As filed with the Securities and Exchange Commission on May 3, 2001
Registration No. 333-56410
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM S-1/A
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SeaChange International, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 3663 04-3197974
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
124 Acton Street, Maynard, MA 01754, (978) 897-0100
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
William C. Styslinger, III
Chairman, President and Chief Executive Officer
SeaChange International, Inc.
124 Acton Street
Maynard, MA 01754
(978) 897-0100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------
Copy to:
William B. Simmons, Jr., Esq.
TESTA, HURWITZ & THIBEAULT, LLP
125 High Street
Boston, Massachusetts 02110
(617) 248-7000
---------------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement as determined
by market conditions and other factors.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED MAY 3, 2001
PROSPECTUS
856,144 SHARES
SEACHANGE INTERNATIONAL, INC.
COMMON STOCK
-----------
This prospectus is part of a registration statement that covers 856,144
shares of our common stock held by Comcast SC Investment, Inc., a wholly-owned
subsidiary of Comcast Corporation, or which may be acquired by it upon the
exercise of a warrant held by it. The shares may be offered and sold from time
to time by Comcast SC. We will receive no proceeds from the sale of the shares.
Our shares are traded on the Nasdaq National Market under the symbol "SEAC."
On May 2, 2001, the last reported sale price of our common stock on the Nasdaq
National Market was $16.050 per share.
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
-----------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
-----------
The date of this Prospectus is , 2001.
SEACHANGE INTERNATIONAL
We develop, manufacture and sell systems, known as video storage servers,
that automate the management and distribution of both short-form video streams,
such as advertisements, and long-form video streams, such as movies or other
feature presentations, each of which requires precise, accurate and continuous
execution, to television operators, telecommunications companies and broadcast
television companies. Our systems utilize both standard industry components and
our embedded proprietary software that performs the specific functions of
information processing such as order processing, invoicing and other similar
functions. Our digital video systems with their state-of-the-art electronic
storage and retrieval capabilities are designed to provide a higher image
quality and to be more reliable, easier to use and less expensive than analog
tape-based systems that are based on transmission of a continuous electronic
signal that may vary in both frequency and amplitude. We believe that by
automating the management and distribution process our systems help our
customers reduce their ongoing operating costs while simultaneously allowing
our customers to increase revenues by offering more targeted services such as
local advertising segments, known as geography-specific spot advertising,
inserted into cable programming; movies, known as video-on-demand movies, that
the subscriber is able to watch at any time with pause, rewind and fast forward
features; and other services, known as interactive television services, that
allow consumers to customize and/or interact with their television viewing
experience in a manner similar to that of using a personal computer.
In our broadband or high bandwidth network or facility business systems
segment, we have one existing movie product and two video-on-demand products
for the interactive television markets. Our Movie System product provides long-
form video storage and delivery for the pay-per-view movie markets. Our
GuestServe System product delivers video-on-demand and other guest services,
Internet access and personal computer games in a hotel environment for cable
television and telecommunications companies. Our ITV System product provides
residential video on demand or interactive television system services,
including accessing movies and other programs, purchasing products and
retrieving Internet content through the television, to digitally manage, store
and distribute digital video for cable television operators and
telecommunications companies. Starting in 1998, the market for our ITV System
expanded when we entered into agreements with several cable companies to
provide our ITV System for demonstration and testing of their video-on-demand
systems and in 2000, several of these cable operators began deploying our ITV
System. We also have agreements with producers of digital set-top boxes to test
and integrate their products with our ITV System. Examples of these agreements
include our relationships with Scientific-Atlanta, Motorola and Sony
Corporation whereby we developed integrated interactive television systems to
ensure our video server systems interfaced with the set-top boxes to provide
long form video content to the potential subscriber.
In addition to our video on demand systems, our broadband system business
segment includes our SPOT System product, which, based on currently available
industry sources and our internal data, we believe to be the leading system in
the United States in terms of market share for the transmission of video
content, known as a video insertion system, in the multichannel television
market for digital advertisement and other short-form video. Our SPOT System
converts analog video forms such as advertisements and news updates to digital
video forms, stores the digital video forms in remote or local storage devices,
known as digital libraries, and inserts them automatically into television
network streams. The SPOT System provides both high accuracy relative to the
volume of video being played and high video image quality, permits geographic
and demographic specificity of advertisements and we believe reduces operating
costs by automating the management and distribution process. Our Advertising
Management Software product operates in conjunction with our SPOT System to
automate and simplify complex sales, scheduling and billing processes for the
multichannel television market. A majority of our customers for these products
consist of major cable television operators and telecommunications companies in
the United States.
In our broadcast or cable network systems business segment, our Broadcast
MediaCluster product offers call letter stations, such as KSTP-Saint Paul, the
ability to directly transmit content, such as commercials and syndicated or
other programming for broadcast television companies, to their viewers. Today,
the technology utilized by broadcasters is going through a transition away from
analog tape libraries to digital server based storage of content. We believe
that our broadcast Mediacluster system will eliminate the need for
2
analog tape libraries and will provide broadcasters the automated storage and
playback features that they require. Since 1998, we have installed broadcast
systems at customer locations including network affiliates and multi-channel
operations in the United States, Europe and the Far East.
Nevertheless, we face significant challenges in our business, as the market
in which we operate is intensely competitive and still emerging, meaning that
the success of our business is contingent upon the widespread marketplace
acceptance of our products and the technology on which they are based.
Currently, we have a certain limited number of customers that each account for
more than ten percent of our revenues and we also have sole raw material
supplier relationships with several of our vendors. Each of these factors,
along with the challenges inherent in managing our growth, could limit our
ability to grow and succeed in accordance with our business plan.
We were incorporated in Delaware in July 1993. Our principal executive
offices are located at 124 Acton Street, Maynard, Massachusetts 01754, and our
telephone number is (978) 897-0100. Our web site is located at www.schange.com.
The information contained on our web site is not incorporated by reference into
this document and should not be considered a part of this prospectus. Our web
site address is included in this document as an inactive textual reference
only.
3
RISK FACTORS
You should carefully consider the following risks before investing in our
common stock. If any of the following risks come to fruition, our business,
results of operations or financial condition could be materially adversely
affected. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment. You should also refer to the
other information set forth in this prospectus, including our financial
statements and the accompanying notes.
If we are unable to manage our growth and the related expansion in our
operations effectively, our business may be harmed through a decreased ability
to monitor and control effectively our operations, and a decrease in the
quality of work and innovation of our employees.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires effective planning and
management. Not only are we growing in size, but we are also continuing to
transition towards greater reliance on our video-on-demand products for an
increased portion of our revenue. 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. A failure to manage our growth may harm our
business through a decreased ability to monitor and control effectively our
operations, and a decrease in the quality of work and innovation of our
employees upon which our business is dependent.
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 because our
business is technology-based and there is a shortage of these employees within
the New England area.
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 given the shortage within
the New England area of qualified persons for these positions. 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, as our business is technology-based. Because
competition for these personnel is intense, we may not be able to attract and
retain qualified personnel in the future. 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 because our business is
technology-based.
Cancellation or deferral of purchases of our products could cause our operating
results to be below the expectations of the public market stock analysts who
cover our stock, resulting in a decrease in the market price of our common
stock.
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 due to the resulting decrease in
revenue and our relatively fixed costs. In addition, to the extent significant
sales occur earlier than expected, operating results for subsequent quarters
may be adversely affected because 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. Because of these
factors, in some future quarter our operating results may be below the
expectations of public market analysts and investors which may adversely affect
the market price of our common stock.
4
Seasonal trends may cause our quarterly operating results to fluctuate, making
period-to-period comparisons of our operating results meaningless.
We have experienced significant variations in the revenue, expenses and
operating results from quarter to quarter and these 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 in accordance with this
purchasing activity making period-to-period comparisons of our operating
results meaningless. In addition, because these factors are difficult for us to
forecast, our business, financial condition and results of operations for one
quarter or a series of quarters may be adversely affected and below the
expectations of public market analysts and investors, resulting in a decrease
in the market price of our common stock.
Due to the lengthy sales cycle involved in the sale of our products, our
quarterly results may vary and should not be relied on as an indication of
future performance.
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 these 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, these comparisons should not be relied upon
as indications of future performance.
If we are unable to successfully compete in our marketplace, our financial
condition and operating results may be 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 these advantages will require a continued high level of investment
by us in research and product development, marketing and customer service and
support. In the future we may not have sufficient resources to continue to make
these investments or to make the technological advances necessary to compete
successfully with our existing competitors or with new competitors.
If we are unable to compete effectively, our business, prospects, financial
condition and operating results would be materially adversely affected because
of the difference in our operating results from the assumptions on which our
business model is based.
5
If the emerging digital video market does not gain commercial acceptance, our
business, financial condition and results of operations would be negatively
affected because the market for our products would be more limited than we
currently believe and have communicated to the financial markets.
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 on the rate at which television operators convert to digital video
systems.
In addition, to date our products have been purchased primarily by cable
television operators and telecommunications companies. An inability to
penetrate new markets would have a material adverse effect on our business,
financial condition and results of operations because the market for our
products would be more limited than we currently believe and have communicated
to the financial markets.
If there were a decline in sales of our SPOT System, our revenues could be
materially affected because we currently derive a large percentage of our
revenues from this product.
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 the remainder
of fiscal year 2000 and in fiscal year 2001. Our success depends in part on
continued sales of our SPOT System product. Accordingly, 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 fail to respond to rapidly changing technologies related to digital
video, our business, financial condition and results of operations would be
materially adversely affected because the competitive advantage of our products
relative to those of our competitors would decrease.
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. In the future, we
may not 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 may be services, products or
technologies developed by others that render our products or technologies
uncompetitive, unmarketable or obsolete, or announcements of currently planned
or other new product offerings either by us or our competitors that cause
customers to defer or fail to purchase our existing solutions.
