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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, 1999
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
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 13, 2000 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 $638,971,146. The
number of shares of the registrant's Common Stock outstanding as of the close of
business on March 13, 2000 was 21,432,320.
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 1, 2000 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"), incorporated in
Delaware in July 1993, develops, markets and supports products to manage, store
and distribute digital video for television operators, including cable,
broadcast, telecommunications and other new media companies. The Company's
products utilize its proprietary distributed application software and standard
computer 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, video-on-demand and other interactive
television services.
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 the United States, based on
currently available industry sources and the Company's internal data. A majority
of SeaChange's customers are 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 local or remote 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 advertising for the multichannel television market.
The Company has one existing movie product and two video-on-demand (VOD)
products for interactive television markets. The Company sells the SeaChange
Movie System which provides long-form video storage and delivery for the pay-
per-view movie markets. The SeaChange GuestServe System delivers video-on-demand
and other guest services, internet access and PC games in a hotel environment
for cable television and telecommunications companies. In addition, SeaChange
has developed the SeaChange ITV (Interactive Television) System to provide
residential video-on-demand and other interactive services for cable television
operators and telecommunications companies. During 1998 and 1999, SeaChange
entered into agreements with several cable companies, including Time-Warner,
Inc., Rogers Cablesystems and Telewest Communications, to provide SeaChange's
ITV System for demonstration and testing of their video-on-demand systems. The
Company also has agreements with leading producers of digital set-top boxes to
test and integrate their products with SeaChange's ITV System.
The Company also sells its video server, which is designed to store and
distribute video streams of various lengths, MediaCluster, SeaChange's
proprietary software technology that enables multiple video servers to operate
together as an integrated video server and a video streaming product for
internet applications.
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 and 1999, the Company installed
broadcast systems at customer locations including network affiliates and
multi-channel operations in the United States and broadcast companies
internationally.
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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 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 video on
demand, internet and other applications.
Cable Television Operators & Telecommunications Companies
According to industry sources, there are approximately 12,000 cable
television systems currently in the United States, serving over 70
million subscribers. In 1999, 96% of all cable systems provided over 30
channels of programming to their subscribers and most systems provided
fifty or more channels. Because cable television programming is sent over
broadband lines, operators have the opportunity to 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 1999, 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
were a major factor which had 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 hotels and apartments using existing
analog set-top boxes. The Company sells its SeaChange Guestserve System
to cable operators including Cox Communications, Time Warner Inc. and
AT&T Media Services in support of their hotel movie on demand business in
New York, Chicago, Honolulu and San Diego. In addition, the Company
directly supports specific hotel systems such as the Opryland in
Nashville, Tennessee. In total, the Company currently supports
approximately 20,000 hotel rooms with its SeaChange video-on-demand
products. 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 Telecommunications Act of 1996 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. The Company believes that its patented video
server technology is well suited to meet this market opportunity.
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 television 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. As television broadcasters continue to automate their entire
programming in order to reduce overall operating costs and improve reliability,
the Company believes the Broadcast Medicluster products provide a unique
solution that addresses these requirements.
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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 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 low cost standard
computer industry 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 effective than individual functional products not
specifically designed to work together. The Company believes that providing
complete integrated 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, network and storage software
and their complete integration. 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 computer hardware components wherever possible to maintain its
focus on software development.
Provide Superior Customer Service and Support. The Company's products
operate in customer 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 and maintaining 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, 1999 more than 37% 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 integrates hardware, software and television components into its
products. These 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 files from the master video library and distributes
them over the operator's data network to appropriate
headends, where they are stored in video servers for
future play.
Insertion: Following a network cue, the SeaChange video switch module
automatically inserts the video stream into the network
feed (initiating the analog conversion, if necessary), 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 a variety of different models of the spot system to
support operators' differing requirements. The selling price for the SeaChange
SPOT Systems ranges from under $100,000 to several million dollars; the 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, remote control devices, 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 System. The Company has developed and is testing its ITV
system. This system is sold to cable television operators and other
telecommunications companies and is intended to enable them to offer video
on demand and other interactive services to their subscribers who have
digital set-top boxes and access two way cable plants. This system
comprises MediaCluster servers which will reside at headends or nodes in
the cable system, SeaChange's Command Center 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, movies and other programming 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.
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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 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, patented software
technology that enables multiple Video Server 100s (and variants) to operate
together as an integrated video server.
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. 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 1997, 1998 and
1999, revenues from the Company's five largest customers represented
approximately 66%, 55% and 47% respectively, of the Company's total
revenues. Customers accounting for more than 10% of total revenues
consisted of Tele-Communications, Inc. (24%), Time Warner, Inc. (17%) and
Comcast Corporation (10%) in 1997; Tele-Communications, Inc. (24%) and Time
Warner, Inc. (15%) in 1998; and AT&T Media Services (15%) and Time Warner,
Inc. (10%) in 1999. 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 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, 1999,
the Company's selling and marketing organization consisted of 30 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 $11.8
million, $15.8 million and $16.3 million for the years ended December 31, 1997,
1998 and 1999, respectively. At December 31, 1999, 106 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 Dresher, Pennsylvania. 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. In December
1999, the Company enhanced its research and development capabilities through the
acquisition of Digital Video Arts, Ltd., a developer of custom software products
specializing in digital video and interactive television. 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.
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 nCube (formerly SkyConnect, Inc.) In the market for long-form video
products including video on demand, the Company competes with various companies
offering video server platforms such as Concurrent Computer Corp., nCube, Diva
Systems Corp. 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 Grass Valley Group, Inc., Pinnacle Systems, Inc.,
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, 1999, the Company employed 336 persons, including 106 in
research and development, 125 in customer service and support, 30 in selling and
marketing, 45 in manufacturing and 30 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
If we are unable to manage our growth and the related expansion in our
operations effectively, our business may be harmed.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires effective planning and
management. Our growth has placed, and our anticipated future operations will
continue to place, a significant strain on our management, administrative,
operational and other resources. To manage future growth effectively, we must
continue to improve our management and operational controls, enhance our
reporting systems and procedures, integrate new personnel and manage expanded
operations.
13
<PAGE>
We may not be able to hire and retain highly skilled employees, particularly
managerial, engineering, selling and marketing, finance and manufacturing
personnel, which could affect our ability to compete effectively.
Our success depends to a significant degree upon the continued contributions of
our key management, engineering, selling and marketing and manufacturing
personnel, many of whom would be difficult to replace. We do not have employment
contracts with our key personnel. We believe that our future success will also
depend in large part upon our 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 we 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 our business, financial condition and results of
operations.
Our operating results are likely to fluctuate significantly.
As a result of our limited operating history and the rapidly evolving nature of
the markets in which we compete, our quarterly and annual revenues and operating
results are likely to fluctuate from period to period. These fluctuations may be
caused by a number of factors, many of which are beyond our control, including:
o the timing and recognition of revenue from significant orders;
o the seasonality of the placement of customer orders;
o the success of our products;
o increased competition;
o changes in our pricing policies or those of our competitors;
o the financial stability of major customers;
o new product introductions or enhancements by competitors;
o delays in the introduction of our products or product enhancements;
o customer order deferrals in anticipation of upgrades and new products;
o the ability to access a sufficient supply of sole source and third party
components;
o the quality and market acceptance of new products we may develop or are in
the process of developing;
o the timing and nature of selling and marketing expenses, such as trade
shows and other promotions;
o personnel changes;
o risks associated with our international sales; and
o economic conditions affecting our customers.
Any significant cancellation or deferral of purchases of our products could have
a material adverse effect on our 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. Our expense levels are based, in part, on our expectations
as to our future revenues, and we may be unable to adjust spending in a timely
manner to compensate for any revenue shortfall. If our revenues are below our
expectations, our operating results are likely to be adversely affected and net
income may be disproportionately affected because a significant portion of our
expenses do not vary with revenues.
Because of these factors, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indications of our future performance. In addition, due to all of the
foregoing factors, in some future quarter our operating results may be below the
expectations of public market analysts and investors.
Seasonal trends may cause our quarterly operating results to fluctuate which may
adversely affect the market price of our common stock.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter and such variations are likely to
continue. We believe that fluctuations in the number of orders being placed from
quarter to quarter are 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.
We expect that there will continue to be fluctuations in the number and value of
orders received. As a result, our results of operations have in the past and
likely will, at least in the near future, fluctuate
14
<PAGE>
in accordance with such purchasing activity. Operating expenses also vary with
the number, timing and significance of our new product and product enhancement
introductions and those of our 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 us to forecast, and these
or other factors may materially adversely affect our business, financial
condition and results of operations for one quarter or a series of quarters.
Only a small portion of our expenses vary with revenues in the short-term and
there would likely be a material adverse effect on our operating results if
future revenues are lower than expectations.
Due to the lengthy sales cycle involved in the sale of our products, our
quarterly results may vary and make period-to-period comparisons of our
operating results meaningless.
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 our digital
video, movie and broadcast products are typically lengthy and subject to a
number of significant risks, including customer's budgetary constraints and
internal acceptance reviews, over which we have little or no control. Based upon
all of the foregoing, we believe that our quarterly revenues, expenses and
operating results are likely to vary significantly in the future, that
period-to-period comparisons of our results of operations are not necessarily
meaningful and that, in any event, such comparisons should not be relied upon as
indications of future performance.
Intense competition may adversely affect our financial condition and operating
results.
The market for digital video, movie and broadcast products is highly
competitive. If we are unable to compete effectively, our business, prospects,
financial condition and operating results would be materially adversely
affected. We currently compete 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, we compete against various computer companies offering video server
platforms and television equipment manufacturers.
Due to the rapidly evolving markets in which we compete, 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 our business, financial condition and results of
operations. Many of our current and potential competitors have greater
financial, selling and marketing, technical and other resources than we do.
