additional Rent, and such
failure to cure continues for ten (10) days after notice from
Landlord;
(b) Tenant fails to perform Tenant's other obligations in this Lease,
and such failure continues for thirty (30) days after notice from
Landlord, or if said default shall require longer than thirty (30)
days to cure, Tenant shall: (i) notify Landlord that it has
commenced the cure within the thirty (30) day period after notice
from Landlord; (ii) provide Landlord with an estimate of the total
time necessary to cure the default; and (iii) diligently proceed
to cure the default and continue to take all steps necessary to
complete the same;
(c) Tenant shall file a voluntary petition in bankruptcy or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking any arrangement, composition, liquidation or
dissolution under any present or future Federal, State, or other
statute, law or regulation relating to bankruptcy, insolvency or
other relief for debtors, or shall seek or consent to or acquiesce
in the appointment of any trustee, receiver or liquidator of the
Tenant or of all or any substantial part of its properties, or of
the Demised Premises, or shall make any general assignment for the
benefit of
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creditors, or shall admit in writing its inability to pay its
debts generally as they become due; or
(d) A court shall enter an order, judgment, or decree approving a
petition filed against Tenant seeking any arrangement,
composition, liquidation or dissolution under any present or
future Federal, State, or other statute, law or regulation
relating to bankruptcy, insolvency or other relief for debtors,
and such order, judgment or decree shall remain unvacated or
unstayed for a period of sixty (60) days.
In any such event, Landlord at any time thereafter may give written
notice to Tenant specifying the occurrence giving rise to such default and
stating that this Lease and the Term hereby demised shall expire and terminate
on the date specified in such notice which shall be at least ten (10) days after
the giving of such notice, and upon the date specified in such notice, this
Lease and the Term, estate and interest hereby demised shall expire and
terminate by limitation and all rights of Tenant under this Lease shall cease.
2. At any time after any such expiration or termination of this Lease,
Landlord, without further notice, may enter upon and reenter the Demised
Premises to repossess itself of the Demised Premises, by summary proceedings,
ejectment or otherwise, and may remove Tenant and all other persons and any and
all property from the Demised Premises as hereinabove provided.
ARTICLE 20 - Landlord's Default
1. If Landlord, during the Term, shall default in the performance or
observance of any agreement, obligation, or condition in this Lease, and
Landlord shall not cure such default within thirty (30) days after receipt of
written notice thereof (the "Default Notice") from Tenant, or shall not within
said period commence to cure and thereafter diligently prosecute the curing of
such default to completion, then Tenant may, at its option, after it has given
Landlord at least five (5) days prior written notice of its intent to cure (the
"Self-Help Notice"), cure such default in the name of and for the account of
Landlord. The Self-Help Notice maybe sent any time after the expiration of 25
days following the Default Notice.
2. Tenant may cure any such default prior to the expiration of said waiting
period, but after said notice to Landlord in the event of an emergency.
3. Landlord shall immediately reimburse Tenant on demand for such payments
and save the Tenant harmless. If Landlord shall fail to reimburse Tenant upon
demand for any amount paid for the account of Landlord hereunder, said amount
may be deducted by Tenant from the next or any succeeding payments of Base Rent
due hereunder until Tenant has been fully reimbursed. In the event that Tenant
wrongly invokes its right herein contained, Landlord's relief shall be the
payment by Tenant of all installment of Base Rent withheld by it plus a penalty
fee of five percent (5%) of the amount of Base Rent withheld.
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33
4. Tenant may abandon any cure of a default by Landlord at any time without
penalty.
5. This Article does not supersede or conflict with the duties, rights and
remedies of the parties which are specifically addressed in other Articles of
this Lease.
ARTICLE 21- Notice/Authority
All notices, consents, approvals, and demands shall be in writing and shall
be delivered in hand, by recognized overnight courier, or by depositing with the
U.S. Postal Service, postage prepaid, certified or registered mail, return
receipt requested. All notices and payments of rent shall be sent: (a) to
Landlord at the address set forth above in Article 1; and (b) to Tenant,
Attention: Vice President Operations, at the address set forth above in Article
I with a courtesy copy to Testa, Hurwitz & Thibeault, LLP, Attn.: Real Estate
Department, High Street Tower, 125 High Street, Boston, 02110. The address of
each may be changed from time to time by notice so given. Notice shall be deemed
given, provided or received, as the context may require,: (1) if delivered by
hand, when actually delivered, as evidenced by a signed receipt; (2) if sent by
recognized overnight courier, the next business day; and (3) if sent by the U.S.
Postal Service, on the business day it is received as noted on the return
receipt.
Landlord hereby agrees that, unless Tenant is otherwise notified in
writing, Landlord's Property Manager has the authority to act on Landlord's
behalf and represents Landlord's interests with respect to day-to-day Building
management issues under this Lease.
ARTICLE 22 - Landlord's Access
Landlord or Landlord's agents shall be allowed to enter the Demised
Premises on an as needed basis in order to perform its facility management
function as referenced in Articles 6 and 7 above. Landlord shall give Tenant's
appointed facility liaison reasonable advance notice, which notice may be
verbal, of Landlord's need to access the Demised Premises to perform its
facility management functions pursuant to Articles 6 and 7. In the event of an
emergency, Landlord may enter the Demised Premises to inspect, assess and
resolve the emergency situation. Landlord shall use reasonable efforts not to
interfere with Tenant's use and occupancy of the Demised Premises and to comply
with Tenant's confidentiality requirements. Tenant shall provide Landlord with a
list of its confidentiality requirements within ten (10) days after the
Commencement Date.
ARTICLE 23 - Quiet Enjoyment
Landlord covenants that upon Tenant's paying the rent and performing its
obligations hereunder, Tenant shall quietly have and enjoy the Demised Premises
during the Term without hindrance or molestation from Landlord or any other
person.
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ARTICLE 24 - Holding Over
1. If Tenant or any one claiming under Tenant occupies the Demised Premises
after the Expiration Date, Tenant shall be considered a tenant-at-will on a
month-to-month basis. The Base Rent for any hold over period shall be at One
Hundred Fifty Percent (150%) of the Base Rent in effect immediately prior to the
Expiration Date. All other terms, conditions and obligations of the Lease in
effect prior to the Expiration Date shall remain in full force and effect.
2. Either Landlord or Tenant may terminate this tenant-at-will tenancy by
providing the other party notice of the intention to terminate thirty (30)days
prior to the proposed termination date.
ARTICLE 25 - Subordination
1. This Lease shall be subject and subordinate, at all times, to the lien
of any mortgage of the Property, now or hereafter placed, with a lending
institution, pension fund, insurance company, other similar financial
institution or private mortgage lender provided that a Subordination,
Recognition and Non-Disturbance Agreement ("Agreement") is executed,
acknowledged and delivered by such mortgagee to Tenant. Said Agreement must be
in form suitable for recording, satisfactory to Tenant, and must contain
substantially the following provisions:
(a) Mortgagee consents to and approves the Lease;
(b) Tenant shall not be named or joined as a party in any suit,
action or proceeding for the foreclosure of the Mortgage or to
enforce any rights under the Mortgage or note or other obligation
secured thereby,
(c) The possession by Tenant of the Demised Premises and Tenant's
rights thereto shall not be disturbed, affected or impaired by,
nor will the Lease or the Term be terminated or otherwise
affected by (i) any suit, action, or proceeding upon the Mortgage
or the note or other obligation secured thereby, (ii) the
foreclosure of the Mortgage, (iii) the enforcement of any fights
under the Mortgage, (iv) any other document held by the
Mortgagee, (v) any judicial sale or execution or other sale of
the Property including the Demised Premises, (vi) any deed given
in lieu of foreclosure, (vii) the exercise of any other rights
given to the Mortgagee by any other documents, (viii) a matter of
law, or (ix) any default under the Mortgage or the note or other
obligation secured thereby;
(d) All condemnation awards and insurance proceeds paid or payable
with respect to the Demised Premises and received by the
Mortgagee shall be applied to the repair and restoration of the
Demised Premises;
(e) Mortgagee must acknowledge and agree that all trade fixtures,
equipment and other property owned by Tenant located or installed
in or on the
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35
Demised Premises, regardless of the manner or mode of attachment
shall be and remain the property of Tenant and may be removed by
Tenant at anytime according to the provisions of Articles 8, 16
and 27;
(f) If the Mortgagee or any successor or assignee takes possession of
the Property including the Demised Premises or starts collecting
rent or becomes the other of the Property by reason of
foreclosure of the Mortgage or otherwise; or if the Property
shall be sold as a result of any action or proceeding to
foreclose tile Mortgage or by a deed given in lieu of
foreclosure, the Lease shall continue in full force and effect,
without necessity for executing any new lease with the Mortgagee
or the new owner of the Property, and such mortgagee and new
owner shall recognize Tenant's rights and Landlord's obligations
under this Lease.
(g) Any agreement between Mortgagee and Tenant shall bind and inure
to the benefit of and be enforceable the parties thereto and
their respective successors.
(h) Tenant agrees that Mortgagee, if Mortgagee shall succeed to the
interest of Landlord under the Lease, shall not be (i) liable for
the prior actions or omissions of Landlord under the Lease, (ii)
subject to any offsets or defenses which Tenant might have
against the prior Landlord, (iii) bound by any Base Rent or
Additional Rent which Tenant might have paid for more than thirty
(30) days in advance to the prior Landlord, (iv) bound by any
security deposit paid to the prior Landlord, unless such deposit
is in an escrow fund available to Mortgagee, or (v) bound by any
amendment or modification of the Lease which reduces the term,
rent, or square footage made without Mortgagee's consent.
Tenant shall execute and send to Landlord any such Agreement within
fifteen (15) days of receipt of same if such Agreement contains substantially
the provisions set forth above and is reasonably acceptable to Tenant or within
fifteen (15) days after agreement of the parties to an alternative Agreement.
2. If the holder of any mortgage of the Property requires that this Lease
have priority over such mortgage, Tenant shall, upon request of such holder,
execute, acknowledge and deliver to such holder an agreement acknowledging such
priority. "Mortgage", as used herein, includes mortgages, deeds of trust or
other similar instruments.
3. Landlord represents and warrants that there is no mortgage or other
encumbrance in existence on the Property at the time this Lease is executed
except for those noted in Landlord's counsel's title certification, dated
March 23, 1998.
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36
ARTICLE 26 - Memorandum of Lease
Neither Landlord nor Tenant shall record this Lease. Landlord and Tenant
shall at any time, at the request of either one, promptly execute a memorandum
of lease which satisfies the requirements of the applicable statute in the State
in which the Demised Premises are located and either party may record the same.
ARTICLE 27 - Surrender of Premises
On the termination date, Tenant shall surrender the Demised Premises free
and clear of all tenants and occupants, and in good order and condition, except
for reasonable wear and tear and damage caused by fire or other casualty,
taking, default by Landlord, or by any negligent or willful act or omission by
Landlord. Tenant shall be required to remove any Alterations, or Tenant
Improvements made by Tenant if Landlord has so stipulated as provided for in
Articles 8 and 9 above.
ARTICLE 28 - Estoppel Certificate
Upon request, either party shall execute and deliver to the other a written
certificate stating (a) whether this Lease has been modified or amended; (b)
whether this Lease (as so modified or amended) is in full force and effect; (c)
the date to which rent has been paid, and (d) whether the other party is in
default, and if so, the nature of such default.
ARTICLE 29 - Mechanics' Liens
Landlord and Tenant shall each pay promptly for all labor and materials in
connection with any construction on the Property or in the Demised Premises. If
a notice of contract is filed against the Demised Premises or the Property for
any work performed, materials furnished or obligation incurred by or at the
request of Tenant, then Tenant shall use reasonable effort to bond or discharge
any such lien within thirty (30) days after Landlord has provided Tenant with
notice of the filing of the statement of account relating to such notice of
contract.
ARTICLE 30 - Hazardous Substances
1. "Hazardous Substance" means any substance, waste or material which is
deemed hazardous, toxic, a pollutant or contaminant, under any Federal, State,
or local statute, law, ordinance, rule, regulation, or judicial or
administrative order or decision, now or hereafter in effect.
"Hazardous Substance on the Demised Premises" means any hazardous
substance present in or on the Demised Premises including, without limitation,
in or on the surface or beneath the Demised Premises, the surface water or
groundwater, and in or on any improvement or part thereof at or beneath the
surface of the Demised Premises.
"Applicable Law" shall mean all Federal, State and local statutes, laws,
ordinances, rules and regulations and judicial and administrative orders,
rulings and decisions
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37
that are applicable now or in the future to the Demised Premises or any portion
thereof or to any activity which shall take place thereon.
"Demised Premises" for the purposes of this Article shall include the
Building, other improvements and the Land on which they are located.
2. Landlord, to the best of its knowledge, has never generated, stored,
disposed of or otherwise handled any Hazardous Substance on the Demised Premises
in any fashion contrary to Applicable Law and Landlord shall not generate,
store, dispose of otherwise handle any Hazardous Substance on the Demised
Premises in any fashion contrary to Applicable Law. Landlord is, to the best of
its knowledge, not aware of the generation, storage, disposal or other handling
of any Hazardous Substance on the Demised Premises by anyone else in any fashion
contrary to Applicable Law. Landlord also is, to the best of its knowledge, not
aware of the presence of any Hazardous Substance on the Demised Premises which
may require remedial action under Applicable Law or may pose a threat to human
health, safety or the environment.
3. Landlord, to the best of its knowledge, is not aware of any underground
storage tanks on the Demised Premises.
4. Landlord, to the best of its knowledge, is not aware of any transformers
or other equipment on the Demised Premises which contain PCBs.
5. Landlord shall defend, indemnify and hold harmless Tenant from and
against any and all liability, loss, claims, actions, proceeding, costs, and
fines resulting from the presence of any Hazardous Substance on the Demised
Premises which occurred or commenced prior to the date on which this Lease is
executed.
6. The indemnities and duties to defend in this Article shall survive the
termination of this Lease.
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ARTICLE 31 - Security Deposit
Tenant shall be required to deposit with Landlord a security deposit in the
initial amount of $23,462.23, which shall increase to $31,596.21 as of January
1, 1999, to $39,911 as of April 1, 1999, and to $43,236.92 as of April 1, 2000
(the "Security Deposit"). Of this, $23,831.73 has been previously deposited
with Landlord. Landlord shall hold the Security Deposit in segregated escrow
account as security for the full and faithful payment or performance by Tenant
of its obligations under this Lease Agreement. Landlord may expend such amount
from the Security Deposit as may be necessary to cure any monetary default by
Tenant under this Lease Agreement, and in such a case, Tenant shall pay to
Landlord the amount so expended on demand. Any balance remaining shall be
promptly returned to Tenant after the termination of or the expiration of the
Term of this Lease upon redelivery of possession of the Demised Premises to
Landlord in the condition required.
ARTICLE 32 - Expansion Right
In addition to the rights and obligations set forth in Section 33.2,
Landlord agrees that neither Landlord nor any of its agents, employees or
contractors shall advertise, market, show, offer for lease or lease all or any
portion of Building No.1 during the first year of the Primary Term of this Lease
and that Tenant shall have the option to lease (the "Expansion Right") all or a
portion of Building No.1 at the Building Complex, on the terms and subject to
the conditions set forth below in (a) and (b).
(a) If Tenant wishes to lease all or a portion of Building No. 1 during the
first lease year of the Primary Term, it shall give to Landlord written notice
of the exercise of such option, specifying the area to be leased and the date of
occupancy and Landlord shall deliver such space to Tenant on such date free of
all occupants and personal property, in good basic operating condition and
repair (including a roof airtight and free of leaks), broom clean and in
compliance with applicable building, life and safety codes. From and after the
date of such delivery, (i) such space shall be added to the Demised Premises for
the balance of such lease year, (ii) the Base Rent shall be due with respect to
such space at the rate of $4.75 per square foot per annum for such space, and
(iii) Tenant's Proportionate Share shall increase accordingly. Tenant may
exercise its option to add additional portions of Building No. 1 to the Demised
Premises by sending additional written notices of the exercise of its option to
Lease at any time during the first lease year, and the terms of the prior two
sentences shall apply to such additional space.