If we are unable to successfully introduce to our marketplace new products or
enhancements to existing products, our financial condition and operating
results may be adversely effected by a decrease in purchases of our products.
Because our business plan is based on technological development in the form
of both development of new products and enhancements to our existing products,
our future success is dependent on our successful introduction to the
marketplace of these products and enhancements. In the future we may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these and other new products and enhancements, or
find that our new products and enhancements do not adequately meet
6
the requirements of the marketplace or achieve market acceptance. Announcements
of currently planned or other new product offerings may cause customers to
defer purchasing our existing products. Moreover, despite testing by us, and by
current and potential customers, errors or failures may be found in our
products, or, if discovered, successfully corrected in a timely manner. These
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 these new products
or enhancements to achieve market acceptance could have a material adverse
effect on our business, financial condition and results of operations.
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 the years ended December
31, 1998 and 1999, the one month ended January 31, 2000, and the year ended
January 31, 2001, revenues from our five largest customers represented
approximately 55%, 47%, 47% and 44%, respectively, of our total revenues. In
the years ended December 31, 1998 and 1999, the one month ended January 31,
2000, and the year ended January 31, 2001, two customers each accounted for
more than 10% of our revenues. We generally do not have written continuing
purchase agreements with our customers and do not generally have 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 these 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.
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 different computer chassis manufactured by JMR Electronics, Inc., a switch
chassis manufactured by Ego Systems, a decoder card manufactured by Vela
Research, Inc. for MPEG-2, the industry standard for digital video and audio
compression, and an MPEG-2 encoder manufactured by Optibase, 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 these
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, in the future there may not be manufacturers that are able to meet our
future volume or quality requirements at a price that is favorable to us. Any
financial, operational, production or quality assurance difficulties
experienced by these 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.
7
The success of our business model depends on both the response of the market
to the current regulatory structure and the continued deregulation of the
telecommunications and television industries.
The telecommunications and television industries are subject to extensive
regulation which may limit the growth of our business, both in the United
States and other countries. Although recent legislation has lowered the legal
barriers to entry for telecommunications companies into the United States
multichannel television market, telecommunications companies may either choose
not to enter or be unable to successfully enter this or related markets.
Moreover, the growth of our business internationally in the manner and to the
extent currently contemplated by our business model is dependent in part on
similar deregulation of the telecommunications industry abroad, the timing and
magnitude of which is uncertain.
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 valuable
assets on which our business is based or incur costly litigation to protect
our rights.
Our success and ability to compete depends upon our intellectual property,
including our proprietary technology and confidential information, as the
broadband and broadcast systems that we develop, market, license and sell are
dependent on this technology and 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:
. difficulties in assimilation of acquired personnel, operations,
technologies or products which may affect our ability to develop new
products and services and compete in our rapidly changing marketplace
due to a resulting decrease in the quality of work and innovation of our
employees upon which our business is dependent; and
. adverse effects on our existing business relationships with suppliers
and customers, which may be of particular importance to our business
because our customer base is highly concentrated among a limited number
of large customers and 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.
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.
8
Because our business is susceptible to risks associated with international
operations, we may not be able to maintain or increase international sales of
our products.
International sales accounted for approximately 13%, 23%, 18% and 20% of
our revenues in the years ended December 31, 1998 and 1999, the one month
ended January 31, 2000 and the year ended January 31, 2001, respectively. We
expect that international sales will account for a significant portion of our
business in the future. However, in the future we may be unable to maintain or
increase international sales of our products. International sales are subject
to a variety of risks, including:
. difficulties in establishing and managing international distribution
channels;
. difficulties in selling, servicing and supporting overseas products and
in translating products into foreign languages;
. the uncertainty of laws and enforcement in certain countries relating to
the protection of intellectual property;
. multiple and possibly overlapping tax structures;
. currency and exchange rate fluctuations; and
. 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 26.83% of the outstanding shares of our common stock as of April
23, 2001. As a result, these persons will strongly influence the composition
of our board of directors and 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.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" based on our
current expectations, assumptions, estimates and projections about our company
and our industry. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of many factors, as
more fully described in the preceding section and elsewhere in the prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by Comcast SC. See
"Comcast SC Investment, Inc." and "Plan of Distribution" described below.
9
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. The consolidated statement
of operations data for each of the five years ended December 31, 1996, 1997,
1998, 1999 and January 31, 2001 and for the one month period ended January 31,
2000 and the consolidated balance sheet data at December 31, 1996, 1997, 1998,
1999 and at January 31, 2000 and 2001 are detailed below. During the fourth
quarter of twelve months ended January 31, 2001, SeaChange implemented the
SEC's SAB 101 guidelines, retroactive to the beginning of the year (see Note 3
of the consolidated financial statements). The pro forma results for prior
periods presented below were calculated assuming the accounting change was made
retroactively to all prior periods presented. An explanation of the
determination of the number of shares used in computing net income (loss) per
share is given in the notes to the consolidated financial statements.
One month
ended Year ended
Year ended December 31, January 31, January 31,
----------------------------------- ----------- -----------
1996 1997 1998 1999 2000 2001
------- -------- -------- ------- ----------- -----------
(in thousands, except per share data)
Consolidated Statement
of Operations Data:
Revenues
Systems............. $45,745 $ 60,414 $ 58,033 $68,457 $ 226 $ 74,986
Services............ 4,378 8,268 14,891 16,764 1,484 23,482
------- -------- -------- ------- -------- --------
50,123 68,682 72,924 85,221 1,710 98,468
------- -------- -------- ------- -------- --------
Costs of revenues
Systems............. 27,133 34,740 35,772 38,889 633 39,928
Services............ 4,538 7,898 13,611 14,962 1,445 18,798
------- -------- -------- ------- -------- --------
31,671 42,638 49,383 53,851 2,078 58,726
------- -------- -------- ------- -------- --------
Gross profit (loss)..... 18,452 26,044 23,541 31,370 (368) 39,742
------- -------- -------- ------- -------- --------
Operating expenses:
Research and
development.......... 5,393 11,758 15,763 16,302 1,764 20,283
Selling and
marketing............ 4,694 6,248 8,566 8,595 1,034 12,472
General and
administrative....... 2,364 3,932 6,132 5,335 457 7,372
Restructuring of
operations........... -- -- 676 -- -- --
Write-off of acquired
in-process research
and development...... -- 5,290 -- -- -- --
Acquisition costs..... -- -- -- 684 -- --
------- -------- -------- ------- -------- --------
12,451 27,228 31,137 30,916 3,255 40,127
------- -------- -------- ------- -------- --------
Income (loss) from
operations............. 6,001 (1,184) (7,596) 454 (3,623) (385)
Interest income
(expense), net......... 375 663 235 28 9 (212)
------- -------- -------- ------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle.............. 6,376 (521) (7,361) 482 (3,614) (597)
Provision (benefit) for
income taxes........... 2,483 1,776 (2,789) (15) (1,156) (690)
------- -------- -------- ------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle.............. 3,893 (2,297) (4,572) 497 (2,458) 93
Cumulative effect of
change in accounting
principle, net of tax
of $732................ -- -- -- -- -- (1,100)
------- -------- -------- ------- -------- --------
Net income (loss)....... $ 3,893 $ (2,297) $ (4,572) $ 497 $ (2,458) $ (1,007)
======= ======== ======== ======= ======== ========
Basic earnings (loss)
per share before
cumulative effect of
change in accounting
principle.............. $ 0.48 $ (0.15) $ (0.24) $ 0.02 $ (0.12) $ 0.00
Cumulative effect of
change in accounting
principle-Basic........ -- -- -- -- -- (0.05)
------- -------- -------- ------- -------- --------
Basic earnings (loss)
per share.............. $ 0.48 $ (0.15) $ (0.24) $ 0.02 $ (0.12) $ (0.05)
======= ======== ======== ======= ======== ========
10
One month
ended Year ended
Year ended December 31, January 31, January 31,
----------------------------------- ----------- -----------
1996 1997 1998 1999 2000 2001
------- -------- -------- ------- ----------- -----------
(in thousands, except per share data)
Diluted earnings (loss)
per share before
cumulative effect of
change in accounting
principle.............. $ 0.22 $ (0.15) $ (0.24) $ 0.02 $ (0.12) $ 0.00
Cumulative effect of
change in accounting
principle-Diluted -- -- -- -- -- (0.05)
Diluted earnings (loss)
per share.............. $ 0.22 $ (0.15) $ (0.24) $ 0.02 $ (0.12) $ (0.05)
======= ======== ======== ======= ======== =======
Pro forma amounts
assuming the change in
accounting principle is
applied retroactively:
Revenue............... $49,884 $ 68,634 $ 71,790 $85,052 $ 2,144 $98,468
Net income (loss)..... $ 3,747 $ (2,509) $ (5,276) $ 323 $ (2,163) $ 93
Basic earnings (loss)
per share............ $ 0.46 $ (0.16) $ (0.28) $ 0.02 $ (0.10) $ 0.00
Diluted earnings
(loss) per share..... $ 0.21 $ (0.16) $ (0.28) $ 0.01 $ (0.10) $ 0.00
December 31, January 31, January 31,
------------------------------- ----------- -----------
1996 1997 1998 1999 2000 2001
------- ------- ------- ------- ----------- -----------
(in thousands)
Working capital....... $26,943 $24,949 $22,871 $23,365 $20,983 $28,819
Total assets.......... 46,467 52,512 54,527 62,304 56,712 88,253
Long-term
liabilities.......... -- -- 1,027 1,231 1,144 3,934
Deferred revenue...... 2,192 3,851 3,939 4,380 6,292 8,435
Total liabilities..... 14,240 17,510 23,207 27,963 24,761 42,951
Total stockholders'
equity............... 32,227 35,004 31,320 34,341 31,951 45,302
Pro forma amounts
assuming the change in
accounting principle is
applied retroactively:
Working capital....... $26,797 $24,737 $22,167 $23,191 $21,278 $28,819
Total assets.......... 46,467 52,512 54,527 62,304 56,712 88,253
Long-term liabili-
ties................. -- -- 1,027 1,231 1,144 3,934
Deferred revenue...... 2,431 3,899 5,073 4,549 5,857 8,435
Total liabilities..... 14,386 17,722 23,911 28,137 24,466 42,951
Total stockholders'
equity............... 32,081 34,792 30,616 34,167 32,246 45,302
11
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements, related notes and other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information
due to competitive factors and other factors discussed under "Risk Factors" and
elsewhere in this prospectus.