Moreover, our competitors may also foresee the course of market developments
more accurately than us. Although we believe that we have certain technological
and other advantages over our competitors, realizing and maintaining such
advantages will require a continued high level of investment by us in research
and product development, marketing and customer service and support. There can
be no assurance that we will have sufficient resources to continue to make such
investments or that the we will be able to make the technological advances
necessary to compete successfully with our existing competitors or with new
competitors.
The success of our business model is dependent on the acceptance of the 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. Our 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 our
business, financial condition and results of operations.
Our success is contingent on our ability to penetrate the broadcast television
market.
To date our products have been purchased primarily by cable television operators
and telecommunications companies. Our success depends in part on the penetration
of new markets. In particular, we 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 we have not significantly
addressed. There can be no assurance that we will be successful in marketing and
selling broadcast products to customers in the broadcast television market. Any
inability to penetrate this new market would have a material adverse effect on
our business, financial condition and results of operations.
15
<PAGE>
A decline in sales of our SPOT System could materially affect our revenues.
Sales of our SPOT System have historically accounted for a large percentage of
our revenues, and this product and related enhancements are expected to continue
to account for a significant portion of our revenues in 2000. Our success
depends in part on continued sales of our SPOT System. A decline in demand or
average selling prices for our 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 our business, financial condition and results of
operations.
If we are unable to continue to develop successfully new products or enhance
existing products, our financial condition and operating results will suffer.
Our future success requires that we develop and market additional products that
achieve significant market acceptance and enhance our current products. There
can be no assurance that we 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 our 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 our existing products. Moreover, there
can be no assurance that, despite testing by us, and by current and potential
customers, errors or failures will not be found in our 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 our competitive position. Our
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 our business, financial condition and results of operations.
If we fail to respond to rapidly changing technologies related to digital video,
our business, financial condition and results of operations would be materially
adversely effected.
The markets for our 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 us or reduce the cost of existing
products or services, any of which could enable our existing or potential
customers to fulfill their video needs better and more cost efficiently than
with our products. Our future success will depend on our ability to enhance our
existing digital video products, including the development of new applications
for our 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 we will be successful in enhancing our 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 our
products or technologies uncompetitive, unmarketable or obsolete, or that
announcements of currently planned or other new product offerings by either by
us or our competitors will not cause customers to defer or fail to purchase our
existing solutions.
Because our customer base is highly concentrated among a limited number of large
customers, the loss of or reduced demand of these customers could have a
material adverse effect on our business, financial condition and results of
operations.
Our 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 our revenues in any year. In 1997, 1998 and 1999,
revenues from our five largest customers represented approximately 66%, 54% and
47%, respectively, of our total revenues. In 1997, 1998 and 1999, three, two and
two customers, respectively, each accounted for more than 10% of our revenues.
We generally do not have written continuing purchase agreements with our
customers and do not have any written agreements that require customers to
purchase fixed minimum quantities of our products. Our 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, we derive a substantial portion of our revenues from products that
have a selling price in excess of $200,000. We believe that revenue derived from
current and future large customers will continue to represent a significant
proportion of our total revenues. The loss of, or reduced demand for products or
related services from, any of our major customers could have a material adverse
effect on our business, financial condition and results of operations.
16
<PAGE>
Because we purchase certain of the components used in manufacturing our product
from a sole supplier and we use a limited number of third party manufacturers to
manufacture our product, our business, financial condition and results of
operation could be materially adversely affected by a failure of this supplier
or these manufacturers.
Certain key components of our products are currently purchased from a sole
supplier, including a computer chassis manufactured by Trimm Technologic Inc., a
disk controller manufactured by Mylex Corporation, an MPEG-2 decoder card
manufactured by Vela Research, Inc. and an MPEG-2 encoder manufactured by
Optivision, Inc. We have 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 us. However, we 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 our business, financial condition and results of operations.
In addition, we rely on a limited number of third parties who manufacture
certain components used in our 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
our future volume or quality requirements or that such services will continue to
be available to us 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 us could have a material
adverse effect on our business, financial condition and results of operations.
The success of our business model depends on the continued deregulation of the
telecommunications and television industries.
The telecommunications and television industries are subject to extensive
regulation in the United States and other countries. Our 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 telecommunications companies
will successfully enter this or related markets. Moreover, the growth of our
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 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 our 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 our
customers, and thereby materially adversely affect our business, financial
condition and results of operations.
If we are unable to protect our intellectual property we may lose a valuable
assets or incur costly litigation to protect our rights.
Our success and ability to compete depend upon our intellectual property,
including our propriety technology and confidential information. We rely on
patent, trademark, trade secret and copyright laws to protect our intellectual
property. Despite our efforts to protect our intellectual property, a third
party could copy or otherwise obtain our proprietary information without
authorization. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology, or
duplicate our products or our other intellectual property. We may have to resort
to litigation to enforce our intellectual property rights, to protect our trade
secrets or know-how or to determine their scope, validity or enforceability.
Enforcing or defending our proprietary technology is expensive, could cause the
diversion of our resources, and may not prove successful. Our protective
measures may prove inadequate to protect our proprietary rights, and any failure
to enforce or protect our rights could cause us to lose a valuable asset.
Future acquisitions may be difficult to integrate, disrupt our business, dilute
stockholder value or divert management attention.
As part of our business strategy, we may seek to acquire or invest in
businesses, products or technologies that we believe could complement or expand
our business, augment our market coverage, enhance our technical capabilities or
otherwise offer growth opportunities. Acquisitions could create risks for us,
including:
17
<PAGE>
o difficulties in assimilation of acquired personnel, operations,
technologies or products;
o unanticipated costs associated with acquisitions;
o diversion of management's attention from other business concerns;
o adverse effects on our existing business relationships with suppliers and
customers; and
o use of substantial portions of our available cash, including the proceeds
of this offering, to consummate the acquisitions.
In addition, if we consummate acquisitions through an exchange of our
securities, our existing stockholders could suffer significant dilution. Any
future acquisitions, even if successfully completed, may not generate any
additional revenue or provide any benefit to our business.
We are subject to risks of operating internationally.
International sales accounted for approximately 12%, 13% and 23% of our revenues
in 1997, 1998 and 1999, respectively. We expect that international sales will
account for a significant portion of our business in the future. However, there
can be no assurance that we will be able to maintain or increase international
sales of its products. International sales are subject to a variety of risks,
including:
o difficulties in establishing and managing international distribution
channels;
o difficulties in selling, servicing and supporting overseas products and in
translating products into foreign languages;
o the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property;
o multiple and possibly overlapping tax structures;
o currency and exchange rate fluctuations; and
o economic or political changes in international markets.
Our executive officers, directors and major stockholders possess significant
control over us which may lead to conflicts with other stockholders over
corporate governance matters.
Our officers, directors and their affiliated entities, and other holders of 5%
or more of our outstanding capital stock, together beneficially owned
approximately 45.17% of the outstanding shares of our common stock as of March
13, 2000. As a result, such persons will have the ability to elect our board of
directors and to determine the outcome of corporate actions requiring
stockholder approval, irrespective of how other of our stockholders may vote.
This concentration of ownership may have the effect of delaying or preventing a
change in control of us which may be favored by a majority of the remaining
stockholders, or cause a change of control not favored by our other
stockholders.
Year 2000 compliance issues could harm our business.
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of our
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
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 105,000 square feet under a lease which expires on March 31, 2005
with annual base rent of $530,000. 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 purchased approximately
24,000 square feet of office and manufacturing space in Greenville,
New Hampshire on February 15, 2000 for $280,000. Also, the Company leases two
facilities totaling approximately 13,000 square feet in Greenville,
New Hampshire that are used for the development and final assembly of its video
servers. Acquired in December with the acquisition of Digital Video Arts was
approximately 3,442 square feet of office space in Dresher, Pennsylvania, which
is primarily used for the development of custom software products for companies
specializing in digital video and interactive television. The Company also
leases small research and development and/or sales and support offices in
Atlanta, Georgia, San Francisco, California, Denver, Colorado, Orlando, Florida,
St. Louis, Missouri, Reno, Nevada, Valbonne, France, and Singapore.
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, 1999 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. All prices reflect the Company's 3-for-2 stock split which
became effective on December 27, 1999.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1999
First Quarter $6.080 $4.000
Second Quarter 12.080 5.300
Third Quarter 14.220 8.750
Fourth Quarter 35.380 10.670
Year ended December 31, 1998
First Quarter 5.667 4.417
Second Quarter 8.667 3.959
Third Quarter 7.833 3.833
Fourth Quarter 5.833 3.833
</TABLE>
On March 28, 2000, the last reported sale price of the Common Stock on the
Nasdaq National Market was $73.50. As of March 28, 2000, there were
approximately 133 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.
19
<PAGE>
On December 30, 1999, in connection with the acquisition by the Company of all
of the issued and outstanding shares of capital stock of Digital Video Arts,
Ltd., the Company issued an aggregate of 330,000 shares of common stock to the
shareholders of Digital Video Arts, Ltd. and to Corum Group Ltd. pursuant to
Section 4(2) of the Securities Act. No underwriter was used in connection with
this private placement of securities.