(b) In addition to the Expansion Right set forth in Paragraph (a) above,
Tenant shall have the option to lease all of Building No. 1 for a period
beginning on or before the second lease year of the Term and continuing for the
remainder of the Primary Term and any Extended Term with Base Rent for such
space due at the same rate per square foot per annum for 21,189 square feet, as
shall apply to the Initial Premises pursuant to Article 4. If Tenant wishes to
elect such option, it shall do so by giving written to Landlord written notice
of the election of such option on or before March 31, 1999. In such event,
Building No. 1 shall be delivered to Tenant free of all occupants and personal
property, in good basic operating condition and repair (including a roof
airtight and free of leaks), broom clean and in compliance with applicable
building, life and
<PAGE>
39
safety codes, whereupon such space shall be added to the Demised Premises, and
the provisions of Subsections (4)(a)(i) and (iii) shall apply to such space. If
no such notice is timely given, Tenant shall vacate any portion of Building
No. 1 occupied by it pursuant to Subparagraph (a) above, on or before March 31,
1999 and all rights of Tenant with respect to the leasing of Building No. 1
pursuant to this Section 32 shall terminate and be of no further force and
effect and Landlord shall be free to advertise, market, show or offer Building
No. 1 for lease, subject to the provisions of Section 33.2.
ARTICLE 33 - Additional Provisions
1. At any time within six (6) months before the expiration of the Term,
Tenant shall at all reasonable times and upon reasonable advance notice permit
Landlord or its agents to enter the Demised Premises to show the Demised
Premises to others, and to affix to any suitable part of the Building and/or the
Demised Premises, but not so as to interfere unreasonably with any of the signs
or the windows of the Tenant, a notice for letting or selling the Demised
Premises, and to keep the same so affixed without hindrance or molestation by
the Tenant.
2. Landlord shall provide Tenant with a notification of vacant space, as
space becomes available, or of space to be vacated, as Landlord becomes aware of
such potential available space, in either the existing Building Complex or in
buildings to be constructed on the Land or on adjacent lots. If Tenant does not
exercise its Expansion Right pursuant to Article 32, then Landlord shall be
required to send a notification under this Section 33.2 as to space in Building
No. 1 only after the initial leasing of such space. If Tenant is interested in
the space, then it must notify Landlord in writing within ten (10) days after
receipt of Landlord's notice that it wants to receive a proposal that would
reflect the terms and conditions of a lease that would be acceptable to the
Landlord at that time. Any rent for such space shall be at fair market rates.
The parties shall either mutually agree to a set of terms and condition within
fifteen (15) days after Tenant has received Landlord's proposal or Landlord
shall commence marketing of the space. Landlord's willingness to notify Tenant
of any vacant space pursuant to this Section 33.2 shall not be construed or
implied to mean that Tenant has either a "Right of First Option" or "Right of
First Refusal" on any space that may become vacant during the Term of Tenant's
Lease, except as set forth in Article 32.
3. The covenants and agreement herein contained shall, subject to the
provisions hereof, bind and inure to the benefit of Landlord and its successors
and assigns, and Tenant and its successors and assigns, and no extensions,
modifications or change in the terms of this Lease effected with any successor,
assignee or transferee shall cancel or affect the obligations of the original
parties hereto. No officer, director, shareholder, trustee, or beneficiary of
Landlord or Tenant shall be personally liable hereunder. Each party represents
to the other that the person signing this Lease on its behalf is properly
authorized to do so.
4. If any provision of this Lease shall be determined to be invalid or
unenforceable by any court of competent jurisdiction in the Commonwealth of
Massachusetts, then such determination shall not affect any other provision of
this Lease, all of which other provisions shall remain in full force and effect;
and it is the intention of the parties hereto that if any
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40
provision of this Lease is capable of two constructions, one of which would
render the provision void, and the other of which would render the provision
valid, then the provision shall have the meaning which renders it valid.
5. This Lease contains the entire and only agreement between the parties as
to the Demised Premises, and no oral statements or representations or prior
written matter not contained in this instrument shall have any force or effect.
This Lease shall not be modified or canceled except by a writing signed by
Landlord and Tenant.
6. This Lease shall be governed by, interpreted and enforced in accordance
with the laws of the Commonwealth of Massachusetts.
7. Failure of one party to complain of any act or omission by the other, no
matter how long the same may continue, shall not be deemed to be a waiver of any
rights hereunder. No waiver of any breach of this Lease shall be deemed a
consent to a subsequent breach. All waivers shall be in writing. The consent to
one action given on one occasion shall not be deemed a consent to of the same
action on another occasion. No consent or approval required under this Lease
shall be unreasonably withheld.
8. Any and all rights and remedies which either party may have under this
Lease or by operation of law, upon any breach, shall be distinct, separate and
cumulative and shall not be deemed inconsistent with each other; no one of them
whether exercised by the other party or not, shall be deemed to be exclusive of
any other, and any two or more of all such rights and remedies may be exercised
at the same time.
9. If at any time a dispute shall arise as to any amount or sum of money to
be paid by one party to the other under the provisions of this Lease, the party
against whom the obligation to pay the money is asserted shall have the right to
make payment "under protest" and such payment shall not be regarded as a
voluntary payment. There shall survive the right on the part of said party to
institute suit for the recovery of such sum, and if it shall be adjudged that
there was no legal obligation on the part of said party to pay such sum or any
part thereof, said party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
10. If at any time a dispute shall arise between the parties hereto as to
any work to be performed by either of them under the provisions hereof, the
party against whom the work is asserted may perform such work and pay the cost
thereof "under protest" and the performance of such work shall in no event be
regarded as a voluntary performance. There shall survive the right on the part
of said party to institute suit for the recovery of the costs of such work, and
if it shall be adjudged that there was no legal obligation on the part of said
party to perform the same or any part thereof, said party shall be entitled to
recover the cost of such work or the cost of so much thereof as it was not
legally required to perform under the provisions of this Lease.
11. Words and phrases used in the singular shall be deemed to include the
plural and vice versa, and nouns and pronouns used in any particular gender
shall be deemed to include any other gender.
<PAGE>
41
12. The various terms which are defined in Articles of this Lease or are
defined in Exhibits annexed hereto shall have the meanings specified in such
Articles and such Exhibits for all purposes of this Lease and all agreements
supplemental thereto, unless the context clearly indicates the contrary.
13. Landlord and Tenant each hereby waive any and all claims for
consequential damages which one may have against the other for breach of or
failure to perform or observe the requirements and obligations created by this
Lease.
14. This Lease shall not be effective or binding on the parties to it until
it has been signed by both Landlord and Tenant.
15. Landlord and Tenant acknowledge that Tenant currently occupies the
Initial Premises pursuant to a Letter Agreement dated March 16, 1998 and agree
that such letter agreement and any other occupancy agreement or arrangement
relating to Tenant's occupancy of the Initial Premises is hereby terminated as
of the Commencement Date. Landlord represents and warrants that neither IPL
Systems Inc. nor Andataco, Inc. nor any successor thereto, nor any other party
has or shall have any rights with respect to any part of the Demised Premises
except as set forth in this Lease.
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of
the date first written above.
LANDLORD: MAYNARD INDUSTRIAL PROPERTIES
ASSOCIATES TRUST, a Massachusetts Nominee Trust
Date: 5/28/98 By: /s/ Robert D. Quirk
------- --------------------------------------------
Name:
Title: Trustee, duly authorized
TENANT: SEACHANGE INTERNATIONAL, INC.
Date: 5/28/98 By: /s/ Richard Poulsen
------- --------------------------------------------
Name: RICHARD POULSEN
Title: V.P. OPERATIONS
<PAGE>
42
Commonwealth of Massachusetts
Middlesex County, SS
At Sudbury, in said County and State, this 29 day of May, 1998, [ILLEGIBLE]
Trustee of Maynard Industrial Properties Associates Trust of 124 Acton Street,
Maynard, MA 01754, personally appeared before me and acknowledged this Lease by
him, signed and sealed to be his free act and deed.
/s/ Sheri Anne Lazaros
- ----------------------
/s/ Sheri Anne Lazaros
- ----------------------
My Commission Expires 12/30/99
Commonwealth of Massachusetts
Middlesex County, SS
At Maynard, in said County and State, this 28th day of May, 1998, Richard
Poulsen, VP Operations, SeaChange International, Inc., of 124 Acton Street,
Maynard, MA 0l754, personally appeared before me and acknowledged this Lease by
him, signed and sealed to be his free act and deed and that of said corporation.
/s/ BEATRICE C. MOONEY
- -----------------------------------
___________________________________
Notary Public
My Commission Expires February 1, 2002
<PAGE>
43
EXHIBIT A
SCHEDULE OF SPACE
Period I: 4/1/98 - 6/30198: Initial Demised Premises
Building No.3, Floor 1 - 12,120 SF*
Building No.3, Floor 2 -25,974 SF
Building No.3, Floor 3 - 7,545 SF(a)
-----
Total Square Feet -45,639 SF(a) 34.4% Occupancy of the Building
Complex for Additional Rent
* Includes 385 SF in Connector Building as loading dock
Period 1A: 7/1/98 - 12/31/98
Vestibule, Floor 1 - 414 SF (b)
Building No.3, Floor 1 -25,974 SF (b)
Building No.3, Floor 2 -25,974 SF
Building No.3, Floor 3 -25,974 SF
Connector Building - 1486 SF (b)
----
Total Square Feet -79,822 SF(c) 47% Occupancy of the Building
Complex for Additional Rent, increasing
to 63%
Period 2: 1/1/99 - 3/31/05:
Vestibule, Floor 1 - 414 SF (b)
Building No.3, Floor 1 -25,974 SF (b)
Building No.3, Floor 2 -25,974 SF
Building No.3, Floor 3 -25,974 SF
Connector Building -1,486 SF (c)
-----
Total Square Feet -79,822 SF 63.0% Occupancy of the Building
Complex for Additional Rent
Notes: (a) Includes 2120 SF of undemised space on the third floor for furniture
storage, on which no rent shall be due. Accordingly, Tenant's
Proportionate Share will be based on 43,519 SF occupancy, or 34.4%
subject to increase if Early Space is added pursuant to Article 2.
<PAGE>
44
(b) The additional portion of the first floor, the additional portion of
the third floor, the vestibule and the Connector Building space which
includes the loading docks noted on Exhibit A-1 to be added to the
Demised Premises are to be referred to as the "First Additional
Premises."
(c) Subject to increase pursuant to the provisions of Section 4.1(b) and
Article 2 relating to Early Space, (i) until Landlord Work is
completed on third floor, no Additional Rent shall be due for 20,549
SF, and accordingly, (ii) Tenant's Proportionate Share will be based
initially on 59,273 SF occupancy or 47.0%
<PAGE>
45
EXHIBIT A-1
PLAN OF THE DEMISED PREMISES
Period 1: The amount of space shown on Exhibit A is shown in yellow.
Periods lA and 2: The amount of space is the addition of yellow and orange.
NOTE: Exhibit A-1 is to include: the loading docks; access routes to first
and third floor space during Period 1 and the common area support
space.
<PAGE>
46
BUILDING #3
FIRST FLOOR
[EVACUATION PLAN APPEARS HERE]
[.] FIRE EXTINGUISHER
<PAGE>
[EVACUATION PLAN APPEARS HERE]
ATTENTION: IN CASE OF FIRE DO NOT USE ELEVATORS!
[.]FIRE EXTINGUISHERS
<PAGE>
BUILDING #3
-----------
THIRD FLOOR
[EVACUATION PLAN APPEARS HERE]
<PAGE>
BUILDING #2
[EVACUATION PLAN APPEARS HERE]
[.]FIRE EXTINGUISHERS
<PAGE>
46
EXHIBIT A-2
BUILDING COMPLEX SPACE ALLOCATION - PERIOD 1A AND 2
Space by Tenant*
Periods 1A & 2
Square Feet Percentage
----------- ----------
SeaChange 79,822 63.0%
Andataco/IPL 24,673 19.5%
Vacant 21,189 16.7%
Common Area 938 .8%
TOTAL 126,622 100%
Space by Building
<TABLE>
<S> <C>
Building No. 1 21,189 SF
Building No. 2 20,763 SF
(Common Area within Bldg. No. 2 - Transformer Room = 146 SF)
Connector Building 6,334 SF
(Common Area within Connector Bldg. - Property Management Office = 577 SF)
Telecom Room = 215 SF)
Building No. 3 78,336 SF
------
TOTAL Building Complex Square Feet 126,622 SF
</TABLE>
*NOTES:
1. During Period 1, Tenant's Proportionate Share shall be 34.4%. (see
Section 4.1(a) and Exhibit A).
2. During Period lA, Tenant's Proportionate Share shall be 47% prior to
Landlord's completion of Landlord Work, and thereafter shall be 63.0%.
(see Section 4.1(b) and Exhibit A).
3. If a portion, or all, of Building No. 1 is added to the Demised Premises
pursuant to Article 32, or if a portion of the First Additional Premises
is added to the Demised Premises prior to 7/1/98, Tenant's Proportionate
Share shall be increased pro rata.
<PAGE>
47
Exhibit B
Landlord's Services
Under the terms of this Lease, Landlord shall provide for the management of
the Property and the delivery of services to the Tenant and other tenants who
may, from time to time, occupy portions of the Building. Specifically,
Landlord's role is that of: (i) a manager and coordinator of service providers,
and (ii) a direct service provider. Except as otherwise provided in the Lease,
the cost of these services shall be paid by the Tenant and the other tenants who
may, from time to time, occupy portions of the Building. The payment for these
services has been provided for in the Lease.
Landlord shall manage and/or coordinate the delivery of the following sets
of services or provide them directly as noted:
1. Utilities.
---------
a. Gas.
The Property is currently served by Commonwealth Gas. Prior to the
Commencement Date, Landlord shall arrange to have the service
placed in the name of Landlord except in the case where a tenant
desires to have a direct relationship with the service provider and
is separately metered for the service.
b. Electricity.
The Property is currently served by Boston Edison. Prior to the
Commencement Date, Landlord shall arrange to have the service
placed in the name of Landlord except in the case where a tenant
desires to have a direct relationship with the service provider and
is separately metered for the service.
c. Water and Sewer.
The Property is served by the Town of Maynard. Service is in the
name of Landlord.
2. Maintenance.
-----------
a. Elevator Maintenance.
Prior to the Commencement Date, a service agreement shall be put in
place with a qualified contractor to provide preventive maintenance
services on a monthly basis that will consist of a visual
examination of the
<PAGE>
48
hydraulic system and pump, controller, governor, piston and any
other major operating part of the elevator and lubrication of
components. The agreement shall also include a provision for an
annual safety test and inspection.
b. HVAC Preventive Maintenance.
A service agreement shall be put in place with a qualified
contractor to provide preventive maintenance services four (4)
times each year on the Building's HVAC equipment and the HVAC
equipment located on the roof of the Connector Building and serving
the Demised Premises. Preventive maintenance shall include
cleaning, lubricating, inspecting, testing, and adjusting of the
HVAC units including filter and belt replacements as needed to
facilitate normal operation of the system. Any repairs and/or
replacements to the new HVAC units installed on Building No. 3
shall be covered under the warranty. Preventive maintenance and any
repairs and/or replacements in subsequent years shall be provided
for in the annual Operating Cost budget. In the case where an
equipment replacement is required, Landlord shall look to any
warranty or guarantee that may be in force before charging Tenant
for any such costs.
c. Parking Lot Maintenance.
Landlord, through its Property Manager, shall engage a qualified
contractor for maintenance and repair of the Property's parking
lots. This maintenance is scheduled to take place every four years
and will be performed by September 1, 1998. The maintenance service
includes the filling of all cracks and sealing the parking lot with
a black rubber sealant. The entire parking lot will then be
restriped.
d. Daily Maintenance.
Landlord, through its Property Manager, shall assume the
responsibility for minor daily maintenance and repair
responsibilities including such items as changing light bulbs
including parking lot lights, changing lock sets, making minor
repairs to walls or ceilings not requiring specialized equipment,
supervising the work of contract vendors in the performance of
their agreements, and coordination with public officials and/or
inspectors on matter related to the Property.
e. Other Repairs and Maintenance: Landlord shall also perform those
-----------------------------
repairs, maintenance and the like set forth in 6.5 of the Lease.
<PAGE>
49
3. Inspections
-----------
a. Backflow Inspection.
Landlord, through its Property Manager, shall engage a qualified
contractor for an annual inspection and test of the Building's
water backflow preventors in accordance with state regulations.
Landlord shall provide all necessary test documentation to the Town
of Maynard.
b. Sewer Pump Inspection.
There are two sewer pumps located under ground along the side of
the Building. These pumps push the sewer waste to the Town of
Maynard's main sewer lines. Landlord, through its Property Manager,
shall engage a qualified contractor for an annual inspection, test,
and servicing of these pumps.
c. Fire Extinguisher and Fire Alarm System Inspections.