Overview
We develop, manufacture and sell systems, known as video storage servers,
that automate the management and distribution of both short-form video streams,
such as advertisements, and long-form video streams, such as movies or other
feature presentations, each of which requires precise, accurate and continuous
execution, and the related services and movie content to television operators,
telecommunications companies and broadcast television companies. Revenues from
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
or determinable and collection of the related receivable is probable.
Installation, project management and training revenue is deferred and
recognized as these services are performed. Revenue from technical support and
maintenance is deferred and recognized ratably over the period of the related
agreements, generally twelve months. Customers are billed for installation,
project management, training and maintenance at the time of the product sale.
Revenue from content fees, primarily movies, is recognized based on the volume
of monthly purchases that are made by hotel guests. Revenue from product
development contract services is recognized based on the time and materials
incurred to complete the work.
Our transactions frequently involve the sales of systems and services under
multiple element arrangements. Systems sales always include one year of free
technical support and maintenance services. Revenue under multiple element
arrangements is allocated to all elements except systems based upon the fair
value of those elements. The amounts allocated to training, project management,
technical support and maintenance and content fees is based upon the price
charged when these elements are sold separately and unaccompanied by the other
elements. The amount allocated to installation revenue is based upon hourly
rates and the estimated time required to complete the service. The amount
allocated to systems is done on a residual method basis. Under this method, the
total arrangement value is allocated first to undelivered elements, based on
their fair values, with the remainder being allocated to systems revenue.
Installation, training and project management services are not essential to the
functionality of systems as these services do not alter the equipment's
capabilities, are available from other vendors and the systems are standard
products.
We have experienced fluctuations in our systems revenues from quarter to
quarter due to the timing of receipt of customer orders and the shipment of
those orders. The factors that impact the timing of receipt of customer orders
include among other factors: (1) customer obtaining authorized signatures on
their purchase orders, (2) budgetary approvals within the customer's company
for capital purchases and (3) the ability to process the purchase order within
the customer's organization in a timely manner. Factors that may impact the
shipment of customer orders include: (1) the availability of material to
produce the product, and (2) the time required to produce and test the system
before delivery. Because the average sales price of our system is high, the
delay in the timing of receipt and shipment of any one customer order can
result in quarterly fluctuations in our revenue.
Our results are significantly influenced by a number of factors, including
our pricing, the costs of materials used in our products and the expansion of
our operations. We price our products and services based upon our costs as well
as in consideration of the prices of competitive products and services in the
marketplace. The costs of our products primarily consist of the costs of
components and subassemblies that have generally declined over time. As a
result of the growth of our business, our operating expenses have increased in
the areas of research and development, selling and marketing, customer service
and support and administration.
12
On December 30, 1999, we acquired all of the outstanding capital stock of
Digital Video Arts, Ltd. in exchange for 330,000 shares of our common stock
using an exchange ratio of 0.033 of one share of our common stock for each
share of Digital Video Arts. The acquisition was accounted for as a pooling of
interests. Digital Video Arts is a developer of custom software products
specializing in digital video and interactive television. As a result of the
acquisition, Digital Video Arts became our wholly-owned subsidiary. 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 Digital Video Arts.
On December 10, 1997, we exchanged 937,500 shares of our common stock for
all of the outstanding capital stock of IPC Interactive Pte. Ltd. which was
renamed to SeaChange Asia Pacific Operations Pte. Ltd. The total consideration
including transaction costs was $4,805,000. 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,
our results of operations include the operating results of SC Asia from the
date of acquisition.
Year Ended December 31, 1999 Compared to the Year Ended January 31, 2001
Systems. Our systems revenues consist of sales of our broadband and
broadcast products. Systems revenues increased 10% from $68.5 million in the
twelve months ended December 31, 1999 to $75.0 million in the twelve months
ended January 31, 2001. Revenues from the broadband segment, which accounted
for 55% of total revenues in the twelve months ended January 31, 2001 and 61%
of total revenues in the twelve months ended December 31, 1999, increased from
$51.7 million in 1999 to $54.4 million in 2001. The increase in broadband
revenues is primarily attributable to the sale of interactive television
systems to U.S. cable operators who began to deploy residential video-on-demand
services to their subscriber base during the twelve months ended January 31,
2001. Broadcast system segment revenues were $20.6 million in the twelve months
ended January 31, 2001 compared to $16.8 million in the twelve months ended
December 31, 1999. The 23% increase in broadcast revenues for the twelve months
ended January 31, 2001 was primarily due to shipments for new broadcast
customers in the U.S., Europe and the Far East. We expect future revenue
growth, if any, to come principally from our interactive television and
broadcast system products as cable and telecommunications companies continue to
offer new video-on-demand applications for their customers and the market for
digital video servers within the broadcast industry continues to expand. As
revenues from broadcast and interactive television products increase, the
digital advertising products will become a smaller portion of total system
revenues. However, SeaChange believes that there will be a continued demand for
expansions to existing digital advertising insertion systems within the U.S.
and growth potential for new interactive advertising systems in the future.
Services. Our services revenues consist of fees for installation, training,
product maintenance, technical support services and movie content fees. Our
services revenues increased 40% to $23.5 million in twelve months ended January
31, 2001 from $16.8 million in the twelve months ended December 31, 1999. This
increase in services revenues primarily resulted from the renewals of existing
technical support and maintenance, price increases on certain technical support
and maintenance services, the impact of a growing installed base of systems and
a higher volume of product development services.
For the twelve-month periods ended January 31, 2001 and December 31, 1999,
certain customers each accounted for more than 10% of our total revenues.
Single customers each accounted for 12% and 10% of total revenues in the twelve
months ended January 31, 2001 and 15% and 10% of total revenues in the twelve
months ended December 31, 1999. Revenue from these customers was primarily in
the broadband segment. We believe that revenues from current and future large
customers will continue to represent a significant proportion of total
revenues.
International sales accounted for approximately 21% and 23% of total
revenues in the twelve-month periods ended January 31, 2001 and December 31,
1999, respectively. We expect that international sales will remain a
significant portion of our business in the future. As of January 31, 2001,
substantially all sales of our products were made in United States dollars. We
do not expect to change this practice in the foreseeable future.
13
Therefore, we have not experienced, nor do we expect to experience in the near
term, any material impact from fluctuations in foreign currency exchange rates
on our results of operations or liquidity. If this practice changes in the
future, we will reevaluate our foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues consist primarily of the cost of
purchased components and subassemblies, labor and overhead relating to the
final assembly and testing of complete systems and related expenses. Costs of
systems revenues increased to $39.9 million in the twelve months ended January
31, 2001 as compared to $38.9 million in the twelve months ended December 31,
1999. In the twelve months ended January 31, 2001, the cost of systems revenues
increased from the prior year primarily as a result of higher systems revenues.
We expect the cost of systems revenues for the interactive television products
within the broadband segment to be higher as a percentage of revenues as the
products are first deployed and to decrease as a percentage of revenues as the
revenue level increases and we improve our manufacturing and material
purchasing efficiencies.
Systems gross profit as a percentage of systems revenues was 47% and 43% in
the twelve months ended January 31, 2001 and December 31, 1999, respectively.
The increase in systems gross profit in the twelve months ended January 31,
2001 was primarily due to lower material and other manufacturing costs as a
percentage of systems revenue within the broadband segment and specifically for
system revenues for the digital advertising insertion products. SeaChange was
able to reduce manufacturing material costs principally through improved
purchasing methods despite the continued trend towards the purchase of smaller
scale digital advertising insertion systems and expansions to existing systems
that have higher material content. Gross profit for the broadband segment
improved from 43% for the twelve months ended December 31, 1999 to 48% for the
twelve months ended January 31, 2001 while gross profit for the broadcast
segment was 44% and 45% for the twelve months ended January 31, 2001 and the
twelve months ended December 31, 1999, respectively. SeaChange does not know if
the reductions in material and labor costs as a percentage of revenues for the
broadband segment will continue in the future.
Services. Costs of services revenues consist primarily of labor, materials
and overhead relating to the installation, training, product maintenance and
technical support services provided by us and costs associated with providing
movie content. Costs of services revenues increased 26% from $15.0 million in
the twelve months ended December 31, 1999 to $18.8 million in the twelve months
ended January 31, 2001, primarily as a result of increased revenues and the
costs associated with our hiring and training additional service personnel to
provide worldwide support for the growing installed base of broadband and
broadcast systems and costs associated with providing movie content. Services
gross profit as a percentage of services revenue was 20% in the twelve months
ended January 31, 2001 and 11% in the twelve months ended December 31, 1999.
Improvements in the services gross profit in the twelve months ended January
31, 2001 reflect the increase in the installed base of systems under
maintenance, price increases on certain annual technical support and
maintenance services and higher product development revenues. We expect that we
will continue to experience fluctuations in gross profit as a percentage of
services revenue as a result of the timing of revenues from product and
maintenance support and other services to support the growing installed base of
systems and the timing of costs associated with our ongoing investment required
to build a service organization to support the installed base of systems and
new products.