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, 1995, 1996, 1997, 1998 and 1999
and the consolidated balance sheet data at December 31, 1995, 1996, 1997, 1998
and 1999 are detailed below.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues
Systems ............................................... $ 21,999 $ 45,745 $ 60,414 $ 58,033 $ 68,457
Services .............................................. 1,965 4,378 8,268 14,891 16,764
-------- -------- -------- -------- --------
23,964 50,123 68,682 72,924 85,221
-------- -------- -------- -------- --------
Costs of revenues
Systems ............................................... 14,917 27,133 34,740 35,772 38,889
Services .............................................. 2,014 4,538 7,898 13,611 14,962
-------- -------- -------- -------- --------
16,931 31,671 42,638 49,383 53,851
-------- -------- -------- -------- --------
Gross profit ........................................... 7,033 18,452 26,044 23,541 31,370
-------- -------- -------- -------- --------
Operating expenses:
Research and development .............................. 2,367 5,393 11,758 15,763 16,302
Selling and marketing ................................. 2,016 4,694 6,248 8,566 8,595
General and administrative ............................ 1,024 2,364 3,932 6,132 5,335
Restructuring of operations ........................... -- -- -- 676 --
Write-off of acquired in-process
research and development ............................. -- -- 5,290 -- --
Acquisition costs ..................................... -- -- -- -- 684
-------- -------- -------- -------- --------
5,407 12,451 27,228 31,137 30,916
-------- -------- -------- -------- --------
Income (loss) from operations .......................... 1,626 6,001 (1,184) (7,596) 454
Interest income, net ................................... 121 375 663 235 28
-------- -------- -------- -------- --------
Income (loss) before income taxes ...................... 1,747 6,376 (521) (7,361) 482
Provision (benefit) for income taxes ................... 713 2,483 1,776 (2,789) (15)
-------- -------- -------- -------- --------
Net income (loss) ...................................... $ 1,034 $ 3,893 $ (2,297) $ (4,572) $ 497
======== ======== ======== ======== ========
Basic earnings (loss) per share (1) .................... $.18 $.48 $(.15) $(.24) $.02
==== ==== ===== ===== ====
Diluted earnings (loss) per share (1) .................. $.06 $.22 $(.15) $(.24) $.02
==== ==== ===== ===== ====
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital .............................. $ 4,483 $26,943 $24,949 $22,871 $23,365
Total assets ................................. 14,651 46,467 52,512 54,527 62,304
Long-term liabilities ........................ -- -- -- 1,027 1,231
Deferred revenue ............................. 767 2,192 3,851 3,939 4,380
Total liabilities ............................ 8,646 14,240 17,510 23,207 27,963
Redeemable convertible preferred stock ....... 4,008 -- -- -- --
Total stockholders' equity ................... 1,997 32,227 35,004 31,320 34,341
</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 title and risk of loss has passed to the
customer, there is evidence of an arrangement, fees are fixed and determinable
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 30, 1999, the Company acquired all of the outstanding capital stock
of Digital Video Arts, Ltd. ("DVA") in a stock for stock deal accounted for as a
pooling of interests. DVA is a developer of custom software products
specializing in digital video and interactive television. As a result of the
acquisition, DVA became a wholly-owned subsidiary of the Company. The
accompanying consolidated financial statements for all the periods presented
have been restated to include the results of operations, financial position and
cash flows of DVA.
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,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Systems
Digital advertising insertion .............. 81.5% 60.5% 52.3%
Movies ..................................... 6.5 13.3 7.7
Broadcast .................................. -- 5.8 19.7
ITV ........................................ -- -- .6
Services ....................................... 12.0 20.4 19.7
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Systems
Digital advertising insertion .............. 47.1 36.4 29.7
Movies ..................................... 3.5 9.3 4.8
Broadcast .................................. -- 3.3 10.8
ITV ........................................ -- -- .4
Services ....................................... 11.5 18.7 17.6
----- ----- -----
62.1 67.7 63.3
----- ----- -----
Gross profit ................................... 37.9 32.3 36.7
----- ----- -----
Operating expenses:
Research and development ............. 17.1 21.6 19.1
Selling and marketing ................ 9.1 11.7 10.1
General and administrative ........... 5.7 8.4 6.3
Restructuring of operations .......... -- .9 --
Write-off of acquired in-
process research and
development ......................... 7.7 -- --
Acquisition costs .................... -- -- .8
----- ----- -----
39.6 42.6 36.3
----- ----- -----
Income (loss) from operations .................. (1.7) (10.3) .4
Interest income, net ........................... 1.0 .3 --
----- ----- -----
Income (loss) before income taxes .............. (.7) (10.0) .4
Provision (benefit) for income taxes ........... 2.6 (3.8) --
----- ----- -----
Net income (loss) .............................. (3.3)% (6.2)% .4%
===== ===== =====
Gross profit:
Systems
Digital advertising insertion .............. 42.2% 39.8% 43.2%
Movies ..................................... 46.3% 30.0% 38.4%
Broadcast .................................. -- 42.7% 45.3%
ITV ........................................ -- -- 35.2%
Services ....................................... 4.5% 8.6% 10.7%
</TABLE>
23
<PAGE>
Year ended December 31, 1998 Compared to the Year Ended December 31, 1999
Revenues
Systems. The Company's systems revenues consist of sales of its digital
video insertion, movie, broadcast and interactive television system
products. Systems revenues increased 18% from $58.0 million in 1998 to
$68.5 million in 1999. The increased systems revenues in 1999 compared to
1998 resulted from a increase of $12.6 million in broadcast systems
revenues partially offset by a $3.1 million decrease in movie systems
revenues. In addition, the Company had revenues of $500,000 related to
first-time sales of residential ITV system sales. The Company expects
future systems revenue growth, if any, to come principally from its
broadcast and interactive television system products.
For the years ended December 31, 1998 and 1999, certain customers accounted
for more than 10% of the Company's total revenues. Individual customers
accounted for 24% and 15% of total revenues in 1998 and 15% and 10% of
total revenues in 1999. 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 13% and 23% of total
revenues in the years ended December 31, 1998 and 1999, respectively. The
Company expects that international sales will remain a significant portion
of the Company's business in the future. As of December 31, 1999,
substantially 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 13% to $16.8 million in
1999 from $14.9 million in 1998. This increase in services revenues
primarily resulted from the renewals of maintenance and support contracts
and the impact of a growing installed base of systems.
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 9% from $35.8 million in 1998 to $38.9
million in 1999. In 1999, the increase in costs of systems revenues
reflects the higher revenue level and increased manufacturing labor and
overhead costs incurred to support changes in the product mix, including
the introduction of the new broadcast and video on demand products.
Systems gross profit as a percentage of systems revenues were 38.4% and
43.2% in 1998 and 1999, respectively. The increase in systems gross profit
in 1999 was primarily due to higher systems revenue and lower material and
labor costs as a percentage of systems revenue. The gross profits in 1998
and 1999 were impacted by increases of approximately $2.0 million and
$500,000, 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 10% from
$13.6 million in 1998 to $15.0 million in 1999, 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, broadcast and video on demand systems
and costs associated with providing movie content. Services gross profit
margin as a percentage of services revenue was 9.0% in 1998 and 11% in
1999. The higher services gross profit in 1999 is primarily due to higher
level of services revenue. 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 3% from $15.8 million in 1998 to $16.3
million in 1999. The increase in the dollar amount in 1999 was primarily
attributable to the hiring and contracting of additional development
personnel which reflects the Company's continuing investment in new
24
<PAGE>
products. 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 remained flat
at $8.6 million in 1998 and 1999.
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
decreased 13% from $6.1 million in 1998 to $5.3 million in 1999. The
decrease in the dollar amounts was primarily attributable to lower payroll
and related costs related to the centralization of accounting and
administrative functions and lower legal costs.
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.
Acquisition Costs. On December 30, 1999, the Company acquired all of the
authorized and outstanding common stock of Digital Video Arts, Ltd. ("DVA")
in exchange for 330,000 shares of the Company's common stock using an
exchange ratio of 0.033 of one share of the Company's common stock for each
DVA share. The acquisition was accounted for as a pooling of interests. DVA
is a developer of custom software products specializing in digital video
and interactive television. As a result of the acquisition, DVA became a
wholly-owned subsidiary of the Company. Total revenues of $85.2 million for
the year ended December 31, 1999 consisted of $84.2 million of the
Company's revenues and $1.0 million of DVA's revenues. Net income of
$497,000 for the same period consisted of the Company's net income of $1.1
million and a DVA net loss of $592,000. Included in net income were
acquisition costs of $684,000 consisting primarily of professional service
fees. Due to the acquisition, DVA's previously unrecognized tax benefits of
operating loss carryforwards were recognized by the combined Company in the
applicable period.
Interest Income, net. Interest income, net was approximately $235,000 and
$28,000 in 1998 and 1999, respectively. The decrease in interest income,
net in 1999 primarily resulted from lower average invested balances in 1999
and interest expense on borrowings.
Provision (Benefit) for Income Taxes. The Company's effective tax benefit
rate was 37.9% and 3% in 1998 and 1999, respectively, due to the taxable
loss in 1998 and the utilization of operating tax loss carryforwards
associated with the acquisition of DVA in 1999.
The Company had net deferred tax assets of $1,967,000 and $2,900,000 at
December 31, 1998 and 1999, 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.
Year ended December 31, 1997 Compared to the Year Ended December 31, 1998
Revenues
Systems. Systems revenues decreased 4% from $60.4 million in 1997 to $58.0
million in 1998. 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
25
<PAGE>
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.
For the years ended December 31, 1997 and 1998, certain customers accounted
for more than 10% of the Company's total revenues. Individual customers
accounted for 24%, 17% and 10% of total revenues in 1997 and 24% and 15% of
total revenues in 1998. International sales accounted for approximately 12%
and 13% of total revenues in the years ended December 31, 1997 and 1998,
respectively.
Services. The Company's services revenues increased 80% to $14.9 million in
1998 from $8.3 million in 1997. 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 increased 3% from $34.7 million in 1997
to $35.8 million in 1998. In 1998, the increase in costs of systems
revenues reflects 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 42.5% and
38.4% in 1997 and 1998, respectively. 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 system products. The gross profits in 1997 and 1998 were impacted
by increases of approximately $1.7 million and $2.0 million, respectively,
in the Company's inventory valuation allowance.