Landlord, through its Property Manager, shall engage a qualified
contractor for an annual inspection of all fire extinguishers
including refill requirements, gasket 0-ring, pull pin, co2
service, conductivity testing and tamper seal charge. Landlord
acknowledges that certain fire extinguishers are not currently
operational in the first floor of Building No. 3 and agrees to
promptly correct the same.
4. Operations.
----------
a. Janitorial Services.
Landlord, through its Property Manager, shall engage a qualified
contractor to provide janitorial services to those tenants desirous
of receiving such services. The contract shall provide for the
following services: (1) empty all wastepaper baskets and trash
barrels including those in the parking lot and change liners as
needed; (2) dust furniture, file cabinets, chairs, and bookcases;
(3) wash fingerprints and dirt on all doors including glass doors;
(4) vacuum all carpeted areas and dust/clean all baseboards, (5)
clean front entrances vacuum mats and carpeted areas, dust lobby
and reception furniture, and wash glass in lobby areas inside and
outside, (6) sweep, wet mop, and spray buff tile floors, wax or
strip and wax all tile floors as required; (7) clean and stock six
restrooms (i) sweep and mop floors with a disinfectant cleaner,
(ii) wash and polish mirrors, shelving and faucets, (iii) scour and
disinfect basins, bowls and urinals, (iv) restock paper, soaps and
sanitary products, (v) dust all horizontal surfaces, wipe
partitions and tiled walls, remove dirt and fingerprints; (8)
machine scrub/vacuum carpet in stairways, wash stairway
<PAGE>
50
railings and stair runners; (9) wash cafeteria table tops, dust and
polish furniture; (10) pick up leaves which gather in the corners
of the front entry areas.
b. Trash Removal.
Currently, the trash is removed on a weekly basis by Browning-
Ferris Industries (BFI). Landlord, through its Property Manager,
shall assume the current contract and administer it. Prior to the
expiration of the contract, Landlord shall seek bids from
alternative vendors before extending the contract with the current
vendor.
c. Landscaping.
Landlord, through its Property Manager, shall engage a qualified
contractor to provide landscaping services for the Property. Said
services shall consist of: (1) weekly cutting and trimming of all
lawn areas with off-site disposal of grass or leaves, (2) pruning,
trimming or shaping of trees, shrubs and hedges shall be done twice
per growing season, (3) mulching will be done annually; (4)
fertilizer and seeding (or overseeding) of lawn areas will be done
upon request at rates specified in the contract; and edging and
weeding flower beds and edging walkways shall be done as needed.
d. Snow Removal.
Landlord, through its Property Manager, shall engage a qualified
contractor to provide snow removal services for all walks,
driveways and parking areas based on the following snow fall
amounts: (1) for snow projected to amount to 0 to 3 inches - walk
ways, door ways, stairs and ramps will be pretreated with calcium
chloride prior to snow fall whenever possible. Shoveling of these
areas will be done as needed; (2) for snow amounts of 3 or more
inches falling during or before regular business hours - plowing
and full sanding of main road and parking lot areas will be done as
needed, all interior walks will be cleared with a standard size
snow blower, main walkways will be cleared with the large 5 ft.
wide snow blower. Snow will be removed from such areas prior to the
beginning of Tenant's business operations.
e. Drain Cleaning.
Landlord, through its Property Manager, shall engage a qualified
contractor to clean all drains on an annual basis. Included in this
service is the cleaning of the main sewer lines from within the
Building to the manholes located in the roadways.
<PAGE>
51
f. Window Cleaning.
Landlord, through its Property Manager, shall engage a qualified
contractor to clean all windows inside and outside on an annual
basis.
g. Security.
Landlord shall not be responsible for the security of Tenant's
Demised Premises, Tenant's Improvements or Tenant's Personal
Property.
5. Administrative.
--------------
a. Real Estate Taxes.
Real Estate Taxes assessed against the Property by the Town of
Maynard, Massachusetts are the responsibility of Landlord. Landlord
may file for an abatement of taxes or may enter into any other
proceeding it may deem appropriate in order to reduce the amount of
taxes due. The cost of real estate taxes shall be pro-rated per the
Lease. This provision is subject to additional provisions relating
to Real Estate Taxes set forth in the Lease.
b. Building Insurance.
Landlord shall procure and keep in full force and effect insurance
on the Building as provide for in the Lease. This insurance is for
the Building only and in no way is meant to extend to Tenant's
Personal Property.
6. Tenant Review of Agreements
---------------------------
Prior to selection of any provider of services described in this
Exhibit B or under Article 7 of the Lease, or any renewal of any
provider's contract, Landlord shall obtain bids from three (3)
independent contractors (including, if Tenant elects, one (1) selected
by Tenant). All such bids, and contractor qualifications shall be
provided to Tenant for its review. Tenant shall have the right to elect
to retain the services of independent contractors to perform those
services to be provided by Landlord pursuant to Section 6.5 and Exhibit
B which are provided to and within the Demised Premises (except for the
roof and the HVAC units) and to pay 100 percent of the cost of such
services. The Tenant shall have the right to make such election with
respect to a particular calendar year by notice to Landlord given on or
before November 30 of the prior calendar year.
7. Acknowledgment
--------------
Landlord hereby acknowledges that all actions described in Sections 1
and 2 above to be taken by it prior to the Commencement Date have been
completed by it prior to the execution of this Lease, and that all
contractors described in Sections 3 and 4 above have been engaged prior
to the execution of this Lease
<PAGE>
52
except for the engaging of a parking lot contractor under Section 2(c)
and the fire extinguisher replacement under Section 3(c).
<PAGE>
EXHIBIT C
SITE PLAN
<PAGE>
EXHIBIT C-1
PARKING & LOADING PLAN
<PAGE>
EXHIBIT C-1
18 Spaces
--------------------------------
20 Spaces
21 Spaces
--------------------------------
21 Spaces
22 Spaces
--------------------------------
22 Spaces
22 Spaces
--------------------------------
22 Spaces
23 Spaces
--------------------------------
23 Spaces
23 Spaces
--------------------------------
23 Spaces
20 Spaces
--------------------------------
20 Spaces
2 Handicap Spaces
----------------------------
1 Loading Dock 4 Visitor Spaces
(Bldg. #1) 124 Acton Street 2 Handicap Spaces
3 Loading Docks Building Complex
[2 for Bldg. #3] [not to scale) 7 Visitor Spaces
[1 for Bldg. #2]
----------------------------
12 Spaces
<PAGE>
FIRST AMENDMENT TO LEASE
Reference is made to that certain Lease (the "Lease") dated May 29, 1998,
(the "Date of Execution") and made effective as of April 1, 1998, between
Maynard Industrial Property Associates Trust, as Landlord, and SeaChange
International, Inc., as Tenant, for the Demised Premises located at 124 Acton
Street, Maynard, Massachusetts.
BACKGROUND:
- -----------
Pursuant to the Lease, Landlord agreed, as a material inducement to
Tenant's willingness to execute the Lease, that it would pay to the Town of
Maynard, or other appropriate entity, amounts due as of the Date of Execution as
the Real Estate Tax Arrearage on or before July 7, 1998, and thereafter provide
Tenant with the Tax Payment Notice and the Building Permit Notice. The Lease
provides that, in the event that Landlord did not timely perform such
obligations, the Tenant could terminate the Lease as of January 31, 1999, upon
at least one hundred twenty (120) days prior written notice. As of the date
hereof, such payments have not been made and notices have not been given by
Landlord; however, Landlord has indicated to Tenant its intention and ability to
do so on or before October 31, 1998. Accordingly, Landlord has requested, and
Tenant has agreed, to extend the deadlines set forth above.
The Lease is hereby amended as follows:
1. In Section 3.3, by (a) deleting the date "January 31, 1999" in line 6
and replacing it with the date "March 3, 1999"; (b) deleting the date
"July 7, 1998" in line 2 and replacing it with the date "October 31,
1998"; and (c) deleting the date "July 8, 1998" in lines 3 and 4 and
replacing it with the date "November 1, 1998."
2. In Section 6.11, by (a) deleting the date "July 7, 1998" in line 9 and
replacing it with the date "October 31, 1998"; (b) deleting the date
"July 8, 1998" in line 10 and replacing it with the date "November 1,
1998"; and (c) deleting the date "July 15, 1998" in line 13 and
replacing it with the date "November 9, 1998."
Except as herein amended, the Lease is ratified and affirmed and shall
remain in full force and effect. All defined terms shall have the same meaning
as in the Lease.
[CONTINUED ON NEXT PAGE]
<PAGE>
Executed as a sealed instrument this 28/th/ day of September, 1998.
LANDLORD:
MAYNARD INDUSTRIAL PROPERTIES
ASSOCIATES TRUST, a Massachusetts
Nominee Trust
By: /s/ Robert D. Quirk
-------------------------
Name: Robert D. Quirk
Title: Trustee duly authorized
TENANT:
SEACHANGE INTERNATIONAL, INC.
By: /s/ Richard Poulsen
-------------------------
Name: Richard Poulsen
------------------------
Tile: VP Operations
------------------------
-2-
<PAGE>
SECOND AMENDMENT TO LEASE
Reference is made to that certain Lease dated May 29, 1998 (the "Date of
Execution"), and made effective as of April 1, 1998, between Maynard Industrial
Property Associates Trust, as Landlord, and SeaChange International, Inc., as
Tenant, for the Demised Premises located at 124 Acton Street, Maynard,
Massachusetts, as amended by that certain First Amendment to Lease dated
September 28, 1998 executed by Landlord and Tenant (as amended, the "Lease").
BACKGROUND:
- -----------
Pursuant to the Lease, Landlord agreed, as a material inducement to
Tenant's willingness to execute the Lease, that it would pay to the Town of
Maynard, or other appropriate entity, amounts due as of the Date of Execution as
the Real Estate Tax Arrearage on or before October 31, 1998, and thereafter
provide Tenant with the Tax Payment Notice and the Building Permit Notice. The
Lease provides that, in the event that Landlord did not timely perform such
obligations, the Tenant could terminate the Lease as of March 3, 1999, upon at
least one hundred twenty (120) days prior written notice. As of the date hereof,
such payments have not been made and notices have not been given by Landlord;
however, Landlord has indicated to Tenant its intention and ability to do so on
or before November 30, 1998. Accordingly, Landlord has requested, and Tenant has
agreed, to extend the deadlines set forth above.
The Lease is hereby amended as follows:
In Section 3.3, by (a) deleting the date "March 3, 1999" in line 6 and
replacing it with the date "April 5, 1999"; (b) deleting the date
"October 31, 1998" in line 2 and replacing it with the date "November
30, 1998"; and (c) deleting the date "November 1, 1998" in lines 3 and 4
and replacing it with the date "December 1, 1998."
In Section 6.11, by (a) deleting the date "October 31, 1998" in line 9 and
replacing it with the date "November 30, 1998"; (b) deleting the date
"November 1, 1998" in line 10 and replacing it with the date "December
1, 1998"; and (c) deleting the date "November 9, 1998" in line 13 and
replacing it with the date "December 9, 1998."
Except as herein amended, the Lease is ratified and affirmed and shall
remain in full force and effect. All defined terms not defined herein shall have
the same meaning as in the Lease.
<PAGE>
[CONTINUED ON NEXT PAGE]
<PAGE>
Executed as a sealed instrument this 10/27 day of October, 1998.
LANDLORD:
MAYNARD INDUSTRIAL PROPERTIES
ASSOCIATES TRUST, a
Massachusetts Nominee Trust
By: /s/ Robert D. Quirk 10/26/98
-----------------------------
Name: Robert D. Quirk
Title: Trustee duly authorized
TENANT:
SEACHANGE INTERNATIONAL, INC.
By: /s/ Richard Poulsen
-----------------------------
Name: Richard Poulsen
-----------------------------
Tile: VP Operations
-----------------------------
Commonwealth of Massachusetts
County of Middlesex
Then personally appeared before me the above-named Robert D. Quirk and
Richard Poulsen, and acknowledged the foregoing instrument to 10/27/98 free act
and deed.
/s/ Stacy Leigh Bennett
-------------------------
Notary Public
My Commission Offices 7/15/2005
<PAGE>
TENANT ESTOPPEL CERTIFICATE
To: Bay State Federal Savings Bank, its successors and assigns (collectively
"Lender")
------
The undersigned hereby certifies and agrees as follows:
1. The undersigned is the tenant (the "Tenant") under that certain Lease
------
by and between Tenant and Maynard Industrial Properties Associates Trust (such
party, together with its successors and assigns hereinafter collectively
referred to as the "Landlord") dated May 29, 1998 and amended September 28, 1998
--------
and as further amended October ___, 1998 (as amended the "Lease") affecting
space in the building complex located at 124 Acton Street, Maynard,
Massachusetts (the "Building"). A true, correct and complete copy of the Lease
--------
and all amendments thereto is attached as Schedule A.
2. The Lease commenced on April 1, 1998.
3. The Lease expires on March 31, 2005. Tenant has no option or other
right to extend the term of the Lease beyond March 31, 2008. Tenant has not
exercised its right to terminate the Lease pursuant to Article 3, Section 3 and
agrees that provided all real estate taxes, water and sewer charges,
assessments, penalties, costs and interest thereon are brought current as of
November 1, 1998 by payment made by November __, 1998, Tenant will forever waive
and cancel said termination right.
4. Tenant has accepted and is occupying the entire premises demised to it
under the Lease (the "Premises") and all improvements to the Premises required
--------
by the Lease have been completed by Landlord in accordance with the Lease other
than certain work with respect to the parking lot as set forth on Schedule B
hereto.
5. Tenant has not paid rent or additional rent beyond the current month
and agrees not to pay rent or additional rent more than one month in advance at
any time.
6. Rent payable in the amount of $21,044.51 per month has been paid
through October 31, 1998.
7. Except as set forth on Schedule B attached hereto, there are no
defenses to or offsets against the enforcement of the Lease or any provision
thereof by the Landlord.
8. Tenant has deposited $23,831.73 as a security deposit with Landlord
pursuant to the terms of the Lease.
9. Except as set forth in the Lease, (i) Landlord has not agreed to grant
Tenant any free rent or rent rebate or to make any contribution to tenant
improvements, and (ii) Landlord has not agreed to reimburse Tenant for or to pay
Tenant's rent obligation under any other lease.
10. Tenant has not advanced any funds for or on behalf of Landlord for
which Tenant has a right to deduct from or offset against future rent payments.
<PAGE>
11. Except as set forth on Schedule B attached hereto, the Lease is in
full force and effect without default past applicable cure periods thereunder by
Tenant or, to the best knowledge of Tenant, Landlord.
12. The Lease is the entire agreement between the Landlord and Tenant
pertaining to the Premises, except for the letter agreement dated May 28, 1998
relating to brokerage commissions.
13. The Lease has not been amended, modified or supplemented except as set
forth above.
14. Tenant agrees that no future amendment of the Lease shall be
enforceable unless such amendment has been consented to in writing by Lender.
15. Except as set forth in the Lease, (i) Tenant does not have any
purchase option or first refusal right with respect to the Building, and (ii)
Tenant does not have any right or option for additional space in the Building.
Tenant acknowledges that Lender will rely on this Certificate in making a
loan or otherwise extending credit to Borrower.
Dated: October 27, 1998 SEA CHANGE INTERNATIONAL, INC.
By: /s/ Richard Poulsen
---------------------------
Name: Richard Poulsen
---------------------------
Title: V.P. OPERATIONS
---------------------------
-2-
<PAGE>
NOTICE OF LEASE
---------------
LESSOR: ROBERT D. QUIRK AND BRUCE T. QUIRK, TRUSTEES OF MAYNARD
INDUSTRIAL PROPERTIES ASSOCIATES TRUST, U/D/T DATED DECEMBER 10,
1990, RECORDED WITH MSRD, BOOK 21018, PAGE 326
LESSEE: SeaChange International, Inc., a Delaware corporation
DATE OF
EXECUTION: May 29, 1998; amended on September 28, 1998 and further amended
on October 27, 1998
DESCRIPTION
OF PREMISES: 79,822 rentable square feet of space, consisting of Building No.3
and a portion of the Connector Building, located at 124 Acton
Street, Maynard, Middlesex County, Massachusetts, on a lot of
land described on Schedule A attached hereto.
TERM: 7 years
DATE OF
COMMENCEMENT: April 1, 1998.