Research and Development. Research and development expenses consist
primarily of the compensation of development personnel, depreciation of
development and test equipment and an allocation of related facilities
expenses. Research and development expenses increased 24% from approximately
$16.3 million in the twelve months ended December 31, 1999 to $20.3 million in
the twelve months ended January 31, 2001. The increase in the dollar amount was
primarily attributable to the hiring and contracting of additional development
personnel which reflects our continuing investment in new products. We expect
that research and development expenses will continue to increase in dollar
amount as we continue to focus on the development of new technology and support
of new and existing products.
14
Selling and Marketing. Selling and marketing expenses consist primarily of
the compensation expenses, including sales commissions, travel expenses and
certain promotional expenses. Selling and marketing expenses increased 45% from
$8.6 million in the twelve months ended December 31, 1999 to $12.5 million in
the twelve months ended January 31, 2001. This increase is primarily due to the
hiring of additional sales personnel for our broadcast and interactive
television products, increased sales commissions on higher revenues and higher
marketing expenses specifically for tradeshow and other promotional activities.
General and Administrative. General and administrative expenses consist
primarily of the compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facilities expenses. General and administrative expenses increased 38%
from $5.3 million in the twelve months ended December 31, 1999 to $7.4 million
in the twelve months ended January 31, 2001. This increase is primarily due to
increased legal expenses associated with various litigation matters and
accounting expenses associated primarily with tax matters.
Interest expense (income), net. Interest expense, net, was approximately
$212,000 in the twelve months ended January 31, 2001 and interest income, net
was approximately $28,000 in the twelve months ended December 31, 1999. The
increase in 2001 in interest expense, net, primarily resulted from interest
expense on increased borrowings under SeaChange's lines of credit and new
borrowings under SeaChange's construction loan.
Provision (benefit) for Income Taxes. SeaChange's effective tax rate for the
twelve months ended January 31, 2001 differed from the U.S. federal statutory
tax rate due to the utilization of research and development tax credits.
SeaChange's effective tax benefit rate was 116% for the twelve months ended
January 31, 2001 as compared to 3% for the twelve months ended December 31,
1999.
SeaChange had net deferred tax assets of $2.9 million, $4.1 million and $7.7
million at December 31, 1999, January 31, 2000 and January 31, 2001,
respectively. Although realizability is not assured, based on the weight of
available evidence, SeaChange believes it is more likely than not that all
remaining deferred tax assets will be realized. The amount of the deferred tax
asset considered realizable is subject to change based on future events,
including generating taxable income in future periods. SeaChange will continue
to assess the need for the valuation allowance at each balance sheet date based
on all available evidence. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if SeaChange does not
generate sufficient taxable income in future periods.
Cumulative effect change in accounting principle. During the fourth quarter
of the twelve months ended January 31, 2001, SeaChange implemented the SEC's
SAB 101 guidelines, retroactive to the beginning of the year. This was reported
as a cumulative effect of a change in accounting principle as of February 1,
2000. Historically, for some of SeaChange's sales transactions, a portion of
the sales price, typically 25%, was not due until installation occurred.
SeaChange now defers the portion of the sales price not due until installation
is complete. The cumulative effect of the change in accounting principle on
prior years resulted in a charge to income of $1.1 million (net of income taxes
of $732,000) or $0.05 per diluted share which has been included in income for
the fiscal year ending January 31, 2001. For the twelve months ended January
31, 2001, SeaChange recognized $1.5 million in revenue that is included in the
cumulative effect adjustment as of February 1, 2000.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1999
Revenues
Systems. Our systems revenues consist of sales of our 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.
Revenues from the digital advertising insertion segment or SPOT Systems, which
accounted for 60.5% and 52.3% of total revenues in 1998 and 1999, respectively,
increased slightly from $44.1 million in 1998 to $44.6 million in 1999. The
most significant increase in systems revenues in 1999 compared to 1998 resulted
primarily from the sale of broadcast systems, a product that was first
introduced and sold by us in the
15
second quarter of 1998. Broadcast segment revenues increased from $4.2 million,
or 5.8% of total revenues, in 1998 to $16.8 million, or 19.7% of total
revenues, in 1999. In addition, during the third quarter of 1999, we sold our
first interactive television systems which are used by cable operators and
telecommunications companies to provide movie and other interactive services
directly to the home of the cable subscriber. Revenues from the interactive
television segment were $500,000 in 1999. These increases in systems revenues
were offset in part by a $3.1 million decrease in systems revenues from the
movies segment which was due to the timing of receiving a relatively small
number of orders with a high average value per order. We expect future revenue
growth, if any, to come principally from our broadcast and interactive
television segments as the market for digital video servers within the
broadcast industry continues to expand and cable and telecommunications
companies continue to offer new video-on-demand applications for their
customers. As revenues from broadcast and interactive television segments
increase, the digital advertising segment will become a smaller portion of
total system revenues. However, we believe that there will be a continued
demand for expansions to existing digital advertising insertion systems within
the U.S. and growth potential for new interactive advertising systems in the
future.
For the years ended December 31, 1998 and 1999, certain customers accounted
for more than 10% of our total revenues. Individual customers accounted for 24%
and 15% of total revenues in 1998 and 15% and 10% of total revenues in 1999.
Revenues from these customers were predominantly in the digital advertising
insertion segment. We believe that revenues from current and future large
customers will continue to represent a significant proportion of our total
revenues.
International sales accounted for approximately 13% and 23% of total
revenues in the years ended December 31, 1998 and 1999, respectively. We expect
that international sales will remain a significant portion of our business in
the future. As of December 31, 1999, substantially all sales our products were
made in United States dollars. We do not expect to change this practice in the
foreseeable future. Therefore, we have not experienced, nor do we expect to
experience in the near term, any material impact from fluctuations in foreign
currency exchange rates on our results of operations or liquidity. If this
practice changes in the future, we will reevaluate our foreign currency
exchange rate risk.
Services. Our services revenues consist of fees for installation, training,
product maintenance, technical support services and movie content fees. Our
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. We expect costs of systems revenues
broadcast and interactive television segments to be higher as a percentage of
revenue when the products are first introduced and to decrease as a percentage
of revenues as we improve manufacturing efficiencies, spread fixed costs over a
larger production volume and achieve lower material costs through improved
purchasing efficiencies.
Systems gross profit as a percentage of systems revenues were 38% and 43% in
1998 and 1999, respectively. Gross profit for the digital advertising insertion
and the movies segments increased from 40% and 30% in 1998 to 43% and 38% in
1999, respectively, primarily as a result of continued reductions in
manufacturing material and labor costs as a percentage of segment revenues. We
were able to reduce manufacturing material costs principally through improved
purchasing methods despite the continued trend towards the purchase of smaller
scale digital advertising insertion systems and expansions to existing systems
16
that have higher material content. Gross profit for the broadcast segment also
improved from 43% in 1998 to 45% in 1999 as a result of higher revenues and
lower material and labor manufacturing costs as a percentage of revenues. We do
not know if the reductions in material and labor costs as a percentage of
revenues for the advertising insertion segment will continue in the future. The
gross profits in 1998 and 1999 were impacted by increases of approximately $2.0
million and $500,000, respectively, in our inventory valuation allowance. These
increases were within the digital advertising insertion segment and were the
result of new product introductions within this segment and the identification
and anticipation of inventory write-downs of slower turning excess and obsolete
materials. We do not anticipate a significant amount of inventory write-offs in
the future because we have established inventory controls of inventory write-
offs in the future because we have established inventory controls which provide
for better inventory management during the transition period of new product
introductions. We evaluate inventory levels and expected usage on a periodic
basis and provide 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 us 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 our 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. We expect that we will
continue to experience fluctuations in gross profit as a percentage of services
revenue as a result of the timing of revenues from product and maintenance
support and other services to support the growing installed base of systems and
the timing of costs associated with our ongoing investment required to build a
service organization to support the installed base of systems and new products.
Research and Development. Research and development expenses consist
primarily of compensation of development personnel, depreciation of equipment
and an allocation of related facilities expenses. Research and development
expenses increased 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 our
continuing investment in new products. All internal software development costs
to date have been expensed by us. We expect that research and development
expenses will continue to increase in dollar amount as we continue our
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, we 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, we had
notified all terminated employees. All restructuring charges were paid as of
December 31, 1998.
Acquisition Costs. On December 30, 1999, we acquired all of the authorized
and outstanding common stock of Digital Video Arts, Ltd. in exchange for
330,000 shares of our common stock using an exchange ratio of 0.033 of one
share of our common stock for each share of Digital Video Arts. The acquisition
was accounted
17
for as a pooling of interests. Digital Video Arts is a developer of custom
software products specializing in digital video and interactive television. As
a result of the acquisition, Digital Video Arts became our wholly-owned
subsidiary. Total revenues of $85.2 million for the year ended December 31,
1999 consisted of $84.2 million of our revenues and $1.0 million of Digital
Video Arts' revenues. Net income of $497,000 for the same period consisted of
our net income of $1.1 million and a Digital Video Arts 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, Digital Video Arts'
previously unrecognized tax benefits of operating loss carryforwards were
recognized in our consolidated results 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. Our 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 Digital Video Arts in 1999.
One Month Ended January 31, 2000 Compared to the One Month Ended January 31,
1999
Revenues
Systems. Systems revenues decreased 68% from $697,000 in the one month ended
January 31, 1999 to $226,000 in the one month ended January 31, 2000. This
decreased systems revenues resulted primarily from the timing of receipt of
customer orders and related shipment within both the broadband and broadcast
segments.
Services. Our services revenues increased 23% from approximately $1.2
million in the one month ended January 31, 1999 to $1.5 million in the one
month ended January 31, 2000. This increase in services revenues resulted
primarily from renewals of technical support and maintenance contracts, higher
product development revenues and the impact of a growing installed base of
systems.