Services. Costs of services revenues increased 72% from $7.9 million in
1997 to $13.6 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. Services gross profit as a percentage of services
revenue was 4.5% and 8.6% in 1997 and 1998, respectively. Improvements in
the services gross profit in 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.
Research and Development. Research and development expenses increased 34%
from $11.8 million in 1997 to $15.8 million in 1998. The increase in the
dollar amount in 1998 was primarily attributable to the hiring and
contracting of additional development personnel which reflects the
Company's continuing investment in new products and the additional
resources acquired with IPC.
Selling and Marketing. Selling and marketing expenses increased 37% from
$6.2 million in 1997 to $8.6 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.
General and Administrative. General and administrative expenses increased
56% from $3.9 million in 1997 $6.1 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.
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
26
<PAGE>
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 has substantially completed this
in-process development as of December 31, 1999 and expects to complete some
features in 2000.
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, net. Interest income, net was approximately $663,000 and
$235,000 in 1997 and 1998, respectively. The decrease in interest income,
net in 1998 primarily resulted from lower average invested balances in
1998.
Provision (Benefit) for Income Taxes. 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 37.9% 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.
27
<PAGE>
Quarterly Results of Operations
The following table presents certain unaudited quarterly information for the
eight quarters ended December 31, 1999. 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,
--------- -------- --------- -------- --------- -------- --------- --------
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Financial
Data (Unaudited):
Revenues
Systems ................... $ 14,807 $ 13,207 $ 14,240 $ 15,779 $ 16,924 $ 17,443 $ 17,507 $ 16,583
Services .................. 3,531 3,728 3,924 3,708 3,887 4,231 4,202 4,444
-------- -------- -------- -------- -------- -------- -------- --------
18,338 16,935 18,164 19,487 20,811 21,674 21,709 21,027
-------- -------- -------- -------- -------- -------- -------- --------
Costs of revenues
Systems ................... 8,967 8,223 8,897 9,685 9,873 10,080 9,895 9,041
Services .................. 3,092 3,206 3,861 3,452 3,444 3,633 3,813 4,072
-------- -------- -------- -------- -------- -------- -------- --------
12,059 11,429 12,758 13,137 13,317 13,713 13,708 13,113
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............... 6,279 5,506 5,406 6,350 7,494 7,961 8,001 7,914
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses
Research and development .. 4,003 3,900 3,897 3,963 4,120 4,274 3,979 3,929
Selling and marketing ..... 1,921 2,158 2,013 2,474 1,996 2,031 2,154 2,414
General and administrative 1,637 1,801 1,259 1,435 1,388 1,360 1,332 1,255
Restructuring of operations 676 -- -- -- -- -- -- --
Acquisition costs ......... -- -- -- -- -- -- -- 684
-------- -------- -------- -------- -------- -------- -------- --------
8,237 7,859 7,169 7,872 7,504 7,665 7,465 8,282
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ................ (1,958) (2,353) (1,763) (1,522) (10) 296 536 (368)
Interest income, net ....... 107 77 26 25 11 8 (13) 22
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes .............. (1,851) (2,276) (1,737) (1,497) 1 304 523 (346)
Provision (benefit) for
income taxes .............. (709) (769) (770) (541) 33 (96) 231 (183)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .......... $ (1,142) $ (1,507) $ (967) $ (956) $ (32) $ 400 $ 292 $ (163)
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share ................. $ (.06) $ (.08) $ (.05) $ (.05) $ 0.00 $ 0.02 $ 0.01 $ (0.01)
Diluted earnings (loss)
per share ................. $ (.06) $ (.08) $ (.05) $ (.05) $ 0.00 $ 0.02 $ 0.01 $ (0.01)
Gross profit
Systems ................... 39.4% 37.7% 37.5% 38.6% 41.7% 42.2% 43.5% 45.5%
Services .................. 12.4% 14.0% 1.6% 6.9% 11.4% 14.1% 9.3% 8.4%
</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.
28
<PAGE>
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.
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
The Company has financed its operations and capital expenditures primarily with
the proceeds of the Company's common stock, borrowings and cash flows generated
from operations. Cash, cash equivalents and marketable securities increased $5.9
million from $5.4 million at December 31, 1998 to $11.3 million at December 31,
1999. Working capital increased from approximately $22.9 million at December 31,
1998 to approximately $23.4 million at December 31, 1999.
Net cash used in operating activities was approximately $9.0 million and $7.5
million for the years ended December 31, 1997 and 1998, respectively. Net cash
provided by operating activities was approximately $8.6 million for the year
ended December 31,1999. The net cash provided by operating activities during
1999 was the result of the net income adjusted for non-cash 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 provided cash in operations include an
increase in accounts payable and a decrease in income taxes receivable,
primarily resulting from a $1.8 million federal income tax refund. These items
that provided cash from operations was offset by an increase in inventories,
principally attributable to the increase in the number of product lines.
Net cash used in investing activities was approximately $10.8 and $3.1 million
for the years ended December 31, 1997 and 1999, 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 $4.1 million and
$364,000 for the years ended December 31, 1998 and 1999, respectively. Net cash
used in financing activities was approximately $454,000 in the year ended
December 31, 1997. In 1999, the cash provided by financing included $1.1 million
of borrowings under the equipment line of credit and $2.0 million 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. During the
same period, cash used by financing activities included the repayment of $2.2
million outstanding under the revolving line of credit and the equipment line of
credit and $500,000 in principal payments under the Company's capital lease
obligations.
29
<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 expired in
October 1999 and was subsequently extended until March 31, 2000. The equipment
line of credit expired in June 1999 and was subsequently extended until March
31, 2000. The Company is in the process of renewing both lines of credit.
Borrowings under the lines of credit are secured by substantially all of the
Company's assets. Loans made under the revolving line of credit would generally
bear interest at a rate per annum equal to the bank's base rate plus .5%. Loans
made under the equipment line of credit bear interest at a rate per annum equal
to the bank's base rate plus 1.0% (9.5% at December 31, 1999). 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, 1999 the Company
was in compliance with all covenants. As of December 31, 1999, there were no
borrowings against the line of credit. As of December 31, 1999, borrowings
against the equipment line of credit were $2,332,000. Maturities of the
equipment line of credit are $859,000, $614,000 and $215,000 in 2000, 2001 and
2002, 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,
1999.
Impact of Year 2000.
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
30
<PAGE>
Effects of Inflation
Management believes that financial results have not been significantly impacted
by inflation and price changes.
Recent Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133,"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. The Company will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the effective date of the FASB Statement
No. 133," in fiscal year 2001. 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 our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's second quarter of the
fiscal year 2000. The effects of applying this guidance, if any, will be
reported as a cumulative effect adjustment resulting from a change in accounting
principle. The Company's evaluation of SAB 101 is not yet complete.
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, 1999, the Company had $1,704,000
outstanding related to variable rate U.S. dollar denominated short-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 $16,000.
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, 1999 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 securities 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, 1999, 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-21, 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 1999 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 Management
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>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheet as of December 31, 1998 and 1999 F-2
Consolidated Statement of Operations for the years ended December 31, 1997, 1998 and 1999 F-3
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999 F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1998 and 1999 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule of the Registrant is filed as part of
this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
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.
(c) 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 30, 2000
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 30, 2000
- ------------------------------
Chairman of the Board and Director
William C. Styslinger, III (Principal Executive Officer)
/s/ William L. Fiedler Vice President, Finance and March 30, 2000
- ----------------------
Administration, Chief Financial
William L. Fiedler Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/ Martin R. Hoffmann Director March 30, 2000
- ----------------------
Martin R. Hoffmann
/s/ Paul Saunders Director March 30, 2000
- -----------------
Paul Saunders
/s/ Carmine Vona Director March 30, 2000
- ----------------
Carmine Vona
</TABLE>
35
<PAGE>
Exhibit Index
Exhibit No. Description
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 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 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 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 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.
(incorporated by reference to the Company's Annual Report on Form 10-K
filed March 24, 1999)
10.4 Sublease agreement dated June 20, 1996 between Harding Lawson
Associates, Inc. and the Company. (incorporated by reference to the
Company's Annual Report on Form 10-K filed March 24, 1999)
10.5 Loan and Security Agreement dated November 10, 1990 between Silicon
Valley Bank and the Company. (incorporated by reference to the
Company's Annual Report on Form 10-K filed March 24, 1999)
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 2.1 to the
Company's Current Report on Form 8-K filed December 24, 1997).
10.9 Stock Purchase Agreement, dated as of December 30, 1999, by and among
the Company, Digital Video Arts, Ltd., the stockholders of Digital
Video Arts, Ltd. and Corum Group Ltd. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed January
14, 2000).
10.10 Registration Rights Agreement, dated as of December 30, 1999, by and
among the Company, Digital Video Arts, Ltd., the stockholders of
Digital Video Arts, Ltd. and Corum Group Ltd. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
filed January 14, 2000).
10.11 Escrow Agreement, dated as of December 30, 1999, by and among the
Company, Digital Video Arts, Ltd., the stockholders of Digital Video
Arts, Ltd. and State Street Bank and Trust Company as escrow agent
(incorporated by reference to Exhibit 2.3 to the Company's Current
Report on Form 8-K filed January 14, 2000).
10.12* First Loan Modification Agreement, dated as of March 27, 2000, by and
between the Company and Silicon Valley Bank.
10.13* Revolving Line of Credit Amendment, dated as of March 1, 2000, by and
between the Company and Silicon Valley Bank.
21.1* List of Significant Subsidiaries
23.1* Consent of PricewaterhouseCoopers LLP.
27.1* Financial Data Schedule (For SEC Edgar Filing Only; Intentionally
Omitted).