RIGHTS OF
RENEWAL OR
EXTENTION: One extension term of three (3) years
EXPANSION
RIGHTS: The tenant has a first option to lease space in Building No.1, to
be exercised within twelve (12) months from the Date of
Commencement. In addition, Landlord is to notify Tenant of
available vacant space at 124 Acton Street, Maynard, MA or other
nearby buildings.
LESSOR: /s/ Robert D. Quirk Trustee
---------------------------------------------
Robert D. Quirk, Trustee as aforesaid
LESSEE:
SeaChange International, Inc.
By: /s/ Richard Poulsen
------------------------------------------
Name: Richard Poulsen
Title: Vice President - Operations
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
Middlesex, SS. October 27, 1998
Then personally appeared the above-named Robert D. Quirk, Trustee of
Maynard Industrial Properties Associates Trust, and acknowledged the foregoing
instrument to be his free act and deed as Trustee as aforesaid, and that of said
Trust, before me,
/s/ Stacy Leisly Bennett
------------------------------------
, Notary Public
My Commission Expires: 7/15/2005
COMMONWEALTH OF MASSACHUSETTS
Middlesex, SS. October 27, 1998
Then personally appeared the above-named Richard Poulsen, Vice President -
Operations, of SeaChange International, Inc. and acknowledged the foregoing
instrument to be his free act and deed as Vice President of SeaChange
International, Inc., and that of said corporation, before me,
/s/ Stacy Leisly Bennett
------------------------------------
, Notary Public
My Commission Expires: 7/15/2005
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
NOTE: LANDLORD TO PROVIDE EXHIBIT A.
<PAGE>
BAY STATE FEDERAL SAVINGS BANK
- and -
SeaChange International, Inc.
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
Dated:
Location:
PREPARED BY AND UPON RECORDATION RETURN TO:
Sherburne, Powers & Needham, P.C.
One Beacon Street
Boston, MA 02108
Attention: Philip J. Notopoulos
<PAGE>
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the
"Agreement") is made as of the _____ day of October, 1998, by and between BAY
STATE FEDERAL SAVINGS BANK, a United States banking corporation ("Lender") and
SeaChange International, Inc. ("Tenant").
RECITALS:
A. Lender has made a loan to "Landlord" (defined below) in the amount of
$3,500,000.00 (the "Loan"). The Loan is evidenced by that certain Promissory
Note dated October __, 1998 in the principal amount of the Loan, given by
Landlord to Lender (the "Note").
B. The Loan is secured by that certain Mortgage Security Agreement and
Financing Statement (the "Mortgage") dated October __, 1998, given by Landlord
to Lender, which encumbers the fee simple estate of Landlord in certain premises
described in Exhibit A attached hereto (the "Property"), and which secures the
payment of the Note.
C. Tenant is the holder of a leasehold estate in a portion of the
Property under and pursuant to the provisions of a certain lease dated May 29,
1998 as amended September 28, 1998 between Maynard Industrial Properties
Associates Trust, as landlord ("Landlord") and Tenant, as tenant (the "Lease"),
notice of which is recorded with the Middlesex (S.D.) Registry of Deeds in Book
____, Page ___.
D. Tenant has agreed to subordinate the Lease to the Mortgage and to the
lien thereof and Lender has agreed to grant non-disturbance to Tenant under the
Lease on the terms and conditions hereinafter set forth.
AGREEMENT:
For good and valuable consideration, Tenant and Lender agree as follows:
1. SUBORDINATION. Subject to the provisions of Section 2 and 3 below, the
-------------
Lease and all of the terms, covenants and provisions thereof and all rights,
remedies and options of Tenant thereunder are and shall at all times continue to
be subject and subordinate in all respects to the terms, covenants and
provisions of the Mortgage and to the lien thereof, including without
limitation, all renewals, increases, modifications, spreaders, consolidations,
replacements and extensions thereof and to all sums secured thereby and advances
made thereunder with the same force and effect as if the Mortgage had been
executed, delivered and recorded prior to the execution and delivery of the
Lease.
-2-
<PAGE>
2. NON-DISTURBANCE. If any action or proceeding is commenced by Lender for
---------------
the foreclosure of the Mortgage or the sale of the Property or to enforce
Lender's rights against Landlord under the Mortgage or the Note or other
obligations secured thereby, Tenant shall not be named as a party therein unless
such joinder shall be required by law, provided, however, such joinder shall
not, nor shall any (i) suit, action, or proceeding upon the Mortgage or the Note
or other obligation secured thereby, (ii) the foreclosure of the Mortgage, (iii)
the enforcement of any rights under the Mortgage, (iv) any other document held
by the Lender, (v) any judicial sale or execution or other sale of the Property
including the premises leased by the Tenant (the "Demised Premises"), (vi) any
deed given in lieu of foreclosure, (vii) the exercise of any other rights given
to the Lender by any other documents, (viii) a matter of law, or (ix) any
default under the Mortgage or the Note or other obligation secured thereby,
result in the termination of the Lease or disturb the Tenant's possession or use
of the Demised Premises demised thereunder, and the sale of the Property in any
such action or proceeding and the exercise by Lender of any of its other rights
under the Note or the Mortgage shall be made subject to all rights of Tenant and
obligations of Landlord under the Lease, provided that at the time of the
commencement of any such action or proceeding or at the time of any such sale or
exercise of any such other rights (a) the term of the Lease shall have commenced
pursuant to the provisions thereof, (b) Tenant shall be in possession of the
premises demised under the Lease, (c) the Lease shall be in full force and
effect and (d) Tenant shall not be in default past applicable grace or cure
periods under any of the terms, covenants or conditions of the Lease or of this
Agreement on Tenant's part to be observed or performed.
3. ATTORNMENT AND RECOGNITION. If Lender or any other subsequent purchaser
--------------------------
of the Property shall take possession, collect rent, or become the owner of the
Property
-3-
<PAGE>
by reason of the foreclosure of the Mortgage or the acceptance of a deed or
assignment in lieu of foreclosure or by reason of any other enforcement of the
Mortgage or otherwise (Lender or such other purchaser being hereinafter referred
as "Purchaser"), and the conditions set forth in Section 2(a)-(d) above have
been met, the Lease shall not be terminated or affected thereby but shall
continue in full force and effect as a direct lease between Purchaser and Tenant
upon all of the terms, covenants and conditions set forth in the Lease and in
that event, Tenant agrees to attorn to Purchaser and Purchaser by virtue of such
acquisition of the Property, possession or collection of rent, shall be deemed
to have agreed to accept such attornment, provided, however, that Purchaser
shall not be (a) liable for the failure of any prior landlord (any such prior
landlord, including Landlord and any successor landlord, being hereinafter
referred to as a "Prior Landlord") to perform any of its obligations under the
Lease which have accrued prior to the date on which Purchaser shall become the
owner of the Property, provided that the foregoing shall not limit Purchaser's
obligations under the Lease to correct any conditions that (i) existed as of the
date Purchaser shall become the owner of the Property and (ii) violate
Purchaser's obligations as landlord under the Lease; provided further, however,
that Purchaser shall have received written notice of such omissions, conditions
or violations and has had a reasonable opportunity to cure the same, all
pursuant to the terms and conditions of the Lease, (b) subject to any offsets,
defenses, abatements or counterclaims which shall have accrued in favor of
Tenant against any Prior Landlord prior to the date upon which Purchaser shall
become the owner of the Property, (c) liable for the return of rental security
deposits, if any, paid by Tenant to any Prior Landlord in accordance with the
Lease unless such sums are actually received by Purchaser, (d) bound by any
payment of rents, additional rents or other sums which Tenant may have paid more
than one (1) month in advance to any Prior Landlord unless (i) such sums are
actually received by
-4-
<PAGE>
Purchaser or (ii) such prepayment shall have been expressly approved of by
Purchaser or (e) bound by any agreement terminating (unless pursuant to a
termination right under the Lease) or amending or modifying the rent, term,
commencement date or other material term of the Lease, or by any voluntary
surrender of the premises demised under the Lease, made without Lender's or
Purchaser's prior written consent prior to the time Purchaser succeeded to
Landlord's interest. In the event that any liability of Purchaser does arise
pursuant to this Agreement, such liability shall be limited and restricted to
Purchaser's interest in the Property and shall in no event exceed such interest.
Lender agrees that, in the event of damage or destruction to the Premises
by casualty, Lender will not unreasonably withhold its consent to a request by
Landlord to advance insurance proceeds for restoration of the Premises provided,
however, the following conditions are met:
(a) Landlord shall not be in default past applicable notice and grace
periods under the Note or the Mortgage or any documents securing or
given in connection with the Note (the "Loan Documents");
(b) Tenant shall not be in default under the Lease beyond applicable
notice and grace periods;
(c) The insurance proceeds are in the opinion of Lender sufficient to
restore the property or, if the proceeds are not sufficient, Landlord
has deposited with Lender the amount of any such insufficiency;
(d) The Premises may be restored as a matter of right under applicable law
and Landlord has secured all permits therefore;
-5-
<PAGE>
(e) Tenant shall not be entitled to terminate the Lease on account of said
casualty, or if such termination right exists, Tenant has waived the
same;
(f) The insurance proceeds will be held by Lender and will be advanced
under Lender's customary construction loan procedures; and
(g) The damage or destruction does not occur within the last two years of
the term of the Lease unless the Lease has been extended.
Lender acknowledges and agrees that all trade fixtures, equipment and other
property owned by the Tenant located or installed in or on the Demised Premises,
regardless of the manner or mode of attachment, shall be and remain the property
of Tenant and may be removed by Tenant at any time according to the provisions
of Articles 9, 16, and 27 of the Lease
4. NOTICE TO TENANT. After notice is given to Tenant by Lender that the
----------------
Landlord is in default under the Note and the Mortgage and that the rentals
under the Lease should be paid to Lender pursuant to the terms of the assignment
of leases and rents executed and delivered by Landlord to Lender in connection
therewith, Tenant shall thereafter pay to Lender or as directed by the Lender,
all rentals and all other monies due or to become due to Landlord under the
Lease and Landlord hereby expressly authorizes Tenant to make such payments to
Lender and hereby releases and discharges Tenant from any liability to Landlord
on account of any such payments.
5. NOTICE TO LENDER AND RIGHT TO CURE. Tenant shall notify Lender of any
----------------------------------
default by Landlord under the Lease and agrees that, notwithstanding any
provisions of the Lease to the contrary, no notice of cancellation thereof or of
an abatement shall be effective unless Lender shall have received notice of
default giving rise to such cancellation or abatement and shall have failed
within sixty (60) days after receipt of such notice to cure such default, or if
-6-
<PAGE>
such default cannot be cured within sixty (60) days, shall have failed within
sixty (60) days after receipt of such notice to commence and thereafter
diligently pursue any action necessary to cure such default, but in any event
such cure shall be effected within 120 days of receipt of said notice.
Notwithstanding the foregoing, Lender shall have no obligation to cure any such
default.
6. NOTICES. All notices or other written communications hereunder shall be
-------
deemed to have been properly given (i) upon delivery, if delivered in person or
by facsimile transmission with receipt acknowledged by the recipient thereof and
confirmed by telephone by sender, (ii) one (1) Business Day (hereinafter
defined) after having been deposited for overnight delivery with any reputable
overnight courier service, or (iii) three (3) Business Days after having been
deposited in any post office or mail depository regularly maintained by the U.S.
Postal Service and sent by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
If to Tenant: 124 Acton Street, Maynard, MA 01754
Attention: Vice President, Operations
Facsimile No._________________________
If to Lender: Bay State Federal Savings Bank
1299 Beacon Street
Brookline, MA 02148
Facsimile No.617-734-5185
or addressed as such party may from time to time designate by written notice to
the other parties. For purposes of this Section 7, the term "Business Day" shall
mean a day on which commercial banks are not authorized or required by law to
close in Massachusetts. Either party by notice to the other may designate
additional or different addresses for subsequent notices or communications.
-7-
<PAGE>
7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
----------------------
inure to the benefit of Lender, Tenant and Purchaser and their respective
successors and assigns.
8. GOVERNING LAW. This Agreement shall be deemed to be a contract
-------------
entered into pursuant to the laws of the Commonwealth of Massachusetts and the
United States of America and shall in all respects be governed, construed,
applied and enforced in accordance with such laws.
9. MISCELLANEOUS. This Agreement may not be modified in any manner or
--------------
terminated except by an instrument in writing executed by the parties hereto. If
any term, covenant or condition of this Agreement is held to be invalid,
illegal or unenforceable in any respect, this Agreement shall be construed
without such provision. This Agreement may be executed in any number of
duplicate originals and each duplicate original shall be deemed to be an
original. This Agreement may be executed in several counterparts, each of which
counterparts shall be deemed an original instrument and all of which together
shall constitute a single Agreement. The failure of any party hereto to execute
this Agreement, or any counterpart hereof, shall not relieve the other
signatories from their obligations hereunder. Whenever the context may require,
any pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice versa.
-8-
<PAGE>
Executed under seal as of the date first above written.
TENANT: LENDER:
SEACHANGE INTERNATIONAL, INC. BAY STATE FEDERAL SAVINGS BANK
By: /s/ Richard Poulsen By: /s/ Phyllis M. Penta
----------------------------- -------------------------
Name: Richard Poulsen Name: Phyllis M. Penta
----------------------------- -------------------------
Title: VP OPERATION'S Title: Vice President
----------------------------- -------------------------
-9-
<PAGE>
The undersigned accepts and agrees to the provisions of Section 4 hereof:
LANDLORD:
/s/ Robert D. Quirk
------------------------------
Robert D. Quirk, Trustee
------------------------------
, Trustee
COMMONWEALTH OF MASSACHUSETTS )
)ss.
COUNTY OF NORFOLK )
November 18, 1998
Then personally appeared the above-named Phyllis M. Penta, Vice President,
of ,and acknowledged the foregoing
instrument to be the free act and deed of Bay State Federal Savings Bank,
before me,
Notary Public /s/ Sebastiana Ovesian
My commission expires: 8/2/2002
COMMONWEALTH OF MASSACHUSETTS )
)ss.
COUNTY OF MIDDLESEX ) 10/27/1998
Then personally appeared the above-named Richard Poulsen, of Sea Change
Intl., and acknowledged the foregoing instrument to be his/her free act and deed
as of said VP Operations of said Sea Change Intl., before me,
Notary Public /s/ Stacy Leigh Bennett
My commission expires: 7/15/2005
-10-
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
)ss.
COUNTY OF MIDDLESEX )
10/27/1998
The personally appeared the above-named Robert D. Quirk of Sudbury, MA and
acknowledged the foregoing instrument to be his/her free act and deed as
Landlord of said Maynard Industrial Park associates, before me,
Notary Public Stacy Leigh Bennett
My commission expires: 7/15/2005
-11-
<PAGE>
EXHIBIT A
Legal Description
-----------------
-12-
<PAGE>
EXHIBIT 10.4
AGREEMENT OF SUBLEASE
IPC INTERACTIVE, INC.
1. PARTIES
This sublease is entered into by Harding Lawson Associates, Inc. ("Sublessor")
and IPC Interactive, Inc. ("Sublessee") subject to the Lease dated April 16,
1992 between MDD Partners, successor's in interest to Condiotti Enterprises,
Inc. ("Landlord") and Harding Lawson Associates, a Delaware Corporation,
("Lessee"). A copy of the Master Lease is attached hereto as Exhibit A.
---------
2. PROVISIONS CONSTITUTING SUBLEASE
Except to the extent that this Sublease clearly indicates otherwise, all terms
and conditions of the Master Lease and all riders and amendments thereto which
are initialed by both parties are incorporated into and made a part of this
Sublease as if Sublessor were the Landlord thereunder, Sublessee the Lessee
thereunder, and the Premises the Master Premises, except for the following terms
and conditions: In the body of the Master Lease, Articles: 1, 2 (a) (e) (f), 17,
33, 35 (f) (g) (n), 36, 37, 39, Exhibits "B", "C", "E", "H".
Sublessee hereby assumes and agrees to perform the Lessee's obligations under
the Master Lease during the Term to the extent that such obligations are
applicable to the Premises as defined in article 3 hereof. Without limiting the
foregoing, Sublessee shall name Sublessor and Landlord as additional insureds
under the insurance policies required to be carried by Sublessee pursuant to the
incorporation of the insurance paragraphs of the Master Lease. Sublessee shall
not commit or suffer any act or omission that will violate any of the provisions
of the Master Lease. Notwithstanding the foregoing or anything to the contrary
in the Master Lease, Sublessee acknowledges and agrees that Sublessor shall not
be obligated to perform any of the obligations or to supply or render any of the
services in the Master Lease required to be performed, supplied or rendered by
Landlord. Sublessee shall look solely to the Landlord for the performance for
any of the foregoing obligations and services so long as Sublessor is not in
default under the Master Lease and has not commenced to cure such default, in
which event Sublessee shall look solely to the Sublessor for the performance
thereof to the extent Sublessor is responsible under the Master Lease ;
provided, however, unless requested by Landlord, all requests by Sublessee for
the performance of any of the foregoing matters shall be submitted to Landlord
by Sublessor.