For the one month period ended January 31, 2000 and January 31, 1999,
certain customers accounted for more than 10% of our total revenues. Single
customers accounted for 16% and 11% of total revenues in one month ended
January 31, 2000 and 17%, 12% and 10% of total revenues in the one month ended
January 31, 1999. Revenues from these customers were primarily in the broadband
segment. We believe that revenues from current and future large customers will
continue to represent a significant proportion of total revenues.
International sales accounted for approximately 18% and 38% of total
revenues for the one month ended January 31, 2000 and January 31, 1999,
respectively. We expect that international sales will remain a significant
portion of our revenues in the future. As of January 31, 2000, substantially
all sales of our products were made in United States dollars. We do not expect
any material change to this practice in the foreseeable future. Therefore, we
have not experienced, nor do we expect to experience in the near term, any
material impact from fluctuations in foreign currency exchange rates on our
results of operations or liquidity. If this practice changes in the future, we
will reevaluate our foreign currency exchange rate risk.
Gross Profit
Systems. Costs of systems revenues decreased 6% from $670,000 in the one
month ended January 31, 1999 to $633,000 in the one month ended January 31,
2000. For the one month ended January 31, 2000, the decrease in cost of systems
revenues primarily reflects lower systems revenue offset in part by fixed
manufacturing labor and overhead costs.
18
Systems gross profit as a percentage of systems revenues was a negative 180%
in the one month ended January 31, 2000. In the one month ended January 31,
1999, gross profit as a percentage of systems revenues was 4%. The decrease in
systems gross profit in 2000 was primarily due to lower systems revenue and
higher material and fixed manufacturing costs as a percentage of systems
revenues.
Services. Costs of services revenues increased 38% from approximately $1.0
million in the one month ended January 31, 1999 to $1.4 million in the one
month ended January 31, 2000, primarily as a result of the costs associated
with our hiring and training additional service personnel to provide worldwide
support for the growing installed base of broadband and broadcast systems and
costs associated with providing movie content. Services gross profit as a
percentage of services revenue decreased to 3% in the one month ended January
31, 2000 compared to a gross profit margin of 13% in the one month ended
January 31, 1999. We expect that we will continue to experience fluctuations in
gross profit as a percentage of services revenue as a result of the timing of
revenues from technical support and maintenance and other services to support
the growing installed base of systems and the timing of costs associated with
our ongoing investment required to build a service organization to support the
installed base of systems and new products.
Research and Development. Research and development expenses increased 33%
from approximately $1.3 million, in the one month ended January 31, 1999 to
$1.8 million in the one month ended January 31, 2000. The increase in the
dollar amount was primarily attributable to the hiring and contracting of
additional development personnel which reflects our continuing investment in
new products. We expect that research and development expenses will continue to
increase in dollar amount as we continue our development and support of new and
existing products.
Selling and Marketing. Selling and marketing expenses increased 98% from
$522,000 in the one month ended January 31, 1999 to $1.0 million in the one
month ended January 31, 2000. This increase is primarily due to the hiring of
additional sales personnel for our broadcast and interactive television
products and higher tradeshow expenses.
General and Administrative. General and administrative expenses increased 2%
from $447,000 in the one month ended January 31, 1999 to $457,000 in the one
month ended January 31, 2000.
Interest Income, net. Interest income, net, was approximately $9,000 in the
one month ended January 31, 2000 and January 31, 1999, respectively.
Benefit for Income Taxes. Our effective tax benefit rate was 32% and 33% in
the one month ended January 31, 2000 and January 31,1999, respectively.
Quarterly Results of Operations
The following tables present certain unaudited quarterly information for the
quarterly periods in the years ended January 31, 2001, January 31, 2000 and
December 31, 1999. Previously reported amounts for the first, second and third
quarters of 2001 have been restated to give effect to the cumulative change in
accounting principle (see Note 3 to the Consolidated Financial Statements) and
the adoption of EITF 00-10, "Accounting for Shipping and Handling Revenues and
Costs." In addition, previously reported amounts for the year ended December
31, 1999 have been recast to present prior year periods on a basis comparable
with the current year-end. This information is derived from unaudited financial
statements and has been prepared on the same basis as our audited financial
statements which appear elsewhere in this document. In the opinion of our
management, this data reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the information when
read in conjunction with our consolidated financial statements and notes
thereto. The results for any quarter are not necessarily indicative of future
quarterly results, and we believe that period-to-period comparisons should not
be relied upon as an indication of future performance.
19
Year ended January 31, 2001
------------------------------------------
As Reported
------------------------------------------
April 30, July 31, October 31, January 31,
2000 2000 2000 2001
--------- -------- ----------- -----------
(in thousands)
Revenue........................... $22,336 $25,567 $24,222 $ 25,782
Gross profit...................... 8,832 10,182 10,005 10,370
Operating expenses................ 8,346 9,426 9,945 12,410
Net income (loss)................. $ 349 $ 512 $ 4 $ (1,012)
======= ======= ======= ========
Earnings (loss) per share-- Ba-
sic.............................. $ 0.02 $ 0.02 $ 0.00 $ (0.05)
======= ======= ======= ========
Earnings (loss) per share-- Dilut-
ed............................... $ 0.02 $ 0.02 $ 0.00 $ (0.05)
======= ======= ======= ========
Year ended January 31, 2001
------------------------------------------
As Adjusted
------------------------------------------
April 30, July 31, October 31, January 31,
2000 2000 2000 2001
--------- -------- ----------- -----------
Revenue........................... $22,304 $25,356 $25,026 $ 25,782
Gross profit...................... 8,706 9,906 10,760 10,370
Operating expenses................ 8,346 9,426 9,945 12,410
Income (loss) before cumulative
effect of change
in accounting principle.......... 263 $ 330 $ 512 $ (1,012)
Cumulative effect of change in ac-
counting principle
net of tax of $732............... (1,100) -- -- --
Net income (loss)................. $ (837) $ 330 $ 512 $ (1,012)
======= ======= ======= ========
Earnings (loss) per share-- Ba-
sic.............................. $ (0.04) $ 0.02 $ 0.02 $ (0.05)
======= ======= ======= ========
Earnings (loss) per share-- Dilut-
ed............................... $ (0.04) $ 0.01 $ 0.02 $ (0.05)
======= ======= ======= ========
Year ended December 31, 1999
---------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenue........................ $20,811 $21,674 $21,709 $21,027
Gross profit................... 7,494 7,961 8,001 7,914
Operating expenses............. 7,504 7,665 7,465 8,282
Net income (loss).............. $ (32) $ 400 $ 292 $ (163)
======= ======= ======= =======
Earnings (loss) per share-- Ba-
sic........................... $ (0.00) $ 0.02 $ 0.01 $ (0.01)
======= ======= ======= =======
Earnings (loss) per share-- Di-
luted......................... $ (0.00) $ 0.02 $ 0.01 $ (0.01)
======= ======= ======= =======
Year ended January 31, 2000
---------------------------------------------
April 30, July 31, October 31, January 31,
1999 1999 1999 2000
--------- -------- ------------- ------------
Revenue........................ $21,289 $22,628 $20,030 $21,076
Gross profit................... 7,792 8,133 6,544 8,344
Operating expenses............. 7,763 7,418 7,521 9,176
Net income (loss).............. $ 1 $ 813 $ (614) $ (757)
======= ======= ======= =======
Earnings (loss) per share-- Ba-
sic........................... $ 0.00 $ 0.04 $ (0.03) $ (0.04)
======= ======= ======= =======
Earnings (loss) per share-- Di-
luted......................... $ 0.00 $ 0.04 $ (0.03) $ (0.04)
======= ======= ======= =======
20
We have experienced significant variations in revenues, expenses and
operating results from quarter to quarter and such variations are likely to
continue. A significant portion of our 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. During the quarterly periods for the last two years, we experienced
variations in our revenues from quarter to quarter primarily related to the
significant growth of our interactive television products in the broadband
segment and broadcast segment products. The broadcast segment revenues
increased from $3.1 million in the first quarter of 1999 to a high of $7.2
million in the third quarter of fiscal year January 31, 2001. During this same
time period, interactive television system revenues increased from $1.3 million
in the first quarter of 1999 to $4.6 million in the fourth quarter of the
twelve months ended January 31, 2001.
We have also experienced significant variations in our 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. During the quarterly periods in 1999 and fiscal year 2001, the gross
margins improved significantly from a low of 37% in the first quarter of 1999
to a high of 41% in the third quarter of the twelve months ended January 31,
2001 as a result of a reduction in prices of hardware components for digital
advertising insertion and broadcast segment products and increased revenues.
Operating expenses also vary with the number, timing and significance of new
product and product enhancement introductions by us and our competitors,
increased competition, the gain or loss of significant customers, the hiring of
new personnel and general economic conditions. During the quarterly periods in
1999 and in the twelve months ended January 31, 2001, we experienced certain
fluctuations in our operating expenses. Specifically, acquisition costs related
to our purchase of Digital Video Arts in the fourth quarter of 1999 resulted in
increased operating expenses. During the twelve months ended January 31, 2001,
we increased headcount within our research and development and sales and
marketing areas to reflect our continued investment in future product
development and our desire to increase our interactive television and broadcast
revenues. As a result, our expenses in both of these areas increased during the
year. In addition, our selling and marketing costs fluctuate from quarter to
quarter as a result of large tradeshows that take place in the first and third
quarter of the year and significant promotional costs that are incurred for new
product introductions. All of the above factors are difficult for us to
forecast, and these or other factors may materially adversely effect 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.
Based upon all of the foregoing, we believe that quarterly revenues and
operating results are likely to vary significantly in the future and that
period-to-period comparisons of our results of operations are not necessarily
meaningful and, therefore, should not be relied upon as indications of future
performance. For the quarter ended April 30, 2001, SeaChange expects to
generate revenues of approximately $29.0 to $30.0 million and net income of a
penny per share.