27.2* Financial Data Schedule (For SEC Edgar Filing Only; Intentionally
Omitted).
* Filed herewith.
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, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2000
F-1
<PAGE>
SeaChange International, Inc.
Consolidated Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 5,442 $ 11,318
Accounts receivable, net of allowance for doubtful
accounts of $870 at December 31, 1998 and
$908 at December 31, 1999 17,663 17,840
Inventories 16,157 17,128
Income taxes receivable 2,117 60
Prepaid expenses 1,705 1,508
Deferred income taxes 1,967 2,243
-------- --------
Total current assets 45,051 50,097
Property and equipment, net 8,050 10,538
Other assets 229 884
Goodwill and intangibles, net 1,197 785
-------- --------
$ 54,527 $ 62,304
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ 2,000 $ --
Current portion of equipment line of credit
and obligations under capital lease 555 1,048
Accounts payable 10,103 15,038
Accrued expenses 3,404 3,499
Customer deposits 1,704 2,092
Deferred revenue 3,939 4,380
Income taxes payable 475 675
-------- --------
Total current liabilities 22,180 26,732
-------- --------
Long-term equipment line of credit and
obligations under capital lease 1,027 1,231
-------- --------
Commitments (Note 11)
Stockholders' Equity
Common stock, $.01 par value; 50,000,000
shares authorized; 20,918,260 shares and
21,285,855 shares issued at December 31,
1998 and 1999, respectively 209 213
Additional paid-in capital 33,107 35,634
Accumulated deficit (1,937) (1,440)
Treasury stock, 60,750 shares -- (1)
Accumulated other comprehensive income (59) (65)
-------- --------
Total stockholders' equity 31,320 34,341
-------- --------
$ 54,527 $ 62,304
======== ========
</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,
----------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Systems $ 60,414 $ 58,033 $ 68,457
Services 8,268 14,891 16,764
------------ ------------ ------------
68,682 72,924 85,221
------------ ------------ ------------
Costs of revenues
Systems 34,740 35,772 38,889
Services 7,898 13,611 14,962
------------ ------------ ------------
42,638 49,383 53,851
------------ ------------ ------------
Gross profit 26,044 23,541 31,370
------------ ------------ ------------
Operating expenses
Research and development 11,758 15,763 16,302
Selling and marketing 6,248 8,566 8,595
General and administrative 3,932 6,132 5,335
Restructuring of operations -- 676 --
Write-off of acquired
in-process research and
development 5,290 -- --
Acquisition costs -- -- 684
------------ ------------ ------------
27,228 31,137 30,916
------------ ------------ ------------
Income (loss) from operations (1,184) (7,596) 454
Interest income, net 663 235 28
------------ ------------ ------------
Income (loss) before income taxes (521) (7,361) 482
Provision (benefit) for income taxes 1,776 (2,789) (15)
------------ ------------ ------------
Net income (loss) $ (2,297) $ (4,572) $ 497
============ ============ ============
Basic and diluted earnings (loss) per share $ (.15) $ (.24) $ .02
============ ============ ============
Shares used in calculating:
Basic earnings (loss) per share 15,716,000 18,982,000 20,883,000
============ ============ ============
Diluted earnings (loss) per share 15,716,000 18,982,000 21,774,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Retained
------------------- Additional earnings Cumulative Total Comprehensive
Number Par paid-in (accumulated) translation Treasury stockholders' income
of shares value capital deficit) adjustment stock equity (loss)
---------- ------ ---------- ------------- ----------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996,
(prior to split and
acquisition) 12,859,234 $ 129 $26,167 $ 5,534 $ -- $ -- $31,830 $ 4,262
Issuance of common stock
in connection with
3:2 stock split 6,429,616 64 (64) -- -- -- --
Issuance of common stock
in connection with
acquisition of
Digital Video Arts, Ltd. 312,922 3 998 (602) -- -- 399
---------- ----- ------- ------- ------ ------ -------
Balance at
December 31, 1996 19,601,772 196 27,101 4,932 -- -- 32,229 $ 4,262
Purchase of treasury stock (13,500) -- -- -- -- -- --
Compensation expense
associated
with stock issuance -- -- 45 -- -- -- 45
Issuance of common stock
pursuant to
exercise
of stock options 133,499 1 203 -- -- -- 204
Issuance of common stock
in connection
with employee stock
purchase plan 44,042 1 478 -- -- -- 479
Issuance of common stock
in connection
with acquisition
of IPC Interactive,
Pte. Ltd. 937,500 9 4,321 -- -- -- 4,330
Translation adjustment -- -- -- -- 14 -- 14 14
Net loss -- -- -- (2,297) -- -- (2,297) (2,297)
---------- ----- ------- ------- ------ ------ ------- -------
Comprehensive loss $(2,283)
Balance at
December 31, 1997 20,703,313 207 32,148 2,635 14 -- 35,004
Issuance of common stock
pursuant to
exercise
of stock options 135,790 1 507 -- -- -- 508
Issuance of common stock
in connection
with employee
stock purchase plan 79,157 1 405 -- -- -- 406
Compensation expense
associated with stock
issuance -- -- 47 -- -- -- 47
Translation adjustment -- -- -- -- (73) -- (73) (73)
Net loss -- -- -- (4,572) -- -- (4,572) (4,572)
---------- ----- ------- ------- ------ ------ ------- -------
Comprehensive loss $(4,645)
Balance at
December 31, 1998 20,918,260 $ 209 $33,107 $(1,937) $ (59) $ -- $31,320
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Retained
------------------- Additional earnings Cumulative Total Comprehensive
Number Par paid-in (accumulated) translation Treasury stockholders' income
of shares value capital deficit) adjustment stock equity (loss)
---------- ------ ---------- ------------- ----------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
pursuant to
exercise
of stock options 310,753 $ 3 $ 1,195 $ -- $ -- $ -- $ 1,198
Issuance of common stock
in connection
with employee
stock purchase plan 87,014 1 422 -- -- -- 423
Issuance of common stock
in connection with
Digital Video
Arts, Ltd. acquisition 17,078 -- 528 -- -- -- 528
Purchase of treasury stock (47,250) -- -- -- -- (1) (1)
Tax benefit from
stock options -- -- 382 -- -- -- 382
Translation adjustment -- -- -- -- (6) -- (6) (6)
Net income -- -- -- 497 -- -- 497 497
---------- ----- ------- ------- ------ ------ ------- -------
Comprehensive income $ 491
Balance at
December 31, 1999 21,285,855 $ 213 $35,634 $(1,440) $ (65) $ (1) $34,341
========== ===== ======= ======= ====== ====== =======
</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,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (2,297) $ (4,572) $ 497
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,816 4,813 4,218
Inventory valuation allowance 1,730 2,016 458
Compensation expense associated with stock and stock options 45 47 --
Write-off of acquired in-process research and development 5,290 -- --
Acquisition costs -- -- 684
Deferred income taxes (516) (876) (933)
Changes in assets and liabilities, net of the effect of the
acquisition of IPC Interactive Pte. Ltd. in 1997:
Accounts receivable (4,410) (6,525) (177)
Inventories (7,049) (4,368) (4,257)
Income taxes receivable (1,131) (986) 2,057
Prepaid expenses and other assets (331) (624) 192
Accounts payable (1,179) 1,255 4,935
Accrued expenses (87) 656 (61)
Customer deposits (3,260) (345) 388
Deferred revenue 1,273 1,644 441
Income taxes payable 85 390 200
-------- -------- --------
Net cash provided by (used in) operating activities (9,021) (7,475) 8,642
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (2,187) (3,816) (3,130)
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
te. Ltd., net of transaction costs 665 -- --
-------- -------- --------
Net cash provided by (used in) investing activities (10,832) 5,494 (3,130)
-------- -------- --------
Cash flows from financing activities
Proceeds from borrowings under equipment line of credit -- 1,226 1,106
Proceeds from borrowings under line of credit -- 2,000 --
Repayments under line of credit and equipment line of credit (1,137) -- (2,245)
Repayment of obligation under capital lease -- (18) (500)
Proceeds from issuance of common stock 683 914 2,003
-------- -------- --------
Net cash provided by (used in) financing activities (454) 4,122 364
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (20,307) 2,141 5,876
Cash and cash equivalents, beginning of year 23,608 3,301 5,442
-------- -------- --------
Cash and cash equivalents, end of year $ 3,301 $ 5,442 $ 11,318
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
SeaChange International, Inc.
Consolidated Statement of Cash Flows
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Income taxes paid $ 1,691 $ 132 $ 81
Interest paid $ -- $ 35 $ 210
Supplemental disclosure of noncash activity:
Transfer of items originally classified as inventories to
fixed assets $ 1,829 $ 584 $ 227
Transfer of items originally classified as fixed assets to
inventories $ -- $ 668 $ 3,055
Equipment acquired under capital lease $ -- $ 374 $ 336
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-7
<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, 1999, 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
title and risk of loss has passed to the customer, there is evidence of an
arrangement, fees are fixed and determinable and collection of the related
receivables is probable. 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. 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, 1998 and 1999, the
Company had an allowance for doubtful accounts of $870,000 and $908,000,
respectively, to provide for potential credit losses and such losses to
date have not exceeded management's expectations.
In 1997, 1998 and 1999, revenues from the Company's five largest customers
represented approximately 66%, 55% and 47%, respectively, of the Company's
total revenues. In 1997, 1998 and 1999 three, two 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 1997, 1998 and 1999.
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, Cash Equivalents and Marketable Securities
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. Marketable securities 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. Gross
unrealized gains and losses on securities for the years ended December 31,
1997, 1998 and 1999, the cost of which is based upon the specific
identification method, were not significant.