Sublessor shall exercise due diligence in attempting to cause Landlord to
perform its obligations under the Master Lease for the benefit of Sublessee. If
the Master Lease terminates, this Sublease shall terminate and the parties shall
be relieved of any further liability or obligation under this Sublease, provided
however, that if the Master Lease terminates as a result of a default or breach
by Sublessee under this Sublease and/or the Master Lease, Sublessee shall be
liable to the Sublessor for the damage suffered as a result of such termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to
terminate the Master Lease in the event of the partial or total damage,
destruction, or condemnation of the Master Premises or the building or project
of which the Master Premises are a part, the exercise of such right by Sublessor
shall not constitute a default or breach hereunder.
3. PREMISES
<PAGE>
Sublessor hereby leases to Sublessee the following premises, commonly described
as a portion of Building "O", it being agreed said premises consist of 28,664
rentable square at 105 Digital Drive, Bel Marin Keys, Novato, CA, as indicated
on Exhibit B.
---------
Sublessee accepts Premises with the alterations outlined on Exhibit B. Sublessor
---------
at it's sole cost and expense shall furnish and install the alterations on
Exhibit B. Sublessor will use commercially reasonable efforts to substantially
- ---------
complete the alterations on Exhibit B on or before September 1, 1996. The
---------
taking of possession or use of the Premises by Sublessee for any purpose shall
conclusively establish that Sublessee has inspected the Premises and accepts
them as being in good and sanitary order, condition and repair. Sublessee
acknowledges that neither Sublessor nor any of Sublessor's brokers or agents has
made any representations or warranties as to the suitability or fitness of the
Premises for the conduct of Sublessee's business, or for any other purpose, and
that neither Sublessor nor any of Sublessor's agents has agreed to undertake any
alterations or additions or construct any improvements to the Premises other
than those outlined on Exhibit B.
---------
4.1 WARRANTY BY SUBLESSOR
Except as expressly set forth herein, Sublessor warrants and represents to
Sublessee that (i) the Master Lease has not been amended or modified (ii)
Sublessor has received no notice of any claim by Landlord that Sublessor is in
default or breach of any of the provisions of the Master Lease, and (v)
Sublessor shall continue to perform its obligations under the Master Lease
throughout the Term of this Sublease.
4.2 DISCLOSURE
Sublessee acknowledges that Sublessor has advised Sublessee that certain
conditions of the Premises are the subject of litigation between Sublessor and
Landlord, in an action entitled MDD PARTNERS, DANIEL CONDIOTTI v. HARDING LAWSON
ASSOCIATES, Sonoma County Superior Court Case No.209317. Sublessor has provided
Sublessee with copies of the Complaint, the Cross Complaint of Sublessor, and
Sublessor's Response to MDD's First Set of Special Interrogatories in that
litigation. Sublessee acknowledges it has had an opportunity to review the
disclosure of certain alleged defective conditions of the Premises as set forth
in the Response to Special Interrogatories, and has had an opportunity to
inspect the property with respect to the alleged defective conditions disclosed.
Sublessee specifically assumes and holds Sublessor harmless from any liability
for any condition of the premises set forth in said Response, including but not
limited to any obligation to maintain, repair or replace any portion of the
Premises because of such condition(s). Sublessee acknowledge that it is
subleasing the property solely in reliance on Sublessee's own investigation and
that no representations or warranties of any kind whatsoever, express or
implied, have been made by Sublessor or Sublessor's agents or brokers, except as
specifically set forth in writing in this Agreement of Sublease.
5.1 BASE NNN RENTAL
Sublessee shall pay to Sublessor as rent for the Premises in advance on the
first day of each calendar month of the term of this Sublease without deduction,
offset, prior notice or demand, to Harding Lawson Associates, 7665 Redwood
Boulevard, Novato California 94945, (Attn: Accounts Receivable) or at such other
place as Sublessor may designate, in lawful money of the United States, the Base
NNN Rental of $29,967.82 (triple net). If the commencement date is not the first
day of the month, or if the Sublease
2
<PAGE>
termination date is not the last day of the month, a prorated monthly
installment shall be paid. Sublessee shall pay the first month's rental upon
execution and delivery of this Sublease. Notwithstanding the forgoing, provided
Sublessee is not in Default hereunder, Sublessee shall not be required to pay
the second month's Base NNN Rental payment.
5.2 NNN SUBLEASE
Sublessor shall receive the Base NNN Rental free and clear of any and all taxes,
liens, charges, or expenses of any nature whatsoever in connection with the
Master Lease and operation of the Premises, except as herein expressly provided.
In addition to the Base NNN Rental reserved above and except as may be expressly
provided herein, Sublessee shall pay to the parties respectively entitled
thereto all Impositions (as hereinafter defined), insurance premiums,
maintenance charges, tenant improvement costs, and any other charges, costs, and
expenses that are defined in the Master Lease during the Term. It is the
intention of the parties that this Sublease shall not be terminable for any
reason by Sublessee, and that Sublessee shall in no event be entitled to any
set-off against, abatement of, or reduction in Base NNN Rental payable under
this Sublease, except as herein expressly provided.
5.3 SUBLESSEE'S OBLIGATION TO REIMBURSE
As defined in the Master Lease, as additional rent, Sublessee shall pay to
Sublessor all real estate taxes, special assessments and other governmental
charges that at any time during, or with respect to the Term hereof may be
assessed or imposed on or with respect to, or become a lien upon, the Premises
or any part thereof or that may be assessed or imposed on or with respect to any
occupancy, use, or possession of, or activity conducted on, the Premises or any
part thereof (collectively, "Impositions") as defined in the Master Lease.
Sublessee shall pay the Impositions within Thirty (30) days after being billed
for the same by Sublessor. If requested by Sublessee in writing within Thirty
(30) days of receipt of a bill for such Impositions, Sublessor shall furnish
Sublessee with such evidence as is reasonably available to Sublessor with
respect to the amount of any Impositions. Sublessee may not withhold payment of
such bill pending receipt and/or review of such evidence.
5.4 UTILITIES
Sublessee shall pay for all gas, electricity, heat, cooling, energy, telephone,
janitorial service, water, waste disposal, refuse collection and other utility-
type services furnished to Sublessee or the Premises, together with all related
installation or connection charges or deposits. Sublessor shall not be liable in
damages, consequential or otherwise, nor shall there be any rent reduction, rent
abatement or right on the part of Sublessee to terminate this Sublease, arising
out of any interruption whatsoever in utility services which is due to
insurrection, war, rioting, earthquakes, fire, accident, strike, governmental
authority, acts of public enemy, acts of God or other causes beyond the
reasonable control of Sublessor, or any temporary interruption in such services
which is necessary to the making of alterations, repairs, or improvements to the
Premises or the Building or any part thereof so long as the need for said
repairs or improvements in not the result of Sublessor's negligence. Sublessor
and Sublessee agree to cooperate with one another to transfer all utility
accounts to Sublessee's account effective June 24, 1996.
5.5 ANNUAL BASE NNN RENTAL CPI INCREASE:
3
<PAGE>
The amount of Base NNN Rental payable by Sublessee under this Sublease shall be
adjusted and increased as of the first day of the thirteenth (13/th/) Sublease
month and on the first day every thirteenth (13/th/) Sublease month thereafter
(the "Adjustment Dates") on the basis of increases in the United States
Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All
Items, All Urban Consumers for the San Francisco-Oakland-San Jose Region (1982-
1984 = 100), (the "Index"). The Index for the month in which the thirtieth
(30/th/) day preceding each Adjustment Date falls shall be deemed the
"Adjustment Index". The Adjustment Index for determining an adjustment to the
Base NNN Rental for a specific Adjustment Date shall be deemed the Index on the
next following Adjustment Date. At the Adjustment Date, the new Base NNN Rental
shall be determined by multiplying the then current Base NNN Rental by the
percentage increase of the Adjustment Index over the Index; provided, however,
that in no event shall the Base NNN Rental as so adjusted be less than 103% nor
more than 108% of the Base NNN Rental in effect for the month immediately prior
to such Adjustment Date. When the new Base NNN Rental is determined, Sublessor
shall give Sublessee written notice of same. If Sublessor fails to give timely
notice of the new Base NNN Rental, the Adjustment shall be retroactive to the
Adjustment Date and Sublessee shall pay the arrears within fifteen (15) days
after being billed therefor. If at any Adjustment Date, the Index is no longer
published as described in this section, Sublessor, after consultation with
Sublessee, shall substitute the official index published by the United States
Department of Labor, Bureau of Labor Statistics or successors or similar
government agency as may then be in existence which is most nearly equivalent
thereto.
6.1 SECURITY DEPOSIT
The amount of $29,967.82 shall be paid upon execution of this Sublease as a non-
interest bearing security for performance under this Sublease. If Sublessee
fails to pay rent or other charges due hereunder, or otherwise defaults with
respect to any provision of the lease, Sublessor may use, apply or retain all or
any portion of said deposit for the payment of any rent or other charge in
default for the payment of any other sum to which Sublessor may become obligated
by reason of Sublessee's default, or to compensate Sublessor for any loss or
damage which Sublessor may suffer thereby. If Sublessor so uses or applies all
or any portion of said deposit, Sublessee shall within ten (10) days after
written demand therefor, deposit cash with Sublessor in an amount sufficient to
restore said deposit to the full amount required under this Sublease. In any
event, the full amount of the security deposit shall be retained by Sublessor
for the full Term hereof and within thirty (30) days following Sublessee's
vacation of the Premises and Sublessor's inspection thereof, said deposit shall
be returned to Sublessee, less any amounts due to compensate Sublessor for
damage or defaults of Sublessee.
6.2 LETTER OF CREDIT
Sublessee, at Sublessee's sole cost and expense, shall provide a letter of
credit in the amount of $60,000.00 for the first two full years of the Sublease
In the event Sublessee defaults, or has defaulted on any monetary obligation
under this Sublease (Monetary Default) in the first two (2) years of the Term
hereof, Sublessee shall maintain a letter of credit in the amount of $60,000.00
for a period extending two full years from the last date upon which Sublessee
Monetary Default has occurred. The letter of credit shall be in the form of an
irrevocable, unconditional, and clean letter of credit, payable at sight and
upon demand, in form and substance acceptable to Sublessor in its sole and
absolute discretion, from Citibank, N.A., Bank of America, N.A. or Wells Fargo
Bank, N.A. or another
4
<PAGE>
national bank acceptable to Sublessor with offices in San Francisco or Marin,
County, California that will accept and pay on any draw on said letter of credit
("Letter of Credit"). The Letter of Credit shall designate Sublessor as
beneficiary and shall be transferable by beneficiary to any transferee,
successor, and assign (including any lender of Sublessor) at no cost or expense
to beneficiary. The letter of credit shall be for a minimum period of two years
Sublessor shall have the right to draw (in whole or in part) on the Letter of
Credit any time it would otherwise have the right to apply all or any portion of
the Security Deposit under the terms of the Sublease. However, the Letter of
Credit shall provide that it may be drawn by Sublessor (or assignee) upon
presentation by Sublessor to the issuing bank (at its offices in San Francisco
or Marin, County, California) of a sight draft(s), together with a statement
from Sublessor that the amount requested by Sublessor is due and owing to
Sublessor and shall be payable by the bank without inquiry or any other
documentation or further action required of the bank, Sublessor, or Sublessee.
All costs and expenses to obtain the Letter of Credit and all renewals shall be
borne by Sublessee. Notwithstanding the foregoing, in the event Sublessee has
not been in default hereunder during the first two (2) full years of the
Sublease Term, Sublessee's obligation to maintain a Letter of Credit for the
benefit of Sublessor shall terminate.
7.1 TERM
A. The term of this Sublease shall extend for five years and commence on July 1,
1996 or upon delivery of the premises and shall terminate sixty months
thereafter (Term) subject to Sublessor's option to terminate the Master Lease
which is ongoing commencing November 3, 1998. Sublessor shall provide Sublessee
with 150 days prior written notice of Sublessor's exercise of its option to
terminate the Master Lease which will terminate this Sublease Agreement. In the
event that Sublessor is unable to deliver possession of the Premises at the
commencement of the Term, Sublessor shall not be liable for any damage caused
thereby. In the event Sublessor is unable to deliver possession of the Premises
on July 1, 1996, the term shall be correspondingly deferred one day for each day
of delay. Sublessor and Sublessee agree to execute an amendment to this Sublease
establishing the commencement date and the expiration date. In the event
Sublessor is unable to deliver the Premises by July 15, 1996, Sublessee, with
prior written notice, shall have the right to terminate this Sublease with all
deposits returned to Sublessee without offset or deduction. In the event
Sublessor fails to deliver possession of the Premises on or before July 15,
1996, and Sublessee has not exercised its option to terminate this agreement,
Sublessee shall be entitled to one (1) day of free Base NNN Rent for each day of
delay of delivery of possession of the Premises beyond July 15, 1996.
7.2 EARLY OCCUPANCY
Sublessee shall have access to the Premises commencing June 24, 1996 for the
purpose of Sublessee's fixturing or Sublessee's work. Sublessee may thereupon
enter the subleased Premises for such purposes at Sublessee's own risk, to make
such improvements as Sublessee shall have the right to make, to install
fixtures, supplies, inventory and other property. Sublessee agrees that
Sublessee shall not in any way interfere with the progress of Sublessor's
alterations by such entry. During the course of any Early Occupancy, whether
such Early Occupancy arises because of an obligation of construction by
Sublessor, or otherwise, all terms and conditions of this Sublease, except for
Base NNN Rental and commencement, shall apply, particularly with respect to
indemnity by Sublessee of Sublessor hereunder.
7.3 TERM EXTENSION
5
<PAGE>
Sublessee may elect to extend the Term of this Sublease as follows:
1) Sublessee shall provide no less than one-hundred eighty days prior
written notice nor more than two-hundred forty days prior written
notice (the Extension Notice); and
2) The term of such extension shall be through October 3, 2003 (the
Extension Period); and
3) The Rental for such extension period shall be a continuance of the
terms of the initial Sublease Term and Base NNN Rental shall be
adjusted in accordance with article 5.5 hereof.
8. USE
The Premises shall be used and occupied only as described in the Master Lease,
and for no other use or purpose.
9. OPERATING EXPENSES
Sublessee shall be solely responsible for all expenses for the operation,
maintenance and repair of the Premises and Building "O" (105 Digital Drive,
Novato) which are incurred during the Term hereof and shall include and not be
limited to: waste disposal, janitorial and cleaning services, HVAC and
mechanical systems (electrical and plumbing) operation, maintenance and repair.
10. DEFAULT BY SUBLESSEE
The following shall be events of default by Sublessee under this Sublease:
(a) The failure by Sublessee to pay when due any installment of rent or
other payment required pursuant to this Sublease;
(b) intentionally deleted;
(c) Sublessee shall fail to comply with any term, provision or covenant of
this Sublease, other than the payment of rent, or other sums of money due
hereunder, and the Sublessee has not diligently commenced to cure said failure
within ten (10) days after written notice thereof to Sublessee;
(d) Sublessee shall file a petition or be adjudged a debtor or bankrupt or
insolvent under the National Bankruptcy Code, as amended, or any similar law or
statute of the United States or any state; or a receiver or trustee shall be
appointed for all or substantially all of the assets of Sublessee; or Sublessee
shall make a transfer in fraud of creditors or shall make an assignment for the
benefit of creditors; or
(e) Sublessee shall permit to be done any act which results in a lien
being filed against the Premises.
11. ENFORCEMENT OF RIGHTS AND REMEDIES.
6
<PAGE>
Upon the occurrence of any event of default set forth in this Sublease,
Sublessor shall have the option to pursue any of the remedies set forth in the
Master Lease against Sublessee as if Sublessor were the landlord named in such
Lease and Sublessee were the tenant named in such Lease. A waiver by the
Sublessor of Sublessee's breach of any one or more covenants or conditions
contained herein shall not bar any of the Sublessor's rights or remedies for a
subsequent breach of the same covenant or condition. Upon the occurrence of any
default or other failure by the Lessor of the Master Lease to fulfill its
obligations under the Master Lease during the term of the Sublease, Sublessor,
shall, at Sublessee's request, take reasonable and appropriate actions to cause
it's Lessor to remedy such default or failure to fulfill obligations and shall
invoke such remedies and powers available to Sublessor as the Lessee under the
Lease as Sublessee under this Sublease may reasonably request.