Liquidity and Capital Resources
We have financed our operations and capital expenditures primarily with the
proceeds of our common stock, borrowings and cash flows generated from
operations. Cash and cash equivalents increased $3.4 million from $2.7 million
at January 31, 2000 to $6.1 million at January 31, 2001. Working capital
increased from approximately $21.0 million at January 31, 2000 to approximately
$28.8 million at January 31, 2001.
Net cash used in operating activities was approximately $4.9 million for the
twelve months ended January 31, 2001. Net cash provided by operating activities
was approximately $8.6 million for the twelve months ended December 31, 1999.
The net cash used in operating activities in the twelve months ended January
31, 2001 was the result of the net loss adjusted for non-cash expenses
including depreciation and amortization of $4.9 million offset by
21
changes in certain operating assets and liabilities. The significant net
changes in assets and liabilities that used cash in operations included an
increase in accounts receivable of $10.4 million, an increase in inventories of
$5.1 million and an increase in prepaid expenses and other assets of $2.1
million. Inventory levels increased during the period principally as a result
of new product introductions within the interactive television and broadcast
product areas. Increases of inventory levels occurred in each of these product
areas specifically for customer demonstration equipment and procurement
commitments in component inventories with an average order to delivery
requirement of twelve to fifteen weeks. We expect these inventory levels to
decrease and then stabilize as revenues from both these products increase. We
expect that the broadcast segment and the interactive television products
within the broadband segment will continue to require a significant amount of
cash to fund future product development, to manufacture and deploy customer
test and demonstration equipment and to meet higher revenue levels in both
product segments. These items that used cash in operations were partially
offset by an increase in accounts payable of $6.9 million and an increase in
deferred revenue of $2.1 million.
Net cash used in investing activities was approximately $12.8 million and
$3.1 million for the twelve months ended January 31, 2001 and December 31,
1999, respectively. Investment activity consisted primarily of capital
expenditures related to construction to expand the current manufacturing
facility and 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 $21.1 million
and $364,000 for the twelve months ended January 31, 2001 and December 31,
1999, respectively. In the twelve months ended January 31, 2001, the cash
provided by financing included $12.8 million received in connection with the
issuance of common stock ($10 million of which was issued to Microsoft
Corporation) and $10.0 million in borrowings under the lines of credit and our
construction loan. Microsoft entered into an agreement with us to collaborate
on extending Microsoft Windows Media Technologies from Broadband Internet
delivery to cable and broadcast television systems. Concurrent with this
agreement, Microsoft purchased 277,162 shares of our common stock for $10
million at 8% below the average closing price of our common stock over the ten
trading days ending one trading day prior to the date of the relevant
commercial milestones. Microsoft has agreed to purchase additional shares of
our common stock based upon the achievement of mutually agreed upon development
milestones including the development of software that meets specific streaming
performance levels and the commercial release of an enhanced version of the
software that will be used with Microsoft's Next Generation Media Server.
During the same period, cash used in financing activities included
approximately $1.7 million in principal payments under our equipment line of
credit and capital lease obligations.
We had a $6.0 million revolving line of credit and a $5.0 million equipment
line of credit with a bank. This revolving line of credit expired in March 2000
and our ability to make purchases under the equipment line of credit expired in
March 2000. In July 2000, we renewed our revolving line of credit and equipment
line of credit with a bank. The revolving line of credit was extended until
March 2001 and borrowings under the facility increased to $7.5 million. The
equipment line of credit was extended to provide SeaChange additional equipment
financing of $4.0 million through March 2001. In addition, we entered into a
$3.0 million line of credit facility with the Export-Import Bank of the United
States ("EXIM") which allows us to borrow money based upon eligible foreign
customer account balances. Our ability to borrow funds under this facility also
expired in March 2001. We are currently in the process of negotiating the
renewal of all our lines of credit. Borrowings under all the lines of credit
are collateralized by substantially all of our assets. Loans made under the
revolving line of credit would generally bear interest at a rate per annum
equal to the LIBOR rate plus 2% (9.05% at January 31, 2001). Loans under the
EXIM line of credit bear interest at a rate per annum equal to the prime rate
(9.5% at January 31, 2001). 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% (10.5% at
January 31, 2001). The loan agreement relating to the lines of credit requires
that we 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 ratio of at least .80 to 1.0. At
January 31, 2001, we were not in compliance with certain financial covenants of
the loan agreement for all the lines of credit. Subsequent to year-end, we
received a waiver of non-compliance from the
22
bank. As of January 31, 2001, there were $4.0 million in borrowings against the
revolving line of credit and borrowings outstanding under the equipment line of
credit were $4.9 million. There were no borrowings outstanding under the EXIM
line of credit at January 31, 2001.
In October 2000, we entered into an agreement with a bank to finance $1.2
million of the construction costs related to the purchase and renovation of a
manufacturing mill in New Hampshire that we previously purchased in February
2000. During the construction period, interest is accrued and payable at a per
annum rate of 8.875%. Upon occupancy of the building , the loan converted into
two promissory notes whereby we will pay principal and interest based upon a
fixed interest rate per annum over a five and ten year period, respectively
(8.875% at January 31, 2001). Borrowings under the loan are secured by the land
and buildings of the renovated mill. The loan agreement requires that we
provide the bank with certain periodic financial reports and comply with
certain financial ratios. At January 31, 2001, we were in compliance with all
covenants. As of January 31, 2001, borrowings outstanding under the loan were
$1.2 million.
On February 28, 2001, we received $10.0 million from a private placement
sale of common stock and a warrant to Comcast SC Investment, Inc. (See Note 14
to the Consolidated Financial Statements). We believe that existing funds
together with available borrowings under the revolving lines of credit are
adequate to satisfy our working capital and capital expenditure requirements
for the foreseeable future.
We had no material capital expenditure commitments as of January 31, 2001.
We had non-cancelable purchase commitments for inventories of approximately
$5,400,000 at January 31, 2001.
One month ended January 31, 2000
During the one month periods ended January 31, 2000 and January 31, 1999, we
used cash in operations of $8.3 million, and $1.3 million, respectively. It is
typical for us to experience fluctuations in our monthly operating results
primarily due to the timing of receiving customer orders and the related
shipment of these customer orders. As a result of these monthly fluctuations,
we may experience an increase in our inventories as a result of procurement of
both short and long lead components for anticipated orders for both our product
segments, a decrease in our accounts payable balance primarily due to the
timing of payments for materials purchased for prior month shipments, a
decrease in accounts receivable amounts as a result of customer payments
without corresponding customer shipments and a resulting decrease in cash and
cash equivalents.
We believe that existing funds together with available borrowings under the
revolving line of credit and equipment line facility are adequate to satisfy
our working capital and capital expenditure requirements for the foreseeable
future.
We had no material capital expenditure commitments as of January 31, 2000.
Effects of Inflation
Our 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. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standarads No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of SFAS No. 133. This accounting standard amended the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. We will adopt SFAS No. 133, as amended, in fiscal year
2002. To date we have 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.
23
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We face exposure to financial market risks, including adverse movements in
foreign currency exchange rates and changes in interest rates. These exposures
may change over time as business practices evolve and could have a material
adverse impact on our financial results. Our primary exposure has been related
to local currency revenue and operating expenses in Europe and Asia.
Historically, we have not hedged specific currency exposures as gains and
losses on foreign currency transactions have not been material to date. At
December 31, 1999 and January 31, 2001, we had $1.7 million and $10.1 million
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 and $95,000 for the twelve month periods
ended December 31, 1999 and January 31, 2001.
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 and January 31, 2001 due to the short maturities of these
instruments.
We maintain investment portfolio holdings of various issuers, types, and
maturities. Our cash and marketable securities include cash equivalents, which
we consider to be securities 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 and January 31, 2001, a sharp rise in
interest rates should not have a material adverse impact on the fair value of
our investment portfolio. As a result, we do not currently hedge these interest
rate exposures.
24
BUSINESS
Incorporated in Delaware in July 1993, we develop, manufacture and sell
systems, known as video storage servers, that automate the management and
distribution of both short-form video streams, such as advertisements, and
long-form video streams, such as movies or other feature presentations, each of
which requires precise, accurate and continuous execution, to television
operators, telecommunications companies and broadcast television companies. Our
systems utilize both standard industry components and our embedded proprietary
software that performs the specific functions of information processing such as
order processing, invoicing and other similar functions. Our digital video
systems with their state-of-the-art electronic storage and retrieval
capabilities are designed to provide a higher image quality and to be more
reliable, easier to use and less expensive than analog tape-based systems that
are based on transmission of a continuous electronic signal that may vary in
both frequency and amplitude. We believe that by automating the management and
distribution process our systems help our customers reduce their ongoing
operating costs while simultaneously allowing our customers to increase
revenues by offering more targeted services such as local advertising segments,
known as geography-specific spot advertising, inserted into cable programming;
movies, known as video-on-demand movies, that the subscriber is able to watch
at any time with pause, rewind and fast forward features; and other services,
known as interactive television services, that allow consumers to customize
and/or interact with their television viewing experience in a manner similar to
that of using a personal computer.
In our broadband or high bandwidth network or facility systems business
segment, we have one existing movie product and two video-on-demand products
for the interactive television markets. Our Movie System product provides long-
form video storage and delivery for the pay-per-view movie markets. Our
GuestServe System product delivers video-on-demand and other guest services,
Internet access and personal computer games in a hotel environment for cable
television and telecommunications companies. Our ITV System product provides
residential video on demand or interactive television system services,
including accessing movies and other programs, purchasing products and
retrieving Internet content through the television, to digitally manage, store
and distribute digital video for cable television operators and
telecommunications companies. Starting in 1998, the market for our ITV System
expanded when we entered into agreements with several cable companies to
provide our ITV System for demonstration and testing of their video-on-demand
systems and in 2000, several of these cable operators began deploying our ITV
System. We also have agreements with leading producers of hardware devices,
known as set-top boxes, used to receive and unscramble television signals,
including agreements with Scientific-America, Motorola and Sony Corporation to
test and integrate their products with our ITV System.