F-8
<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
carrying value of goodwill and intangible assets is reviewed on a quarterly
basis for the existence of facts and circumstances both internally and
externally that may suggest impairment or that the useful lives of these
assets are no longer appropriate. To date, no such impairment has occurred.
The Company determines whether an impairment has occurred based on gross
expected future cash flows and measures the amount of impairment based on
the related future estimated discounted cash flows. The cash flow estimates
used to determine the impairment, if any, contain management's best
estimates, using appropriate and customary assumptions and projections at
that time.
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. Amortization is based on the
straight-line method over the remaining estimated life of the product.
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. Non-employee
stock awards are accounted for in accordance with Emerging Issues Task
Force Issue No. 96-18.
F-9
<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.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence
as other financial statements. The Company has presented accumulated other
comprehensive income and other comprehensive income in the Statement of
Stockholders' (Deficit) Equity. Other comprehensive loss consists primarily
of cumulative translation adjustments.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs
were $659,000, $624,000 and $857,000 for the years ended December 31, 1997,
1998 and 1999 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, 702,467 and 360,966 common
shares issuable upon the exercise of stock options, respectively, and
3,992,738 and 1,791,732 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,
--------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares used in calculating
earnings per share- Basic 15,716,000 18,982,000 20,883,000
Shares attributable to unvested restricted
common stock -- -- 2,000
Acquisition escrow shares -- -- 1,000
Dilutive stock options -- -- 888,000
---------- ---------- ----------
Weighted average shares used in calculating
earnings per share- Diluted 15,716,000 18,982,000 21,774,000
========== ========== ==========
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133,"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, collectively referred
to as derivatives, and for hedging activities. The Company will adopt SFAS
No. 133 as required by SFAS No. 137, "Deferral of the effective date of the
FASB Statement No. 133," in fiscal year 2001. To
F-10
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
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 our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The application of the guidance in SAB 101 will be required in the
Company's second quarter of the fiscal year 2000. The effects of applying
this guidance, if any, will be reported as a cumulative effect adjustment
resulting from a change in accounting principle. The Company's evaluation
of SAB 101 is not yet complete.
3. Consolidated Balance Sheet Detail
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Components and assemblies $14,592,000 $14,739,000
Finished products 1,565,000 2,389,000
----------- -----------
$16,157,000 $17,128,000
=========== ===========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated December 31,
useful life --------------------------------
(years) 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Office furniture and equipment 5 $ 1,602,000 $ 1,645,000
Computer and demonstration equipment 3 9,139,000 12,213,000
Deployed assets 3-7 1,789,000 4,065,000
Service and spare components 5 2,584,000 2,584,000
Leasehold improvements 1-7 760,000 1,096,000
Automobiles 5 56,000 56,000
----------- -----------
15,930,000 21,659,000
Less -- Accumulated depreciation and amortization 7,880,000 11,121,000
----------- -----------
$ 8,050,000 $10,538,000
=========== ===========
</TABLE>
F-11
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Depreciation expense was $2,529,000, $3,857,000 and $3,806,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued software license fees $1,206,000 $1,565,000
Accrued sales and use taxes 733,000 647,000
Other accrued expenses 1,465,000 1,287,000
---------- ----------
$3,404,000 $3,499,000
========== ==========
</TABLE>
4. Segment Information
The Company has five reportable segments: digital advertising insertion,
movies systems, broadcast systems, interactive television systems (ITV) 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 ITV segment comprises products to
provide long-form video storage and delivery for television operators and
telecommunication companies for the residential market. 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,
----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Digital advertising insertion $55,977,000 $44,088,000 $44,553,000
Movies 4,437,000 9,722,000 6,582,000
Broadcast -- 4,223,000 16,793,000
ITV -- -- 529,000
Services 8,268,000 14,891,000 16,764,000
----------- ----------- -----------
$68,682,000 $72,924,000 $85,221,000
----------- ----------- -----------
Costs of revenues
Digital advertising insertion $32,356,000 $26,551,000 $25,302,000
Movies 2,384,000 6,801,000 4,057,000
Broadcast -- 2,420,000 9,187,000
ITV -- -- 343,000
Services 7,898,000 13,611,000 14,962,000
----------- ----------- -----------
$42,638,000 $49,383,000 $53,851,000
----------- ----------- -----------
</TABLE>
F-12
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
The following summarizes revenues by geographic locations:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
United States $60,650,000 $63,497,000 $65,730,000
Canada and South America 2,696,000 691,000 5,371,000
Europe 4,481,000 4,272,000 9,777,000
Rest of world 855,000 4,464,000 4,343,000
----------- ----------- -----------
$68,682,000 $72,924,000 $85,221,000
=========== =========== ===========
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, certain customers
accounted for more than 10% of the Company's revenues. Individual customers
accounted for 24%, 17% and 10% in 1997; 24% and 15% in 1998; and 15% and
10% in 1999.
5. Acquisitions and Restructuring of Operations
Acquisitions
On December 30, 1999, the Company acquired all of the authorized and outstanding
common stock of Digital Video Arts, Ltd. ("DVA") in exchange for 330,000 shares
of the Company's common stock using an exchange ratio of 0.033 of one share of
the Company's common stock for each DVA share. The acquisition was accounted for
as a pooling of interests. DVA is a developer of custom software products
specializing in digital video and interactive television. As a result of the
acquisition, DVA became a wholly-owned subsidiary of the Company. Total revenues
of $85.2 million for the year ended December 31, 1999 consisted of $84.2 million
of the Company's revenues and $1.0 million of DVA's revenues. Net income of
$497,000 for the same period consisted of the Company's net income of $1.1
million and DVA's net loss of $592,000. Included in net income were acquisition
costs of $684,000 consisting primarily of professional service fees. All
intercompany transactions were eliminated in consolidation. Due to the
acquisition, DVA's previously unrecognized tax benefits of operating loss
carryforwards were recognized by the combined Company in the applicable period.
The accompanying consolidated financial statements for all the periods presented
have been restated to include the results of operations, financial position and
cash flows of DVA.
On December 10, 1997, the Company exchanged 937,500 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 consideration, 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>
<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-13
<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 $61,229,000 $76,368,000
Net income (loss) $716,000 $(3,280,000)
Basic earnings (loss) per share $.09 $(.21)
Diluted earnings (loss) per share $.04 $(.21)
</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 had 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 expired
in October 1999 and was subsequently extended until March 31, 2000. The
equipment line of credit expired in June 1999 and was subsequently extended
until March 31, 2000. Borrowings under the lines of credit are secured by
substantially all of the Company's assets. Loans made under the revolving
line of credit bear interest at a rate per annum equal to the bank's base
rate plus .5%. Loans made under the equipment line of credit bear interest
at a rate per annum equal to the bank's base rate plus 1.0% (9.5% at
December 31, 1999). 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, 1999 the Company was in compliance with all
covenants. As of December 31, 1999, there were no borrowings under the
revolving line of credit. As of December 31, 1999, borrowings against the
equipment line of credit were $1,688,000. Maturities of the equipment line
of credit are $859,000, $614,000 and $215,000 in 2000, 2001 and 2002,
respectively.
F-14
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Domestic $ (521,000) $(7,361,000) $ 331,000
Foreign -- -- 151,000
----------- ----------- -----------
$ (521,000) $(7,361,000) $ 482,000
=========== =========== ===========
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current provision (benefit):
Federal $ 1,920,000 $(1,913,000) $ 532,000
State 371,000 -- 354,000
Foreign -- -- 56,000
----------- ----------- -----------
2,291,000 (1,913,000) 942,000
----------- ----------- -----------
Deferred benefit:
Federal (394,000) (124,000) (586,000)
State (121,000) (752,000) (371,000)
Foreign -- -- --
----------- ----------- -----------
(515,000) (876,000) (957,000)
----------- ----------- -----------
$ 1,776,000 $(2,789,000) $ (15,000)
=========== =========== ===========
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 1,299,000 $ 1,282,000
Allowance for doubtful accounts 320,000 405,000
Deferred revenue 126,000 115,000
Software 111,000 107,000
Accrued expenses 153,000 135,000
Property and equipment -- 104,000
Research and development credit carryforwards -- 198,000
State net operating loss carryforwards 398,000 554,000
Acquired net operating loss carryforwards and
basis differences 3,361,000 3,361,000
----------- -----------
5,768,000 6,261,000
Valuation allowance (3,361,000) (3,361,000)
----------- -----------
Total deferred tax assets 2,407,000 2,900,000
----------- -----------
Deferred tax liabilities:
Property and equipment 430,000 --
Other 10,000 --
----------- -----------
Total deferred tax liabilities 440,000 --
----------- -----------
Net deferred income taxes $ 1,967,000 $ 2,900,000
=========== ===========
</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, 1998 and 1999 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-15
<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.
U.S. federal income taxes are not provided for on the earnings of the
non-U.S. subsidiaries which are expected to be reinvested indefinitely in
operations outside the U.S.
At December 31, 1999, the Company had state net operating loss
carryforwards of approximately $5,127,000 which expire at various dates
through 2013.
The income tax provision (benefit) 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,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Statutory U.S. federal tax rate $ (91,000) $(2,552,000) $ 164,000
State taxes after state tax credits,
net of federal tax benefits 165,000 (496,000) (12,000)
Other 145,000 355,000 98,000
Research and development tax credits (334,000) (316,000) (446,000)
Non-deductible acquisition costs -- -- 233,000
Acquired net operating losses -- -- (192,000)
Nondeductible expenses, including write-off of
acquired in-process research and
development in 1997 1,891,000 220,000 140,000
----------- ----------- -----------
$ 1,776,000 $(2,789,000) $ (15,000)
=========== =========== ===========
</TABLE>
The Company's effective tax benefit rate was 37.9% and 3% in 1998 and 1999,
respectively. In the second quarter of 1999, the separate return limitation
year (SRLY) regulations were finalized to allow for the use of acquired net
operating loss carryforwards where an ownership change and an acquisition
has taken place within a six month period. As a result of the Company's
acquisition of DVA, the Company recorded a tax benefit of $192,000 in the
second quarter of 1999 related to the use of DVA's net operating loss
carryforwards. In the fourth quarter of 1999, the federal research and
development tax credit was retroactively extended through June 30, 2004. As
a result, the Company recorded a tax benefit of $446,000 in the fourth
quarter of 1999 related to the utilization of these tax credits.