12. NOTICES
All notices or demands which may or are to be required or permitted to be given
by either party on the other hereunder shall be in writing. All notices and
demands between Sublessor and Sublessee shall be sent by United States mail,
postage prepaid, addressed to the parties at the addresses designated below, or
to such other places as may be designated from time to time by the parties.
Sublessee Sublessor
________________________ Manager, Corporate Contracts
IPC Interactive, Inc. Harding Lawson Associates, Inc.
105 Digital Drive 7655 Redwood Boulevard
Novato, CA 94949 P.O. Box 578
Novato, CA 94948
Sublessor shall promptly deliver to Sublessee a copy of any notice which
Sublessor shall receive from Landlord under the Master Lease.
13. HOLD HARMLESS
Each party to this Sublease holds harmless, defends and indemnifies the other
party and Landlord against all reasonable losses, claims, damages, liability,
accountants', attorneys' and paralegals' fees and litigation (including
appellate procedures) and other expenses related to, growing out of, arising
from Sublessee's occupancy, use of the Premises and or either parties acts or
omissions, or litigation arising out of any violation or alleged violation of
any laws or regulations. In no event shall Sublessor be liable for any and all
consequential damages of any nature to Sublessee.
14. ASSIGNMENT AND SUBLETTING
All of the provisions of Article 9 of the Master Lease are hereby incorporated
into and made a part of the Sublease, except that Sublessee's exercise of its
rights under said Articles shall be subject to the prior written consent of the
Sublessor and Landlord pursuant to the Master Lease. Sublessor's consent to
assignment or subletting shall not be unreasonably withheld.
15. BROKER PARTICIPATION
7
<PAGE>
The parties recognize Julien J. Studley, Inc. and Meridian Commercial, Inc. as
the brokers who negotiated this Sublease and agree that Sublessor shall be
solely responsible for the payment of brokerage commissions to said brokers, and
that Sublessee shall have no responsibility therefor. As part of the
consideration for the granting of this Sublease, Sublessor and Sublessee
represent and warrant to each other, that, to their knowledge, no other broker,
agent or finder negotiated or was instrumental in negotiating or consummating
this Sublease on behalf of Sublessor or Sublessee, and that Sublessor and
Sublessee know of no other real estate broker, agent or finder who is or might
be entitled to a commission or compensation in connection with this Sublease.
Sublessee shall hold Sublessor harmless from all damages and indemnify Sublessor
for all damages paid or incurred by Sublessor resulting from any claims that may
be asserted by any broker, agent or finder based on any statements or
representations by Sublessee. Sublessor shall hold Sublessee harmless from all
damages and indemnify Sublessee for all said damages paid or incurred by
Sublessee resulting from all claims that may be asserted against Sublessee by
any broker, agent or finder based on any statements or representations by
Sublessor.
16. ATTORNEY'S FEES
If Sublessor, Sublessee, or Broker shall commence any action or proceeding
arising out of or in connection with this Sublease, the prevailing party (as
determined by the court) shall be entitled to recover from the non-prevailing
party its costs of suit and actual attorney's fees reasonably incurred,
including without limitation all costs of appeal and collection of any judgment.
17. ASSIGNMENT BY SUBLESSOR, ATTORNMENT
In the event of any transfer, assignment, buyout or other conveyance or transfer
of Sublessor's interest in the Master Lease, Sublessor shall be automatically
freed and relieved from the performance of any covenants or obligations on the
part of Sublessor contained in this Sublease thereafter to be performed. Without
further agreement the transferee of such interest shall be deemed to have
assumed and agreed to perform any and all obligations of Sublessor hereunder,
during its ownership of said interest.
Sublessor may transfer, assign, sell or otherwise convey its interest in and
obligations under the Master Lease without the consent of Sublessee and such
transfer or conveyance shall not be deemed a violation on Sublessor's part of
any of the terms and conditions of this Sublease. Within ten (10) days following
any written request which Sublessor may make from time to time, Sublessee shall
execute and deliver to Sublessor a statement certifying: (i) the date of
commencement of this Sublease; (ii) the fact that this Sublease is unmodified
and in full force and effect (or, if there have been modifications hereto, that
this Sublease is in full force and effect, and stating the date and nature of
such modifications); (iii) the date to which the rent and other sums due under
this Sublease have been paid; (iv) that there are no current defaults under the
Sublease by either Sublessor or Sublessee, except as specified in Sublessee's
statement; (v) if the statement is in connection with a transfer, assignment or
other conveyance of Sublessor's interest in the Master Lease, that Sublessor is
freed and relieved from all liability as respects the performance of covenants
and obligations on the part of Sublessor under the Sublease; and (vi) such other
matters reasonably requested by Sublessor. Sublessor and Sublessee intent that
any statement delivered pursuant to this paragraph may be relied upon by any
mortgagee, beneficiary, assignee, purchaser or other transferee of Sublessor's
interest in the Master Lease.
8
<PAGE>
18. ALTERATIONS AND MODIFICATIONS TO THE PREMISES
During the Term, Sublessee may make improvements, alterations or additions to
the Premises, provided such work is done in a workmanlike manner with materials
and finishes comparable to those then existing in the Premises, and provided
that structural improvements, alterations and additions shall be made only with
the prior written consent of Sublessor and Landlord. If Sublessee makes any
improvements, alterations or additions, Sublessee agrees to:
(i) comply with all insurance requirements and all laws, ordinances,
rules and regulations of all governmental authorities, provided that Sublessor
shall cooperate with Sublessee in securing any necessary permits, the cost for
such permits to be borne by Sublessee;
(ii) discharge by payment, bond or otherwise, any mechanics' lien
filed against the Property (of which Sublessee has written notice) for work,
labor, services or materials performed at or furnished to the Premises on behalf
of Sublessee; and
(iii) upon reasonable request from Sublessor and/or Landlord, (A)
furnish Sublessor and/or Landlord with plans of such improvements, alterations
or additions and (B) furnish Sublessor and Landlord with contractors' affidavits
and lien waivers.
Upon the expiration or earlier termination of this Sublease, Sublessee shall
surrender the Premises in substantially as good condition as when entered,
except for loss or damages resulting from casualty, condemnation, acts of God,
ordinary wear and tear and any improvements, alterations or additions made to
the Premises. Notwithstanding the foregoing, Sublessee shall have the obligation
to remove any improvements, alterations or additions made to the Premises on
Sublessee's behalf, and Sublessee shall repair any damage caused by such removal
in the event Master Lessor has not agreed in writing to allow said improvements,
alterations or additions made to the Premises to remain without the obligation
of the Sublessee to comply with this paragraph.
19. PARKING
Sublessee shall be entitled to the exclusive use of a total of ninety-five (95)
parking spaces at the building which shall be on an assigned and reserved basis
subject to mutual approval of the exact location of the spaces. Ten of the total
of ninety-five parking spaces shall be reserved in front of the Premises in a
mutually agreed location.
20. SIGNAGE
Subject to Sublessor's written approval, which shall not be unreasonably
withheld, and also subject to Sublessor's signage rights, transferability of
said rights as defined in article 35 (I) of the Master Lease, and the written
approval by the Lessor, Sublessee shall be allowed to install, or have installed
at Sublessee's sole cost and expense signage in accordance with the building
master-signage program.
21. HOLDING OVER
Should Sublessee hold over the term hereby created without the consent of
Sublessor, Sublessee shall become a Subtenant from month to month at 150% of the
scheduled monthly rental payable hereunder,
9
<PAGE>
and otherwise upon the covenants and conditions contained in this Lease, and
shall continue to be such tenant until thirty (30) days after either party
hereto serves upon the other written notice of intention to terminate such
monthly tenancy. Should such termination occur on any day other than the last
day of any rental month, any unearned prepaid rental shall, within thirty (30)
days following surrender of the premises by Lessee, be refunded.
22. FINANCIAL INFORMATION
No more than once each Sublease year, Sublessee agrees to provide audited
financial information upon written request by Sublessor Sublessee agrees said
financial information shall be in accordance with GAAP. Sublessor acknowledges
that Sublessor shall rely on such statements.
DATED: 6/20/96, 1996
SUBLESSOR: SUBLESSEE:
HARDING LAWSON ASSOCIATES, INC. IPC INTERACTIVE INC.
By /s/ Greg Thurox By /s/ Mary E. McGushin
--------------------------- ---------------------------
7655 Redwood Boulevard
Novato, CA 94948
(415) 892-0821
The above Sublease is hearby approved by Master Lessor
MASTER LESSOR
By: /s/ Solomon S. Condiotti
-----------------------------
Date: 6/24/96
--------------------------
10
<PAGE>
EXHIBIT 10.5
SILICON VALLEY BANK
$6,000,000 REVOLVING LINE OF CREDIT
$3,000,000 EQUIPMENT LINE OF CREDIT
WITH
SEACHANGE INTERNATIONAL, INC.
AS OF
NOVEMBER 10, 1998
================================================================================
INDEX OF CLOSING DOCUMENTS
--------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
ITEM TAB No.
---- -------
- --------------------------------------------------------------------------------------------------------
<S> <C>
Loan and Security Agreement 1
- --------------------------------------------------------------------------------------------------------
Intellectual Property Security Agreement 2
- --------------------------------------------------------------------------------------------------------
Unconditional Guaranty of Seachange Systems, Inc. 3
- --------------------------------------------------------------------------------------------------------
Unconditional Guaranty of GuestServe Networks, Inc. 4
- --------------------------------------------------------------------------------------------------------
Uniform Commercial Code Financing Statements:
(i) Secretary of the Commonwealth
(ii) Clerk, Town of Maynard 5
(iii) Registry of Deeds
- --------------------------------------------------------------------------------------------------------
Secretary's Certificate of Seachange International, Inc. 6
- --------------------------------------------------------------------------------------------------------
Secretary's Certificate of Seachange Systems, Inc. 7
- --------------------------------------------------------------------------------------------------------
Secretary's Certificate of GuestServe Networks, Inc. 8
- --------------------------------------------------------------------------------------------------------
Certificate of Good Standing from Delaware for Seachange International, Inc. 9
- --------------------------------------------------------------------------------------------------------
Certificate of Good Standing from Delaware for Seachange Systems, Inc. 10
- --------------------------------------------------------------------------------------------------------
Certificate of Good Standing from California for GuestServe Networks, Inc. 11
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
Assorted Foreign Qualification Certificates for Seachange International, Inc.,
Seachange Systems, Inc. and GuestServe Networks, Inc. 12
- ---------------------------------------------------------------------------------------------------------
Perfection Certificate 13
- ---------------------------------------------------------------------------------------------------------
Certificate of Liability Insurance naming Silicon Valley Bank as
Loss Payee and Additional Insured 14
- ---------------------------------------------------------------------------------------------------------
Copies of Patent Application Filing Receipts 15
- ----------------------------------------------------------------------------------------------------------
Termination and Release Statements with respect to BankBoston, N.A. 16
- ---------------------------------------------------------------------------------------------------------
Legal Opinion of Testa, Hurwitz and Thibeault, LLP 17
- ---------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of November 10, 1998,
by and between SILICON VALLEY BANK, a California-chartered bank, with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
and with a loan production office located at Wellesley Office Park, 40 William
Street, Suite 350, Wellesley, Massachusetts 02481, doing business under the name
"Silicon Valley East" ("Bank") and SEACHANGE INTERNATIONAL, INC., a Delaware
corporation with its principal place of business at 124 Acton Street, Maynard,
Massachusetts 01754 ("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the
rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor,
as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person
that is a limited liability company, such Persons, managers and members.
"Agreement" means this Loan and Security Agreement.
"Approved Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States, which the Bank approves on a case by case basis.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency
Proceeding) whether or not suit is brought.
<PAGE>
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means an amount equal to: (i) eighty percent (80.0%)
of Eligible Accounts, PLUS (ii) ninety percent (90%) of Eligible Foreign
----
Accounts, PLUS (iii) a percentage determined by the Bank, on a case by case
----
basis, of Approved Foreign Accounts, up to a maximum amount equal to
thirty-five percent (35.0%) of the total aggregate Borrowing Base, each as
determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower, MINUS (iv) at any time prior to the Debt
-----
Service Coverage Event, the amounts outstanding under the Committed
Equipment Line.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
"Committed Revolving Line" means a credit extension of up to Six
Million Dollars ($6,000,000.00).
"Committed Equipment Line" means a credit extension of up to Three
Million Dollars ($3,000,000.00).
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to
(i) any indebtedness, lease, dividend, letter of credit or other obligation
of another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that
such amount shall not in any event exceed the maximum amount of the
obligations under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished
and whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment Advance or any other
extension of credit by Bank for the benefit of Borrower hereunder.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on
the consolidated balance sheet of Borrower and its Subsidiaries,
-2-
<PAGE>
as at such date, plus, to the extent not already included therein, all
outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date
of determination thereof unless such Indebtedness is renewable or
extendable at the option of Borrower or any Subsidiary to a date more than
one year from the date of determination, but excluding Subordinated Debt.
"Debt Service Coverage Event" means the first day of the calendar
month immediately following the achievement by the Borrower of a Debt
Service Coverage Ratio of at least 1.5 to 1.0 for the two prior consecutive
fiscal quarters of the Borrower, as confirmed by Bank with reference to the
most recent Compliance Certificate delivered by Borrower.
"Debt Service Coverage Ratio" means the Borrower's earnings after tax
plus interest and non-cash expenses (depreciation and amortization) divided
by the current portion of its long term debt, plus interest.
"Eligible Accounts" means those Accounts that arise in the ordinary
course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4. Unless
otherwise agreed to by Bank in writing, Eligible Accounts shall not include
the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five
percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for
account debtors having their principal place of business in Canada;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department,
agency, or instrumentality thereof, except for those Accounts of the
United States or any department, agency or instrumentality thereof as
to which the payee has assigned its rights to payment thereof to Bank
and the assignment has been acknowledged, pursuant to the Assignment
of Claims Act of 1940, as amended (31 U.S.C. 3727);
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g.
accounts payable, customer deposits, credit accounts etc.);
(g) Accounts generated by demonstration or promotional equipment,
or with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be
conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis
-3-
<PAGE>
for dispute (but only to the extent of the amount subject to such
dispute or claim), or is subject to any Insolvency Proceeding, or
becomes insolvent, or goes out of business; and
(j) Accounts the collection of which Bank reasonably determines
in accordance with its standard commercial practices to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States or Canada and that are: (1) covered by credit insurance in form and
amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one
or more letters of credit in an amount and of a tenor, and issued by a
financial institution, acceptable to Bank.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1.2.
"Equipment Availability End Date No. 1" has the meaning set forth in
Section 2.1.2.
"Equipment Availability End Date No. 2" has the meaning set forth in
Section 2.1.2.
"Equipment Maturity Date No. 1" means that date which is the thirtieth
(30th) Payment Date after Equipment Availability End Date No. 1.
"Equipment Maturity Date No. 2" means June 5, 2002.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time.
"Guarantors" means SeaChange Systems, Inc., and GuestServe Networks,
Inc..
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Insolvent" means: (a) the Borrower is not able to pay its debts
(including trade debts) as they mature; (or (b) the Borrower's liabilities
are greater than its assets (as determined in accordance with GAAP).
"Intellectual Property Collateral" means
-4-
<PAGE>
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for
said use or infringement of the intellectual property rights
identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works, and all license fees and royalties
arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service,
of every kind and description now or at any time hereafter owned by or in
the custody or possession, actual or constructive, of Borrower, including
such inventory as is temporarily out of its custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance
or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to
time.
"Mask Works" means all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired;
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its material obligations as the same
shall become due under the Loan Documents.