In addition to our video on demand systems, our broadband system business
segment includes our SPOT System product, which, based on currently available
industry sources and our internal data, is the leading system in the United
States for the transmission of video content, known as a video insertion
system, in the multichannel television market for digital advertisement and
other short-form video. Our SPOT System converts analog video forms such as
advertisements and news updates to digital video forms, stores the digital
video forms in remote or local storage devices, known as digital libraries, and
inserts them automatically into television network streams. The SPOT System
provides both high accuracy relative to the volume of video being played and
high video image quality, permits geographic and demographic specificity of
advertisements and we believe reduces operating costs by automating the
management and distribution process. Our Advertising Management Software
product operates in conjunction with our SPOT System to automate and simplify
complex sales, scheduling and billing processes for the multichannel television
market. A majority of our customers for these products consist of major cable
television operators and telecommunications companies in the United States.
In our broadcast or cable network systems business segment, our Broadcast
MediaCluster product offers call letter stations, such as KSTP-Saint Paul, the
ability to directly transmit content, such as commercials and syndicated or
other programming for broadcast television companies, to their viewers. Today,
the technology utilized by broadcasters is going through a transition away from
analog tape libraries to digital server based storage of content. We believe
that our broadcast MediaCluster system will eliminate the need for analog tape
25
libraries and will provide broadcasters the automated storage and playback
features that they require. Since 1998, we have installed broadcast systems at
customer locations including network affiliates and multi-channel operations in
the United States, Europe and the Far East.
Financial information regarding our business segments is located in the
footnotes to our financial statements included with this prospectus under the
heading "Segment Information."
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 videotape as the primary mechanism for the
storage and distribution of video, have substantial limitations. Videotapes 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, videotapes 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, competition has forced television operators to 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. The number of cable subscribers world-wide has been estimated at 150
million. Over the last several years, cable operators have spent billions of
dollars to upgrade their networks from analog to digital yielding a significant
increase in available bandwidth, channel capacity and two-way capability. We
believe this investment by the cable operators reflects their commitment to
video on demand, advertising insertion, Internet and other applications.
Video on demand represents a new opportunity for cable television operators.
The increased channel capacity through the installation of fiber optic cables
is providing many cable television operators with the capacity to offer
specific video on demand services to residential cable subscribers. In 2000,
cable operators and telecommunications companies began the deployment of
residential video on demand services which allows the subscriber the ability to
watch video programming at any time with pause, rewind and fast forward
capabilities. The first application offered by these cable operators has been
movies on demand.
Because cable television programming is sent over broadband or high
bandwidth network or facility 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
26
prevented cable television operators from historically exploiting their
advantages over television broadcasters as these systems are difficult to
manage in multichannel and multi-zone environments, resulting in relatively
poor video insertion accuracy and high operating costs.
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. We believe
that cable television operators and telecommunications companies will play an
integral role in providing these broadband Internet applications. We also
believe 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. We believe that our 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 accuracy relative to the volume of video being played and high 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 videotapes in these systems need to be replaced frequently due
to repeated use.
In addition, many television broadcasters are beginning to use the recently
available digital bandwidth to originate multiple program streams. As this
application develops further, 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, we believe that our Broadcast MediaCluster products provide a
unique solution that addresses these requirements.
The SeaChange Solution
We develop, manufacture and sell systems, known as video storage servers,
that automate the management and distribution of both short-form video streams,
such as advertisements, and long-form video streams, such as movies or other
feature presentations, each of which requires precise, accurate and continuous
execution, and the related services and movie content to television operators,
telecommunications companies and broadcast television companies. Our solutions
are based on the following five core areas of functionality:
. real-time conversion of analog video into digital video format;
. storage and retrieval of video content to and from digital libraries;
. scheduled distribution of video streams between digital libraries by
means of local and wide area data networks;
. delivery of video streams over single and multiple channels; and
. Management of video sales, scheduling, billing and execution of related
business transactions.
We use these core areas of functionality to provide solutions to a number of
commercial markets. Our systems are designed to provide a consistent set of
features and benefits, including:
27
. Viewer Targeting. Our 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. Our
ITV and GuestServe systems make it possible for television operators to
offer video-on-demand movies to individual residences or hotel rooms,
our SPOT System offers this capability to television operators and our
Broadcast MediaCluster offers this capability to broadcast television
networks companies.
. Cost Reduction. Our products are designed to provide our customers
operating cost reductions as compared to analog tape-based systems due
to, among other things, the elimination of videotapes and their storage
and lower operating personnel requirements. We are also able to price
our products on a competitive basis by using standard operating systems
and components. We believe that the combination of competitive pricing
of our products and reductions in the operating costs of our customers
results in attractive payback periods on the initial capital outlay by
our customers for our products.
. Scalability. Our 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,
our proprietary storage technology enables the scalability of storage of
digital video from a few minutes to hundreds of hours of video.
. Reliability. Our 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, our 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. We believe our products are simple to learn, require less
maintenance, and are less personnel intensive than analog systems. Due
to their innovative architecture, our products offer a number of
features that simplify their use, including remote monitoring and
service and automated short- and long-form video distribution.
Strategy
Our objective is to be the leader in the emerging market for the storage,
management and distribution of professional quality digital video for the
television marketplace. The key elements of our strategy are to:
. Develop long-term Customer Relationships. We are focusing our 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. We have formed our customer relationships by
providing digital video solutions to address customers' immediate
problems, such as advertisement and other short-form video insertion. We
intend to continue to leverage our customer relationships to offer new,
compatible products to meet evolving market needs, such as video-on-
demand programming. We believe that the fundamental shift from analog to
digital video and the growing emphasis on interactive technologies will
continue to present opportunities for us to develop, market and support
our products to both our existing customer base and to customers in
additional markets.
28
. Offer Complete Solutions. Our customers operate complex networks that
require the delivery and management of video programming across multiple
channels and target zones. We believe 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, we provide integrated applications and support services, which
are more effective than individual functional products not specifically
designed to work together. We believe that providing complete integrated
solutions has been a significant factor in our success and will be an
increasingly important competitive advantage.
. Establish and Maintain Technological Leadership Through Systems
Integration. We believe our competitive position is dependent in a large
part on the features and performance of our integrated systems. As a
result, we focus our research and development efforts on introducing
systems with improved hardware and software capabilities.
. Provide Superior Customer Service and Support. Our products operate in
customer environments where continuous operation is critical. As a
result, we believe that providing a high level of service and support
give us a competitive advantage and is a differentiating factor in
developing and maintaining key customer relationships. Our in- depth
industry and application knowledge allows us to better understand the
service needs of our customers. As of January 31, 2001 more than 34% of
our 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 our products, the service organization has the ability to monitor the
performance of customer installations and, in most cases, rectify
problems remotely. Customers have access to service personnel via 24-
hour, seven-day a week telephone support.
Products
We integrate standard industry components and embedded proprietary software
with television components into our products. These products are marketed to
cable television operators, telecommunication companies, television
broadcasters, systems integrators and value-added resellers.
Broadband Products
Interactive Television Products
SeaChange ITV System. We have developed and are deploying our interactive
television system. This system is sold to cable television operators and other
telecommunications companies and enables them to offer video on demand and
other interactive services, including accessing movies and other programs,
purchasing products and retrieving Internet content through the television, to
their subscribers who have digital set-top boxes and access two way cable
plants. This system consists of our MediaCluster product which will reside at
headends or nodes in the cable system, our Command Center control software to
manage and control the system, and interfaces to digital headend modulators and
control systems and subscriber management systems.
The delivery of video content to the subscriber utilizes our proprietary
MediaCluster technology through the following steps:
. Customer selection: When a customer selects from their set top box a
video title to view, a message is transmitted from the set top box to
our MediaCluster video server system located at the headend of the cable
system.
. Video selection execution: The MediaCluster video server system receives
the video title request and retrieves the selection from the storage
disk; which is an MPEG-2 compressed digital video file. The video file
is loaded on the video server, which then executes the program.
. Transmission to the customer: A network management device assesses the
best route along the operator's network to deliver the video selection.
The video file is delivered to a modulator,
29
which formats the video file so that it can be delivered across the
broadband network. The video file is then delivered back to the
customer's set top box.
. Customer viewing: The set top box receives the video file and decrypts
the signal and delivers it to the television for viewing. The software
in the set top box provides the subscriber with the functionality of a
traditional video cassette recorder, allowing the customer to pause,
fast-forward and rewind the video file. Some set top boxes have storage
capabilities that enable the customer to store the video file for an
extended period of time.
SeaChange Guestserve System. Our Guestserve System product 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 personal computer games. We are marketing our Guestserve System to
cable television operators as part of an integrated product that allows these
operators to 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, and
our MediaCluster product that contains 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. Our Movie System product provides cable television
operators, pay-per-view movie service providers and direct-to-home providers
with capability to originate multiple pay-per-view movie channels or any other
scheduled video programming. Our Movie System includes both our MediaCluster
products that contains technology for storage and delivery of the video
programming and an MPEG-2 encoder for capturing movies from video tape, and
scheduling software and hardware to enable creating programming schedules for
the pay-per-view 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 SPOT System Product
Our SPOT System product automates the complex process of advertisement and
other video insertion across multiple channels and geographic zones for cable
television operators and telecommunications companies. Through our embedded
proprietary software, our 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.
Our SPOT System is an integrated solution composed of software
applications, hardware platforms, data networks and easy to use graphical
interfaces. Our SPOT System is designed to be installed at local cable
transmission sites, known as headends, and advertising sales business offices.
Our video insertion process consists of six steps:
. Encoding: The process begins with our Encoding Station product which
uses our embedded proprietary encoding software and hardware that
embodies MPEG-2, the industry standard for digital video and audio
compression, to transform in real time and compress analog to digital
short-and long-form video.