8. Common Stock
Stock Split
On December 10, 1999, the Board of Directors authorized a 3-for-2 stock
split of the Company's common stock, which became effective on December 27,
1999. 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 1999.
F-16
<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, 1999, 59,738 of such shares are unvested.
Treasury Stock
In 1997 and in 1999, the Company repurchased 13,500 and 47,250 shares of
its common stock, respectively, from employees of the Company. The 1997
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, 1999, the Company had 1,475,575 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 450,000 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,
1998, and 1999, 44,042, 79,157, and 87,014 shares of common stock,
respectively, were issued under the Stock Purchase Plan.
F-17
<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 2,925,000 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 45,000 shares of common stock under the Director
Option Plan. Under the Director Option Plan, participating directors
receive an option to purchase 5,062 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 5,062
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, 1997, 1998 and 1999 are summarized as
follows:
F-18
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- ------------------------- -------------------------
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 1,109,001 $3.91 1,714,586 $7.60 2,113,824 $5.34
Granted 878,304 12.02 1,334,594 4.95 524,739 14.76
Exercised (133,499) 1.53 (135,790) 3.71 (310,753) 3.94
Cancelled (139,220) 11.87 (799,566) 9.99 (287,757) 6.00
========= ========= =========
Outstanding at
period end 1,714,586 $7.60 2,113,824 $5.34 2,040,053 $7.79
========= ========= =========
Options exercisable
at period end 307,797 473,465 594,265
Weighted average fair value
of options granted
during the period $7.33 $3.54 $7.11
</TABLE>
The following table summarizes information about employee and director stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding at December 31, 1999
-------------------------------------------------------
Weighted
average
remaining Weighted
Number contractual average
outstanding life (years) exercise price
----------- ------------ --------------
<S> <C> <C> <C>
Range of exercise prices
$0.33 32,192 5.65 $0.33
0.82 to 0.91 114,624 3.05 0.87
2.80 to 4.00 546,740 8.60 3.87
4.45 to 6.25 704,431 8.10 5.48
6.58 to 10.00 287,492 8.58 7.47
10.33 to 14.33 145,233 9.26 11.55
19.17 to 35.375 209,341 8.87 28.52
----------
2,040,053
==========
<CAPTION>
Options exercisable at December 31, 1999
-----------------------------------------
Weighted
Number average
Range of exercise prices exercisable exercise price
<S> <C> <C>
$0.33 26,496 $0.33
0.82 to 0.91 88,704 0.87
2.80 to 4.00 149,150 3.74
4.45 to 6.25 233,144 5.41
6.58 to 10.00 46,179 7.63
10.33 to 14.33 11,757 12.90
19.17 to 35.375 38,835 19.35
-------
594,265
=======
</TABLE>
F-19
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
Fair Value Disclosures
The Company applies APB 25 in accounting for employee stock awards.
Compensation expense of $45,000, $47,000 and $-- has been recorded for the
years ended December 31, 1997, 1998 and 1999, 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:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported $(2,297,000) $(4,572,000) $497,000
Pro forma $(3,167,000) $(6,456,000) $122,000
Basic earnings (loss) per share
As reported $(.15) $(.24) $.02
Pro forma $(.20) $(.34) $.01
Diluted earnings (loss) per share
As reported $(.15) $(.24) $.02
Pro forma $(.20) $(.34) $.01
</TABLE>
The fair value of each option granted was estimated on the date of grant
assuming a weighted average volatility factor of 67% for the years ended
December 31, 1997 and 1998 and 46% for the year ended December 31, 1999.
Additional weighted average assumptions used for grants during the years
ended December 31, 1997, 1998 and 1999 included: dividend yield of 0.0% for
all periods; risk-free interest rates of 5.70% to 6.75% for options granted
during the year ended December 31, 1997, 6.00% for options granted during
the year ended December 31, 1998, and 5.54% for options granted during the
year ended December 31, 1999; and an expected option term of 5 years for
all periods.
Because additional option grants are expected to be made each year and
options vest over several years, 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 long-term
incentive to employees. Accordingly, the Committee granted those employees
whose options were between $10.00 and $16.42 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 $16.42 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 319,169 shares of common
stock and the average exercise price of such options was reduced from
$14.79 per share to $5.50 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 $5.50 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 non-cancelable capital and operating leases, which expire at various
dates through 2005. Rental expense under operating leases was approximately
$600,000,
F-20
<PAGE>
SeaChange International, Inc.
Notes to Consolidated Financial Statements (continued)
$1,341,000 and $1,681,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Future commitments under minimum lease payments as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
Year ended December 31, 2000 $ 236,000 $1,680,000
2001 221,000 1,411,000
2002 156,000 895,000
2003 67,000 714,000
2004 -- 687,000
Thereafter -- 171,000
----------
Minimum lease payments 680,000
Less: Amount representing interest 89,000
----------
$ 591,000
==========
</TABLE>
The Company had non-cancelable purchase commitments for inventories of
approximately $1,600,000 at December 31, 1999.
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, 1998 and 1999, the Company contributed
$68,000, $189,000 and $225,000, respectively, to the Plan.
F-21
<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 31, 2000 appearing in the 1999 Annual Report to Shareholders of
SeaChange International, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10K) 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.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2000
S-1
<PAGE>
Exhibit 10.12
FIRST LOAN MODIFICATION AGREEMENT
The First Loan Modification Agreement is entered into as of ________,
2000, by and between SEACHANGE INTERNATIONAL, INC., a Delaware corporation with
its principal place of business at 124 Acton Street, Maynard, Massachusetts
("Borrower"), and SILICON VALLEY BANK, a California-chartered bank ("Lender"),
with its principal place of business at 3003 Tasman Drive, Santa Clara, CA
95054 and with a loan production office located at Wellesley Office Park, 40
William Street, Suite 350, Wellesley, MA 02481, doing business under the name
"Silicon Valley East."
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may
------------------------------------
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Loan and Security Agreement dated November 10, 1998 (as
may be amended, the "Loan Agreement"). Capitalized terms used but not otherwise
defined herein shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
-----------------------------------------
secured by the Collateral as described in the Loan Agreement (together with any
other collateral security granted to Lender, the "Security Documents").
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
-------------------------------
A. Modification(s) to Loan Agreement.
----------------------------------
1. The Loan Agreement shall be amended by deleting the following
definition for Committed Equipment Line:
"Committed Equipment Line" means a credit extension of up to
Three Million Dollars ($3,000,000.00).
and substituting therefor the following:
"Committed Equipment Line" means a credit extension of up to
Three Million Dollars ($3,000,000.00) for Equipment Line No. 1,
and Equipment Line No. 2, plus Two Million Dollars
($2,000,000.00) for Equipment Line No. 3.
2. The Loan Agreement shall be amended by inserting into Section
1.1, the following definitions:
"Equipment Line No. 1" has the meaning set forth in Section
2.1.2.
"Equipment Line No. 2" has the meaning set forth in Section
2.1.2.
"Equipment Line No. 3" has the meaning set forth in Section
2.1.2.
"Equipment Availability End Date No. 3" has the meaning set
forth in Section 2.1.2.
<PAGE>
"Equipment Maturity Date No. 3" means March 31, 2003.
3. The Loan Agreement shall be amended by deleting the following
Section 2.1.2:
"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 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.
2-
<PAGE>
(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."
and substituting therefor the following:
"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 once advance to take place
----
days after the Closing Date (the "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"), and (iii) at any time
and from time to time from March 13, 2000 through March
31, 2000 (the "Equipment Availability End Date No. 3") in
the aggregate outstanding amount not to exceed Two
Million Dollars ($2,000,000.00) (the "Equipment Line No.
3"). 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. Equipment Advance
requests under Equipment Line No. 3 shall be used only
for Equipment purchased through March 31, 2000. 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, and Equipment Line No. 3, each of
(i) and (ii) excluding taxes, shipping, warrant charges,
freight discounts, and installation expense.
(b) Interest shall accrue from the date of each Equipment
Advance at the per annum rate of: (i) for Equipment Line
No. 1, and Equipment Line No. 2, one percent (1.0%) above
the Prime Rate, and (ii) for Equipment Line No. 3, at one
half of one percent (.50%) above the Prime Rate. Interest
shall be payable monthly on the Payment Date of each
month. Any Equipment
3-
<PAGE>
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. Any Equipment Advances
made pursuant to the Equipment Line No. 3 that are
outstanding on the Equipment Availability End Date No. 3
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. 3 and ending on the
Equipment Maturity Date No. 3. 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. The Loan Agreement shall be amended by deleting the following in
Section 6.3:
"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 affects the
value of the Intellectual
4-
<PAGE>
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."
and inserting in lieu thereof the following:
"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 one hundred twenty (120) 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 quarterly financial
statements a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit D hereto.
5-
<PAGE>
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."
3. The Loan Agreement shall be amended by deleting the following
financial covenants appearing as Sections 6.8 through 6.12:
"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."
and substituting the following:
"6.8 [Intentionally Deleted]
6.9 [Intentionally Deleted]
6.10 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 1.0 to 1.0.