-5-
<PAGE>
"Maturity Date" means, as applicable, (i) the Revolving Maturity Date
with respect to Advances, and (ii) the Equipment Maturity Date No. 1 and
the Equipment Maturity Date No. 2, as applicable, with respect to Equipment
Advances.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after
the commencement of an Insolvency Proceeding and including any debt,
liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Overadvance" is defined in Section 2.2.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Payment Date" means the fifth (5th) calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State
thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from
the date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., and (iii) certificates of deposit maturing no
more than one (1) year from the date of investment therein issued by
Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
-6-
<PAGE>
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings and as to which adequate reserves are
maintained on Borrower's Books in accordance with GAAP, provided the
--------
same have no priority over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such Equipment, or (ii) existing on such
equipment at the time of its acquisition, provided that the Lien is
--------
confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor,
licensor or under any lease or license provided that such leases,
subleases, licenses and sublicenses do not prohibit the grant of the
security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described
in clauses (a) through (c) above, provided that any extension, renewal
--------
or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being
extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with maturities
of fewer than 90 days of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means one day prior to the date which is one
(1) year from the Closing Date.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than fifty percent (50%) of the voting stock or other
equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
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<PAGE>
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
-----
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted
from assets, and (ii) Total Liabilities, plus (iii) Subordinated Debt.
--- ----
"Total Liabilities" means as of any applicable date, any date as of
which the amount thereof shall be determined, all obligations that should,
in accordance with GAAP be classified as liabilities on the consolidated
balance sheet of Borrower, including in any event all Indebtedness, but
specifically excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same
and like protections, and the entire goodwill of the business of Assignor
connected with and symbolized by such trademarks.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in
-----------------
lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such Credit Extensions
at rates in accordance with the terms hereof.
2.1.1 (a) Subject to and upon the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower in an aggregate outstanding amount not
to exceed the Committed Revolving Line or the Borrowing Base, whichever is less.
Subject to the terms and conditions of this Agreement, amounts borrowed pursuant
to this Section 2.1 may be repaid and reborrowed at any time during the term of
this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank
by facsimile transmission or telephone no later than 3:00 p.m. Eastern time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer or a
designee thereof, and Borrower shall indemnify and hold Bank harmless for any
damages or loss suffered by Bank as a result of such reliance. Bank will credit
the amount of Advances made under this Section 2.1 to Borrower's deposit
account.
(c) The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this Section 21 and other
amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
2.1.2 Equipment Advances.
------------------
(a) Subject to and upon the terms and conditions of this Agreement,
Bank agrees to make advances (each an "Equipment Advance" and collectively, the
"Equipment Advances") to Borrower: (i) in one advance to take place at any time
---
after the Closing Date through thirty (30) days after the Closing Date (the
"Equipment
-8-
<PAGE>
"Equipment Availability End Date No. 1") in the aggregate outstanding amount not
to exceed Two Million Dollars ($2,000,000.00) (the "Equipment Line No. 1"), and
(ii) at any time and from time to time from the Equipment Availability End Date
No. 1 through June 30, 1999 (the "Equipment Availability End Date No. 2") in
the aggregate outstanding amount not to exceed Three Million Dollars
($3,000,000.00) LESS the cumulative Equipment Advances made under Equipment Line
----
No. 1 (the "Equipment Line No. 2"). To evidence the Equipment Advances,
Borrower shall deliver to Bank, at the time of each Equipment Advance request,
an invoice for the equipment to be purchased or refinanced. Equipment Advance
requests under Equipment Line No. 1 shall only be permitted for Equipment
purchased between July 2, 1997 and June 30, 1998. Equipment Advance requests
under Equipment Line No. 2 shall only be permitted for Equipment purchased
between July 1, 1998 and June 30, 1999. The Equipment Advances shall be used
only to purchase or refinance Equipment and shall not exceed: (i) eighty percent
(80.0%) of the invoice amount on such equipment , including software, approved
from time to time by Bank under Equipment Line No. 1, and (ii) one hundred
percent (100%) of the invoice amount on such equipment, including software,
approved from time to time by Bank in accordance with its standard commercial
practices under Equipment Line No. 2, each of (i) and (ii) excluding taxes,
shipping, warranty charges, freight discounts, and installation expense.
(b) Interest shall accrue from the date of each Equipment Advance at
the per annum rate of one percent (1.0%) above the Prime Rate and shall be
payable monthly on the Payment Date of each month. Any Equipment Advances made
pursuant to the Equipment Line No. 1 that are outstanding on the Equipment
Availability End Date No. 1 will be payable in Thirty (30) equal monthly
installments of principal, plus all accrued interest, beginning on the Payment
Date of the month following Equipment Availability End Date No. 1 and ending on
the Equipment Maturity Date No. 1. Any Equipment Advances made pursuant to the
Equipment Line No. 2 that are outstanding on the Equipment Availability End Date
No. 2 will be payable in Thirty-Six (36) equal monthly installments of
principal, plus all accrued interest, beginning on the Payment Date of the month
following Equipment Availability End Date No. 2 and ending on the Equipment
Maturity Date No. 2. Equipment Advances, once repaid, may not be reborrowed.
(c) When Borrower desires to obtain an Equipment Advance, Borrower
shall notify Bank (which notice shall be irrevocable) by facsimile transmission
to be received no later than 3:00 p.m. Eastern time one (1) Business Day before
the day on which the Equipment Advance is to be made. Such notice shall be
substantially in the form of Exhibit B. The notice shall be signed by a
Responsible Officer or its designee and include a copy of the invoice for the
Equipment to be financed.
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1.1 plus, prior to
the Debt Service Coverage Event, Section 2.1.2, is greater than the Borrowing
Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess
(the "Overadvance").
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances under the Committed Revolving Line shall bear interest, on the average
daily balance thereof, at a per annum rate equal to: (i) One Half of One percent
(0.5%) above the Prime Rate prior to the Debt Service Coverage Event, and (ii)
the Prime Rate beginning on the date which is the Debt Service Coverage Event.
(b) Default Rate. All Obligations shall bear interest, from and after
------------
the occurrence of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on each
--------
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number _____________________ for payments
of principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts.
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<PAGE>
Any such debits against Borrower's accounts in no way shall be deemed a set-off.
Any interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder. All amounts borrowed hereunder together with all interest,
fees or other amounts due by Borrower to Bank may be repaid or prepaid to Bank
in whole or in part prior to the Maturity Date without the imposition of any
fee, penalty or cost to Borrower.
(d) Computation. In the event the Prime Rate is changed from time to
-----------
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
------------------
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Eastern
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Committed Revolving Line Facility Fee. A Committed Revolving Line
-------------------------------------
Facility Fee equal to Fifteen Thousand Dollars ($15,000.00), which fee
shall be due on the Closing Date and shall be fully earned and non-
refundable;
(b) Committed Equipment Line Facility Fee. A Committed Equipment Line
-------------------------------------
Facility Fee equal to: (i) Five Thousand Dollars ($5,000.00), which fee
shall be due on the Closing Date and shall be fully earned and non-
refundable, PLUS (ii) Two Thousand Five Hundred Dollars ($2,500.00), which
----
fee shall be due upon the initial Equipment Advance under the Equipment
Line No. 2 and shall be fully earned at such time and non-refundable;
(c) Financial Examination and Appraisal Fees. Bank's customary fees
----------------------------------------
and out-of-pocket expenses for Bank's semi-annual audits of Borrower's
Accounts, appraisals of Collateral and financial analysis and examination
of Borrower performed by Bank or its agents;
(d) Bank Expenses. Upon demand from Bank, including, without
-------------
limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and after
the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or official
----------------
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
-10-
<PAGE>
(a) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise
with respect to the transactions contemplated hereby (except for taxes on
the overall net income of Bank imposed by the United States of America or
any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall
----
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension. The obligation of
------------------------------------------------
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) an Intellectual Property Security Agreement;
(d) an opinion of Borrower's counsel;
(e) guaranties by the Guarantors;
(f) financing statements (Forms UCC-1);
(g) insurance certificate;
(h) payment of the fees and Bank Expenses then due specified in
Section 25 hereof;
(i) Certificates of Good Standing and Foreign Qualification; and
(j) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
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<PAGE>
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
---------------------------------------------
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
(b) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension.
The making of each Credit Extension shall be deemed to be a representation
and warranty by Borrower on the date of such Credit Extension as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
--------------------------
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
----------------------------------
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound. Borrower
is not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
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<PAGE>
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. To the best of Borrower's knowledge, the
---------------------------
Eligible Accounts are bona fide existing obligations. The service or property
giving rise to such Eligible Accounts has been performed or delivered in all
material respects to the account debtor or to the account debtor's agent for
immediate shipment to the account debtor. Borrower has not received notice of
actual or imminent Insolvency Proceeding of any account debtor whose accounts
are included in any Borrowing Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects of
----------------------
good and marketable quality, free from all material defects.
5.6 Intellectual Property. Borrower is the sole owner of the Intellectual
---------------------
Property Collateral, except for licenses granted by Borrower to its customers in
the ordinary course of business. Each of the Patents is valid and enforceable,
and no part of the Intellectual Property Collateral has been judged invalid or
unenforceable, in whole or in part, and no claim known to Borrower has been made
in writing that alleges that any part of the Intellectual Property Collateral
violates the rights of any third party. Except for and upon the filing (i) with
the United States Patent and Trademark Office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights and
Mask Works, and (ii) with appropriate state authority, UCC-1 Financing
Statements necessary to perfect the intellectual property security interests
created hereunder, and except as has been already made or obtained, no
authorization, approval or other action by, and no notice to or filing with, any
United States governmental authority or United States regulatory body is
required either (i) for the grant by Borrower of the intellectual property
security interest granted hereby or for the execution, delivery or performance
of Loan Documents by Borrower in the United States or (ii) for the perfection in
the United States or the exercise by Bank of its rights and remedies under this
Section 5.6.
5.7 Name; Location of Chief Executive Office. Except as disclosed in the
----------------------------------------
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no actions
----------
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision could have a Material Adverse Effect on Borrower or a material
adverse effect on Bank's security interest in the Collateral.
5.9 No Material Adverse Change in Financial Statements. All consolidated
--------------------------------------------------
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.10 Solvency. Borrower is able to pay its debts (including trade debts)
--------
as they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or
-13-
<PAGE>
carrying margin stock (within the meaning of Regulations G, T and U of the Board
of Governors of the Federal Reserve System). Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. Borrower has not violated in
any material respect any statutes, laws, ordinances or rules applicable to it,
violation of which could have a Material Adverse Effect.
5.12 Environmental Condition. To the best of Borrower's knowledge, none of
-----------------------
Borrower's or any Subsidiary's properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste or
hazardous substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
-----
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith by proper proceedings with adequate reserves
under GAAP.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained all
-------------------
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted where
the failure to take such actions would have a Material Adverse Effect.
5.16 Full Disclosure. No representation, warranty or other statement made
---------------
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
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<PAGE>
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver
-------------------------------------------
to Bank: (a) as soon as available, but in any event within forty-five (45) days
after the end of each quarter, a company prepared consolidated balance sheet and
income statement covering Borrower's consolidated operations during such period,
in a form and certified by an officer of Borrower reasonably acceptable to Bank;
(b) as soon as available, but in any event within thirty (30) days after the end
of each month, a company prepared consolidated revenue and expense statement
covering Borrower's consolidated operations during such period, in form
reasonably acceptable to Bank; (c) as soon as available, but in any event within
ninety (90) days after the end of Borrower's fiscal year, audited consolidated
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (d)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of Two Hundred Fifty Thousand Dollars
($250,000) or more; (e) prompt notice of any material change in the composition
of the Intellectual Property Collateral, including, but not limited to, any
subsequent ownership right of the Borrower in or to any Copyright, Patent or
Trademark not specified in any intellectual property security agreement between
Borrower and Bank or knowledge of an event other than information that is
publicly available and applicable generally to Borrower's business practices and
industry that materially adversely effects the value of the Intellectual
Property Collateral; and (f) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Within twenty (20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
---------
accounts receivable.
Within forty-five (45) days after the last day of each quarter, Borrower
shall deliver to Bank with the quarterly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of Exhibit
-------
D hereto.
- -
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
------------------
marketable condition, free from all material defects. Returns and allowances,
if any, as between Borrower and its account debtors shall be on the same basis
and in accordance with the usual customary practices of Borrower, as they exist
at the time of the execution and delivery of this Agreement. Except with
respect to the Borrower's ordinary course of business or standard warranty
provisions, Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Two Hundred Fifty Thousand Dollars ($250,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
-----
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower will make, and will cause each Subsidiary to make,
timely payment or deposit of all material tax payments and withholding taxes
required of it by applicable laws, including, but not limited to, those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment with
respect to the foregoing if (i) the amount or validity of such payment is
contested in good faith by appropriate proceedings, (ii) Borrower or Subsidiary,
as the case may be, has established proper reserves (to the extent required by
GAAP) and (iii) no lien other than a Permitted Lien results.
-15-
<PAGE>
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, measured as of the last day of
-----------
each quarter, a ratio of Quick Assets to Current Liabilities of at least 0.75 to
1.0.
6.9 Tangible Net Worth. Borrower shall maintain, measured as of the last
------------------
day of each quarter, a Tangible Net Worth of not less than: (i) Twenty Nine
Million Dollars ($29,000,000.00) as of the last day of the quarter ending
September 30, 1998; and (ii) Twenty-Eight Million Five Hundred Thousand Dollars
($28,500,000.00) as of the last day of each calendar quarter thereafter.
6.10 Debt-Net Worth Ratio. Borrower shall maintain, measured as of the
--------------------
last day of each quarter, a ratio of Total Liabilities to Tangible Net Worth of
not greater than 0.80 to 1.0.
6.11 Profitability. Borrower shall maintain, measured as of the last day
-------------
of each quarter: (i) a maximum net loss of One Million Five Hundred Thousand
Dollars ($1,500,000.00) as of the last day of the third quarter of 1998; (ii) a
maximum net loss of One Million Dollars ($1,000,000.00) as of the last day of
the fourth quarter of 1998; and (iii) a profit for each quarter commencing with
the first quarter of Borrower's fiscal year 1999 with an allowance for one
quarterly loss during such fiscal year of no greater than Two Hundred Fifty
Thousand Dollars ($250,000.00).
6.12 Debt Service Coverage Ratio. Beginning with the last day of the first
---------------------------
quarter following the Debt Service Coverage Event, Borrower shall maintain,
measured as of the last day of each quarter, a Debt Service Coverage Ratio of
1.50 to 1.0.
6.13 Registration of Intellectual Property Rights.
--------------------------------------------
(a) Borrower shall, in its discretion, and in accordance with normal
business practices, register or cause to be registered (to the extent not
already registered) with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those intellectual property
rights listed on Exhibits A, B and C to the Intellectual Property Security
Agreement delivered to Bank by Borrower in connection with this Agreement within
thirty (30) days of the date of this Agreement. Borrower shall, in its
discretion, and in accordance with normal business practices, register or cause
to be registered with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those additional intellectual
property rights developed or acquired by Borrower from time to time in
connection with any product prior to the sale or licensing of such product to
any third party,
-16-
<PAGE>
including, without limitation, revisions or additions to the intellectual
property rights listed on such Exhibits A, B and C. Notwithstanding the
foregoing, upon the occurrence of an Event of Default, the Bank may require, in
its discretion, that Borrower register or cause to be registered with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, any intellectual property rights developed or acquired by Borrower,
including, without limitation, revisions or additions to the intellectual
property rights listed on such Exhibits A, B and C.
(b) Borrower shall execute and deliver such additional instruments and
documents from time to time as Bank shall reasonably request to perfect Bank's
security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) in its sole discretion, protect, defend and
maintain the validity and enforceability of the Trademarks, Patents, Copyrights,
and Mask Works, (ii) use its best efforts to detect infringements of the
Trademarks, Patents, Copyrights and Mask Works and promptly advise Bank in
writing of material infringements detected and (iii) not allow any Trademarks,
Patents, Copyrights, or Mask Works to be abandoned, forfeited or dedicated to
the public without written notice to Bank; provided, however, that the decision
to abandon, forfeit or dedicate to the public such assets shall be solely within
the discretion of the Borrower.
(d) Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 613 to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.13.
6.14 Further Assurances. At any time and from time to time Borrower shall
------------------
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
------------
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers: (i) of inventory
in the ordinary course of business, (ii) of licenses and similar arrangements
for the use of the property of Borrower or its Subsidiaries in the ordinary
course of business; (iii) that constitute payment of normal and usual operating
expenses in the ordinary course of business; or (iv) of worn-out or obsolete
Equipment.
7.2 Changes in Business, Ownership, or Management, Business Locations.
-----------------------------------------------------------------
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a material change in Borrower's ownership or management. Borrower will
not, without at least thirty (30) days prior written notification to Bank,
relocate its chief executive office or add any new offices or business
locations.