6.11 Tangible Net Worth. Borrower shall maintain, measured as of
the last day of each quarter, a Tangible Net Worth of not less
than Thirty Million ($30,000,000.00) as of the month ending
December 31, 1999, and as of the last day of each month
thereafter.
6.12 Profitability. Borrower shall maintain, measured as of the
last day of each quarter: (i) a profit of One Hundred Thousand
Dollars ($100,000.00) as of the last day of the first quarter of
fiscal year 2000; (ii) a profit of Two Hundred Thousand
6-
<PAGE>
Dollars ($200,000.00) as of the last day of the second and third
quarters of fiscal year 2000; and (iii) a profit of Three
Hundred Thousand Dollars ($300,000.00) as of the last day of the
fourth quarter of fiscal year 2000, with an allowance for one
quarterly loss during such fiscal year of no greater than One
Hundred Thousand Dollars ($100,000.00). Notwithstanding the
foregoing, the Borrower shall maintain a profit for fiscal year
2000 of Eight Hundred Thousand Dollars ($800,000.00)."
2. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
3. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and
reaffirms all terms and conditions of all security or other collateral granted
to the Lender, and confirms that the indebtedness secured thereby includes,
without limitation, the Indebtedness.
4. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
5. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Lender in writing. No maker, endorser, or guarantor will be released by virtue
of this Loan Modification Agreement. The terms of this Paragraph apply not only
to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
6. JURISDICTION/VENUE. 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 Loan Modification Agreement; provided, however, that if for any
reason Lender cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
7. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Lender (provided, however,
in no event shall this Loan Modification Agreement become effective until signed
by an officer of Lender in California).
7-
<PAGE>
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
SEACHANGE INTERNATIONAL, INC. SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ WL FIEDLER By:
---------------------------- -----------------------------
Name: WL FIEDLER Name:
-------------------------- ---------------------------
Title: Vice President Title:
------------------------- --------------------------
SILICON VALLEY BANK
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
-8-
<PAGE>
Exhibit 10.13
February 25, 2000
Seachange International, Inc.
124 Acton Street
Maynard, Massachusetts 02481
Attn: Mr. William Fiedler, Chief Financial Officer
Re: Silicon Valley Bank Loan Arrangement with
Seachange International, Inc.
Dear Sir/Madam:
Reference is made to a certain loan arrangement dated November 10, 1998 by
and between Seachange International, Inc. (the "BORROWER") and Silicon Valley
Bank (the "BANK"), evidenced by, among other documents, a certain Loan and
Security Agreement between the Borrower and the Bank dated as of November 10,
1998 (as the same has been amended and extended to date, the "LOAN AGREEMENT").
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Loan Agreement.
Notwithstanding anything to the contrary contained in the Loan Agreement
or otherwise, the term "Revolving Maturity Date" as set forth in the Loan
Agreement shall now mean and refer to the date March 31, 2000. Any and all
Credit Extensions made pursuant to he Loan Agreement shall (i) continue to be
secured by all Collateral, and (ii) be repaid in full at the earlier of (A) the
occurrence of any Event of Default, or (B) March 31, 2000.
All other terms and conditions contained in the Loan Agreement shall
remain in full force and effect.
Sincerely,
SILICON VALLEY BANK,
d/b/a SILICON VALLEY EAST
By: /s/ John K. Peck
----------------------
Name: John K. Peck
--------------------
Title: Vice President
-------------------
ACCEPTED AND AGREED:
SEACHANGE INTERNATIONAL, INC.
By: /s/ WL Fiedler
----------------------
Name: WL Fiedler
--------------------
Title: Vice President
-------------------
<PAGE>
February 25, 2000
Silicon Valley Bank
40 William Street, Suite 350
Wellesley, Massachusetts 02181
Re: Silicon Valley Bank Loan Arrangements with
Seachange International, Inc.
Gentlemen:
Reference is made to a certain loan arrangement (the "Loan Arrangement")
entered into as of November 10, 1998 by and between Seachange International,
Inc. (the "Borrower") and Silicon Valley Bank (the "Bank"), evidenced by, among
other documents, a certain Loan and Security Agreement dated as of November 10,
1998 by and between the Borrower and Bank (as amended and extended to date, the
"Loan Agreement").
Reference is further made to a certain Unconditional Guaranty (the
"Guaranty") dated November 10, 1998, executed and delivered by the undersigned
(the "Guarantor"), pursuant to which the undersigned unconditionally guaranteed
the prompt, punctual and faithful payment and performance of the obligations
and liabilities of the Borrower to the Bank (the "Obligations").
The Guarantor hereby;
(a) ratifies, confirms and reaffirms, all and singular, the terms and
conditions for the Guaranty;
(b) acknowledges, confirms and agrees that the Guaranty shall remain in
full force and effect; and
(c) acknowledges, confirms and agrees that the obligations and liabilities
for Borrower to Bank under the Guaranty include, without limitation,
the Loan Agreement and 2000 Agreement.
Further, the undersigned acknowledges, confirms and agrees that it has no
offsets, defenses, claims or counterclaims against the Bank with respect to the
Borrower's and/or the undersigned's respective liabilities and obligations due
and owing to the Bank, and that to the extent that the undersigned has or has
ever had any such offsets, defenses, claims or counterclaims, the undersigned
hereby specifically WAIVES and RELEASES any and all rights to same.
This letter shall take effect as a sealed instrument under the laws of the
Commonwealth of Massachusetts as of the date first written above.
Very truly yours,
("Guarantor")
GUESTSERVE NETWORKS, INC.
By: /s/ William L. Fiedler
-----------------------------
Name: William L. Fiedler
---------------------------
Title: Vice President
--------------------------
(duly authorized)
<PAGE>
February 25, 2000
Silicon Valley Bank
40 William Street, Suite 350
Wellesley, Massachusetts 02181
Re: Silicon Valley Bank Loan Arrangements with
Seachange International, Inc.
Gentlemen:
Reference is made to a certain loan arrangement (the "Loan Arrangement")
entered into as of November 10, 1998 by and between Seachange International,
Inc. (the "Borrower") and Silicon Valley Bank (the "Bank"), evidenced by, among
other documents, a certain Loan and Security Agreement dated as of November 10,
1998 by and between the Borrower and Bank (as amended and extended to date, the
"Loan Agreement").
Reference is further made to a certain Unconditional Guaranty (the
"Guaranty") dated November 10, 1998, executed and delivered by the undersigned
(the "Guarantor"), pursuant to which the undersigned unconditionally guaranteed
the prompt, punctual and faithful payment and performance of the obligations
and liabilities of the Borrower to the Bank (the "Obligations").
The Guarantor hereby;
(a) ratifies, confirms and reaffirms, all and singular, the terms and
conditions for the Guaranty;
(b) acknowledges, confirms and agrees that the Guaranty shall remain in
full force and effect; and
(c) acknowledges, confirms and agrees that the obligations and liabilities
for Borrower to Bank under the Guaranty include, without limitation,
the Loan Agreement and 2000 Agreement.
Further, the undersigned acknowledges, confirms and agrees that it has no
offsets, defenses, claims or counterclaims against the Bank with respect to the
Borrower's and/or the undersigned's respective liabilities and obligations due
and owing to the Bank, and that to the extent that the undersigned has or has
ever had any such offsets, defenses, claims or counterclaims, the undersigned
hereby specifically WAIVES and RELEASES any and all rights to same.
This letter shall take effect as a sealed instrument under the laws of the
Commonwealth of Massachusetts as of the date first written above.
Very truly yours,
("Guarantor")
GUESTSERVE NETWORKS, INC.
By: /s/ William L. Fiedler
-----------------------------
Name: William L. Fiedler
---------------------------
Title: Vice President
--------------------------
(duly authorized)
<PAGE>
EXHIBIT 21.1
SeaChange International, Inc.
List of Significant Subsidiaries
Subsidiary Name Subsidiary 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 31, 2000 relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated January 31, 2000 relating to the financial statement schedule,
which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEACHANGE INTERNATIONAL, INC. FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,318
<SECURITIES> 0
<RECEIVABLES> 18,846
<ALLOWANCES> (1,006)
<INVENTORY> 17,128
<CURRENT-ASSETS> 50,097
<PP&E> 21,659
<DEPRECIATION> (11,121)
<TOTAL-ASSETS> 62,304
<CURRENT-LIABILITIES> 26,732
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 34,128
<TOTAL-LIABILITY-AND-EQUITY> 62,304
<SALES> 85,221
<TOTAL-REVENUES> 85,221
<CGS> 53,851
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (28)
<INCOME-PRETAX> 482
<INCOME-TAX> (15)
<INCOME-CONTINUING> 497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 497
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEACHANGE INTERNATIONAL INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 5,442 3,301
<SECURITIES> 0 9,310
<RECEIVABLES> 18,553 13,253
<ALLOWANCES> (870) 12,694
<INVENTORY> 16,157 13,721
<CURRENT-ASSETS> 45,051 42,459
<PP&E> 15,930 12,369
<DEPRECIATION> (7,880) 4,023
<TOTAL-ASSETS> 54,527 52,512
<CURRENT-LIABILITIES> 22,180 17,510
<BONDS> 0 0
0 0
0 0
<COMMON> 209 207
<OTHER-SE> 31,111 34,797
<TOTAL-LIABILITY-AND-EQUITY> 54,527 52,527
<SALES> 72,924 68,682
<TOTAL-REVENUES> 72,924 68,682
<CGS> 49,383 42,638
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 31,137 27,228
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (235) (663)
<INCOME-PRETAX> (7,361) (521)
<INCOME-TAX> (2,789) 1,776
<INCOME-CONTINUING> (4,572) (2,297)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,572) (2,297)
<EPS-BASIC> (.24) (.15)
<EPS-DILUTED> (.24) (.15)
</TABLE>