7.3 Mergers or Acquisitions. Prior to the Termination Date, merge or
-----------------------
consolidate, or permit any of its Subsidiaries to merge or consolidate, with or
into any other business organization, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
-17-
<PAGE>
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
------------
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
-------------
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
----------------------------
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Intellectual Property Agreements. Borrower shall not permit the
--------------------------------
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way prevent the creation of a security interest in
Borrower's rights and interests in any property included within the definition
of the Intellectual Property Collateral acquired under such contracts, except to
the extent that such provisions are necessary in Borrower's exercise of its
reasonable business judgement.
7.10 Subordinated Debt. Make any payment in respect of any Subordinated
-----------------
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.11 Inventory. Store more than ten percent of the book value of the
---------
Inventory with a bailee, warehouseman, or similar party unless Bank has received
a pledge of any warehouse receipt covering such Inventory. Except for Inventory
sold in the ordinary course of business and except for such other locations as
Bank may approve in writing, Borrower shall keep the Inventory only at the
locations set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" or a company controlled by
----------
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral; or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
-18-
<PAGE>
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Sections 6.3,
6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12 or 6.13 or violates any of the covenants
contained in Article 7 of this Agreement and such failure is not cured within
thirty (30) days with respect to Borrower's obligations under Section 6.7 and
6.13; or
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within twenty (20) days after the occurrence thereof;
provided, however, that if the default cannot by its nature be cured within the
twenty (20) day period or cannot after diligent attempts by Borrower be cured
within such twenty (20) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default (provided that no Advances
will be required to be made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse change
-----------------------
in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations as the same shall become due or (iii) is a material
impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
----------
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes Insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
----------------
Borrower is a party with a third party or parties resulting in the acceleration
of the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty
Thousand Dollars ($250,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
---------
amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand
Dollars ($250,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
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<PAGE>
8.9 Misrepresentations. If any material misrepresentation or material
------------------
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable
without any action by Bank);
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower
and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may reasonably designate. Borrower authorizes Bank to enter
the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or lien which in Bank's
determination appears to be prior or superior to its security interest and
to pay all expenses incurred in connection therewith. With respect to any
of Borrower's premises, Borrower hereby grants Bank a license to enter such
premises and to occupy the same, without charge;
(e) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely for the purposes of exercising Bank's rights
hereunder, to use, without charge, Borrower's labels, patents, copyrights,
mask works, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production
of, advertising for sale, and selling any Collateral and, in connection
with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to
the Obligations in whatever manner or order it deems appropriate;
-20-
<PAGE>
(h) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(i) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
(j) Bank shall have a non-exclusive, royalty-free license to use the
Intellectual Property Collateral to the extent reasonably necessary to
permit Bank to exercise its rights and remedies upon the occurrence of an
Event of Default.
9.2 Power of Attorney. Effective only upon the occurrence and during the
-----------------
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; (f) to modify, in its
sole discretion, any intellectual property security agreement entered into
between Borrower and Bank without first obtaining Borrower's approval of or
signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and
Exhibit D, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower
after the execution hereof or to delete any reference to any right, title or
interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower
no longer has or claims any right, title or interest; (g) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (h) to transfer the Intellectual Property Collateral
into the name of Bank or a third party to the extent permitted under the
California Uniform Commercial Code provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
-------------
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible, unless the same is due to Bank's gross negligence or willful
-21-
<PAGE>
misconduct, for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral, unless the same is due to
Bank's gross negligence or willful misconduct, shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
-------------------
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not expressly set forth herein as provided
under the Code, by law, or in equity. No exercise by Bank of one right or
remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
---------------
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower SeaChange International, Inc.
124 Acton Street
Maynard, Massachusetts 01754
Attn: Mr. William Fiedler, Chief Financial Officer
FAX: _______________________
with a copy to Testa, Hurwitz & Thibeault, LLP
125 High Street - 20th Floor
Boston, Massachusetts 02110
Attn: William B. Simmons, Esquire
FAX: (617) 248-7100
If to Bank Silicon Valley Bank
40 William Street
Wellesley, Massachusetts 02481
Attn: Mr. Mark J. Pasculano
FAX: (781) 431-9906
with a copy to: Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
FAX: (617) 723-6831
-22-
<PAGE>
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
------------------------------------
The laws of the Commonwealth of Massachusetts shall apply to this
Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall , indemnify ,defend, protect and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall be
--------------------------
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
----------------------------------
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
-23-
<PAGE>
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
--------
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run; provided that so
long as the obligations referred to in the first sentence of this Section 12.7
have been satisfied, and Bank has no commitment to make any Credit Extensions or
to make any other loans to Borrower, Bank shall release all security interests
granted hereunder and redeliver all Collateral held by it in accordance with
applicable law.
12.8 Confidentiality. In handling any confidential information Bank shall
---------------
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
12.9 Countersignature. This Agreement shall become effective only when it
----------------
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SEACHANGE INTERNATIONAL, INC.
/s/ William L. Fiedler
By:-----------------------------------------
William L. Fiedler
Name:---------------------------------------
Chief Financial Officer
Title:--------------------------------------
SILICON VALLEY BANK, D/B/A SILICON VALLEY
EAST
/s/ J.S. Parsons
By:-----------------------------------------
J.S. Parsons
Name:---------------------------------------
Senior V.P.
Title:--------------------------------------
-24-
<PAGE>
SILICON VALLEY BANK
/s/ Heidi Fetty
By:-----------------------------------------
Heidi Fetty
Name:---------------------------------------
Loan Documentation Officer
Title:--------------------------------------
Signed in Santa Clara County,
California)
-25-
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints, drawings,
purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and
rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and
chattel paper now owned or hereafter acquired and Borrower's Books relating
to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; all trade secret rights, including all rights to
unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter acquired;
all mask work or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired; all claims for
damages by way of any past, present and future infringement of any of the
foregoing; and
Including, without limitation, all items listed on Rider 1 attached hereto and
-------
made a part hereof.
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:__________________________
FAX#: (408) ________________________ TIME: ____________________
FROM: SEACHANGE INTERNATIONAL, INC.
-----------------------------------------------------------------------
BORROWER'S NAME
FROM:________________________________________________________________________
AUTHORIZED SIGNER'S NAME
_____________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:_______________________________________________________________________
FROM ACCOUNT #_________________________ TO ACCOUNT#__________________________
- -----------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
- -----------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
- ------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
-----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_________________________
Authorized Requester
___________________________________
Authorized Signature (Bank)
Phone #____________________________
- ------------------------------------------------------------------------------
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: SEACHANGE INTERNATIONAL, INC. Bank: Silicon Valley Bank
Commitment Amount: $6,000,000.00
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ________ $____
2. Additions (please explain on reverse) $____
3. TOTAL ACCOUNTS RECEIVABLE $____
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $____
5. Balance of 50% over 90 day accounts $____
6. Concentration Limits $____
7. Foreign Accounts $____
8. Governmental Accounts $____
9. Contra Accounts $____
10. Promotion or Demo Accounts $____
11. Intercompany/Employee Accounts $____
12. Other (please explain on reverse) $____
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____
14. Eligible Accounts (#3 minus #13) $____
15. Eligible Foreign Accounts $____
16. Approved Foreign Accounts
17. LOAN VALUE OF ALL ACCOUNTS (80% of #14, plus 90% of #15, $____
plus a Bank determined percentage of #16)
BALANCES
18. Maximum Loan Amount $____
19. Total Funds Available (Lesser of #18 or #17) $____
20. Present balance owing on Line of Credit $____
21. Outstanding under Committed Equipment Line $____
[ONLY PRIOR TO DEBT SERVICE COVERAGE EVENT]
22. RESERVE POSITION (#19 minus #20 and #21) $____
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
================================
COMMENTS: BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
================================
_____________________________________
By: _________________________________
Authorized Signer
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SEACHANGE INTERNATIONAL, INC.
The undersigned authorized officer of SEACHANGE INTERNATIONAL, INC. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Financial statements & CC Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
BBC & A/R Agings Monthly within 20 days Yes No
Monthly Revenue and Expense Monthly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Minimum Quick Ratio 0.75:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $29,000,000 for 9/30/98;
$28,500,000 thereafter $___________ Yes No
Maximum Debt-Net Worth 0.80:1.0 _____:1.0 Yes No
Profitability ($1,500,000) for third
quarter 1998; ($1,000,000)
for fourth quarter 1998;
and profitable on quarterly
basis in FY 1999 with
allowance for one quarterly
loss of up to $250,000 $___________ Yes No
Minimum Debt Service Coverage Ratio 1.5:1.0 (commencing after ____:1.0 Yes No
DSC Event)
</TABLE>
================================
COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY
RECEIVED BY:____________________
DATE:________________
REVIEWED BY:____________________
COMPLIANCE STATUS: YES / NO
================================
Sincerely,
_______________________ Date:________________
Signature
_______________________
Title
<PAGE>
Silicon Valley Bank
Representations & Warranties
EXHIBIT 5.3
-----------
<TABLE>
<CAPTION>
Equipment Leases:
- -----------------
<S> <C> <C>
????ce' Copier Ikon Capital Corp. Leased from 10/01/96 through 10/01/01
AT&T/Lucent Definity Generic
?SI Comm. System AT&T Credit Corp. Leased from 08/31/97 - 08/31/02 (Est.)
Microspace Transponder Lease Agreement Mr. Joseph L. Amor III
From 3/97 - 4/02 Microspace Communications Group
3100 Highwoods Blvd.
Raleigh, NC 27604
Paramount Financial Movie Systems & TV Sets One Jericho Plaza
Corporation From 7/98 - 7/03 Jericho, New York 11753
Property Leases:
- ----------------
OFFICE LOCATION PROPERTY ADDRESS LANDLORD
CITY, STATE
Greenville, NH 47 Main Street, #1 Mill Alden T. Greenwood
Greenville, NH 03048 773 Greenville Road
(603) 878-5055 Mason, NH 03048
(603) 878-2485
Fairfield, CT 3141 North Street Thomas Franeta
Fairfield, CT 06430 3141 North Street
(203) 259-4499 Fairfield, CT 06430
(203) 259-4499
Baltimore, MD 38 Bellchase Court Ira Goldfarb
Baltimore, MD 21208 38 Bellchase Court
(410) 653-7175 Baltimore, MD 21208
(410) 653-7175
Burlingame, CA 500 Airport Blvd., Suite 345 The Horn Group
Burlingame, CA 94010 Sabrina Horn
(415) 589-4499 500 Airport Blvd.
Burlingame, CA 94010
St. Louis, MO 710 North Second Street Arch Equities II, LLC
Suite 350S 319 No. Fourth St.
St. Louis, MO 63102 Suite 300
(314) 436-8989 St. Louis, MO 63102
</TABLE>
<PAGE>
EXHIBIT 5.3 (CONTINUED)
-----------------------
Property Leases:
- ----------------
<TABLE>
<CAPTION>
OFFICE LOCATION PROPERTY ADDRESS LANDLORD
CITY, STATE
<S> <C> <C>
Englewood, CO 6050 S. Greenwood Blvd. Dowd Systems, Inc.
Suite 150 F/B/O Allstate Insurance Co.
Englewood, CO 80111
(303) 694-0900
Lawrenceville, GA 1000 Hurricane Shoals Rd NE Ron H. Garrard
- ------------------
(Updated 8/8/97) D- 1200 316 BC, LLC
(Moved from Duluth, GA; Lawrenceville, GA 30043 1000 Hurricane Shoals Road
???ce above) Building D, Suite 100
Lawrenceville, GA 30243
St. Margarets 12 Sidney Road Anne Wright
- -------------
Twickenham Middlesex St. Margarets Twickenham 78a Malborough Street
- --------------------
(England) Middlesex TW1 1JR Boston, MA 02116
- ---------
(Updated 8/8/97) ENGLAND
Novato, CA Digital Drive Harding and Lawson
- ----------
Novato, CA
Singapore 10 Tannery Lane IPC Corporation
- ---------
#03-02, Singapore 347773 Singapore
Sophia Antipolis, France Centre International DE Monsieur Alain ANDRE.
- ------------------------
(Updated 8/8/97) Communication Avancee De Sophia C.I.COM.Organisation, S.A.R.L.
Antipolis (C.I.C.A.) 06560 Valbonne 2229
FRANCE 401 432 059 (France)
</TABLE>
<PAGE>
EXHIBIT 5.4
-----------
The following accounts receivable are adequately reserved for as part of
SeaChange International's general account receivable reserve. They are
specifically identified here for purposes of disclosure:
COX Cable 6,000.00
Cablerep Advertising 37,070.40
Continental Cablevision 25,191.40
Central Oregon Cable 14,352.00
Comcast Cablevision 6,293.90
Comcast Communications 9,452.00
Media One 27,511.24
Cosmos Broadcasting Corp. 10,729.75
Charter Communications 25,623.07
Time Warner Cable 13,500.00
Capital Networks 6,546.00
Cape Elegance, Singapore 207,000.00
HCI 150,000.00
<PAGE>
EXHIBIT 5.5
-----------
Merchantable Inventory:
- ----------------------
The inventory identified in the balance sheet of SeaChange International, Inc.,
is in all material respects, good and marketable quality and free from all
material defects. The Company has, as part of general business practice,
customer returned materials which undergoes evaluation for before final
disposition. The Company also maintains a level of logistical materials for
support of our installation base which generally is less than 13% of our total
inventory value. This material is primarily used and is adequately reserved for.
EXHIBIT 5.8
-----------
Litigation:
- ----------
The following actions or proceedings are pending with the Company, none of which
either individually or in the aggregate would have a material adverse effect on
the financial performance of the Company in the event the Company did not
prevail:
Burst Communications Vendor dispute $124,000
SeaGate Vendor dispute $ 60,000
Karen Chernoff Employee dispute less than $ 5,000
The Columbia Group Contract dispute NTE $ 84,000
EXHIBIT 5.14
------------
The Company has a certificate for 50,000 shares of $0.1 par value common stock
in Players Network. The Company accepted this certificate and other
consideration for the loan of its system to Players Network. Pursuant to this
transaction and given the speculative nature of this privately held company,
SeaChange has not recorded the stock.
<PAGE>
PERMITTED LIENS OF
SEACHANGE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF DESCRIPTION OF
CREDITOR SECURED LOCATION OF DATE OF FILE
PROPERTY FILING FILING NUMBER
- --------------------------------------------------------------------------------
AT&T Credit Corporation AT&T/Lucent Central Filing 09/02/97 494205
Catehall Drive Definity Generic Office in the
Parsippany, NJ 07054 3SI Commonwealth
Communications of Massachusetts
System
- --------------------------------------------------------------------------------
AT&T Credit Corporation AT&T/Lucent Town of Maynard 09/02/97 #1610-Bk-1
2 Catehall Drive Definity Generic in the
Parsippany, NJ 07054 3SI Commonwealth
Communications of Massachusetts
System
- --------------------------------------------------------------------------------
Xerox Corporation One Xerox Central Filing 10/01/96 420118
800 Carillon Parkway 5665SF Copier Office in the
St. Petersburg, FL 33716 Commonwealth
of Massachusetts
- --------------------------------------------------------------------------------
Xerox Corporation One Xerox Town of Maynard 10/11/96 #1502-Bk-1
800 Carillon Parkway 5665SF Copier in the
St. Petersburg, FL 33716 Commonwealth
of Massachusetts
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 21.1
SeaChange International, Inc.
List of Significant Subsidiaries
Subsidiary Name Subsidary Jurisdiction
- --------------- ----------------------
SeaChange Asia Pacific Operations Pte. Ltd. Singapore
GuestServe Networks, Inc. (1) Delaware
(1) Wholly-owned subsidiary of SeaChange Asia Pacific Operations Pte. Ltd.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-17379) of SeaChange International, Inc. of our
report dated January 29, 1999 appearing on page F-1 of this form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page S-1 of this form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEACHANGE INTERNATIONAL, INC. FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,115
<SECURITIES> 0
<RECEIVABLES> 19,845
<ALLOWANCES> (870)
<INVENTORY> 16,157
<CURRENT-ASSETS> 46,032
<PP&E> 15,784
<DEPRECIATION> (7,803)
<TOTAL-ASSETS> 55,386
<CURRENT-LIABILITIES> 23,706
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 30,515
<TOTAL-LIABILITY-AND-EQUITY> 55,386
<SALES> 71,770
<TOTAL-REVENUES> 71,770
<CGS> 49,013
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (223)
<INCOME-PRETAX> (7,506)
<INCOME-TAX> (2,789)
<INCOME-CONTINUING> (4,717)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,717)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