. Storage: Digital video is then stored in a disk-based video library,
capable of storing thousands of spots, where our SPOT System organizes,
manages and stores these video streams.
. Scheduling: Our 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: Our 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.
30
. Insertion: Following a network cue, our 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, our proprietary software and
hardware verifies the content, accuracy, timing and placement of these
video streams to facilitate proper customer billing.
We have developed a variety of different models of the SPOT System to
support operators' differing requirements. The selling price for our SPOT
Systems ranges from under $100,000 to several million dollars; the average
system selling price of approximately $250,000.
SeaChange Advertising Management Software
Our Advertising Management Software product, referred to in the past as our
Traffic and Billing Software product, is designed to permit television
operators to manage advertising sales, scheduling, packaging and billing
operations. This product provides advertising sales executives with management
performance reports, inventory tracking, and order entry, billing and accounts
receivable management. Our Advertising Management Software can be integrated
with our SPOT System and is also compatible with many other commercially
available third party advertisement insertion systems.
Broadcast Products
SeaChange Broadcast MediaCluster System. Our Broadcast MediaCluster System
product 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. Our Broadcast MediaCluster
System is designed for customers both in larger broadcast television markets,
which use station automation systems, and in smaller markets, which use control
software included in the system.
As with the ITV System in the broadband segment, our Broadcast MediaCluster
System is designed to simultaneously record, encode, store to a disk and play
video content using 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.
Currently, our Broadcast MediaCluster system is composed of three to seven
individual video servers arranged in a cluster acting as one system. Each video
server in a cluster is connected to every other video server in the cluster
creating a system with no single point of failure. Our broadcast system
utilizes parity data to ensure fault tolerance in the event of component or
video server failure and provides for more efficient data storage and
eliminates the need for mirrored back-up video servers. Our Broadcast
MediaCluster system also has other features that enable the broadcaster to have
end to end functionality and reliability. One feature enables the broadcasters
to schedule its programming for a week of television content.
Customer Service and Support
We install, maintain and support our products in North America, Asia, South
America and Europe. We offer basic and advanced formal on-site training for
customer employees. We currently provide installation, maintenance and support
to international customers and also provide movie content in conjunction with
sales of our GuestServe System. We offer technical support to customers, agents
and distributors on a 24-hour, seven-day a week basis. Our systems sales
include always one year of free maintenance.
Customers
We currently sell our products primarily to cable television operators,
broadcast and telecommunications companies.
31
Our 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 our revenues in any given
fiscal period have been derived from substantial orders placed by these large
organizations. In the years ended December 31, 1998 and 1999, the one month
ended January 31, 2000, and the year ended January 31, 2001, revenues from our
five largest customers represented approximately 55%, 47%, 47% and 44%
respectively, of our total revenues. Customers accounting for more than 10% of
total revenues consisted of AT&T Media Services (formerly Tele-Communications)
(24%) and Time Warner (15%) in 1998; AT&T Media Services (15%) and Time Warner
(10%) in 1999; AT&T Media Services (16%) and Time Warner (11%) in the one month
ended January 31, 2000; and Time Warner (12%) and Cox Communications (10%) in
the twelve months ended January 31, 2001. We expect that we will continue to be
dependent upon a limited number of customers for a significant portion of our
revenues in future periods. As a result of this customer concentration, our
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. In addition, the
concentration of customers may make variations in revenue, expenses and
operating results due to seasonality of orders more pronounced.
We believe that our backlog at any particular time is not meaningful as an
indicator of our future level of sales for any particular period. Because of
the nature of our products and our use of standard components, substantially
all of the backlog at the end of a quarter can be manufactured by us and is
intended to be shipped by the end of the following quarter. However, because of
the requirements of particular customers these backlogs may not be shipped or,
if shipped, the related revenues may not be recognized in that quarter.
Therefore, there is no direct correlation between the backlog at the end of any
quarter and our total sales for the following quarter or other periods.
Selling and Marketing
We sell and market our 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 our marketing group. Direct sales activities in the United States are
conducted from our Massachusetts headquarters and seven field offices. In
October 1996, we entered into an exclusive sales and marketing services
agreement with a private Italian company to provide these services throughout
continental Europe. We also market certain of our products, namely our
MediaCluster, to systems integrators and value-added resellers. As of January
31, 2001, our selling and marketing organization consisted of 40 people.
In light of the complexity of our digital video products, we primarily
employ a consultative direct sales process. Working closely with customers to
understand and define their needs enables us to obtain better information
regarding market requirements, enhance our expertise in our customers'
industries, and more effectively and precisely convey to customers how our
solutions address the customer's specific needs. In addition to the direct
sales process, customer references and visits by potential customers to sites
where our products are in place are often critical in the sales process.
We use several marketing programs focused on our targeted markets to support
the sale and distribution of our products. We use exhibitions at a limited
number of prominent industry trade shows and conferences and presentations at
technology seminars to promote awareness of us and our products. We also
publish technical articles in trade and technical journals and promotional
product literature.
Research and Product Development
Our management believes that our success will depend to a substantial degree
upon our ability to develop and introduce in a timely fashion new products and
enhancements to our existing products that meet changing customer requirements
in our current and new markets. We have in the past made, and intend to
continue to make, substantial investments in product and technological
development. Through our direct sales process we monitor changing customer
needs, changes in the marketplace and emerging industry standards, and are
therefore better able to focus our research and development efforts to address
these evolving industry requirements.
32
Our research and development expenditures totaled approximately $15.8
million, $16.3 million, $1.8 million, and $20.3 million for the years ended
December 31, 1998 and 1999, the one month ended January 31, 2000, and the year
ended January 31, 2001, respectively. At January 31, 2001, 157 employees were
engaged in research and product development. We believe that the experience of
our product development personnel is an important factor in our success. We
perform our research and product development activities at our headquarters and
in offices in Greenville, New Hampshire; Atlanta, Georgia; and Fort Washington,
Pennsylvania. We have historically expensed our direct research and development
costs as incurred.
We have 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 our MediaCluster software. In December
1999, we enhanced our 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. However, in
the future we may not be able to successfully develop and market these
products, or to identify, develop, manufacture, market or support other new
products or enhancements to our existing products successfully or on a timely
basis. In addition, our products may not gain market acceptance, or we may be
unable to respond effectively to product announcements by competitors or
technological changes.
Manufacturing
Our 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. Our 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. We rely on
independent contractors to manufacture components and subassemblies to our
specifications. Each of our products undergoes testing and quality inspection
at the final assembly stage.
We attempt to use standard parts and components available from multiple
vendors. Certain components used in our products, however, are currently
purchased from a single source, including a computer chassis manufactured by
Trimm Technologic, a disk controller manufactured by Mylex, a decoder card for
MPEG-2, the standard for digital video and audio compression, manufactured by
Vela Research and an MPEG-2 encoder manufactured by Optivision, Inc. While we
believe that there are alternative suppliers available for these components, we
believe that the procurement of these components from alternative suppliers
would take anywhere from 45-120 days. However, these alternative components may
not be functionally equivalent or may be unavailable on a timely basis or on
similar terms. In addition, we purchase several other components from a single
supplier, although we believe that alternative suppliers for these components
are readily available on a timely basis. We generally purchase sole source or
other components pursuant to purchase orders placed from time to time in the
ordinary course of business and have no written agreements or guaranteed supply
arrangements with our sole source suppliers. We have experienced quality
control problems and supply shortages for sole source components in the past
and, in the future, it is possible that we may again experience significant
quality control problems or supply shortages for these components. However, any
interruption in the supply of these single source components could have a
material adverse effect on our business, financial condition and results of
operations. Because of our reliance on these vendors, we may also be subject to
increases in component costs which could adversely affect our business,
financial condition and results of operations.
Competition
The markets in which we compete are characterized by intense competition,
with a large number of suppliers providing different types of products to
different segments of the markets. We currently compete principally on the
basis of the breadth of our 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 our products; and our reputation and the
depth of our expertise,
33
customer service and support. While we believe that we currently compete
favorably overall with respect to these factors and that our ability to provide
solutions to manage, store and distribute digital video differentiates us from
our competitors, in the future we may not be able to continue to compete
successfully with respect to these factors.
In the digital advertisement insertion market, we generally compete only
with nCube (formerly SkyConnect, Inc.). In the market for long-form video
products including video-on-demand, we compete 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, our 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,
we compete against Grass Valley Group, Inc., Pinnacle Systems, Inc., Sony
Corporation, and ASC Incorporated. We expect the competition in each of these
markets to intensify in the future.
Many of our current and prospective competitors have significantly greater
financial, technical, manufacturing, sales, marketing and other resources than
us. As a result, these competitors may be able to devote greater resources to
the development, promotion, sale and support of their products than us.
Moreover, these companies may introduce additional products that are
competitive with ours or enter into strategic relationships to offer complete
solutions, and in the future our products may not be able to compete
effectively with these products.
Although we believe that we have certain technological and other advantages
over our competitors, maintaining these advantages will require continued
investment by us in research and development, selling and marketing and
customer service and support. In addition, as we enter new markets,
distribution channels, technical requirements and competition levels may be
different than those in our current markets. In the future we not be able to
compete successfully against either current or potential competitors.
Proprietary Rights
Our success and our ability to compete is dependent, in part, upon our
proprietary rights. We have been granted one U.S. patent for our MediaCluster
technology and have filed a foreign patent application for the same technology.
We also have other patent applications in process for other technologies. In
addition, we rely on a combination of contractual rights, trademark laws, trade
secrets and copyright laws to establish and protect our proprietary rights in
our products. It is possible that in the future not all of these patents will
be issued or that, if issued, the validity of these patents would be upheld. It
is also possible that the steps taken by us to protect our intellectual
property will be inadequate to prevent misappropriation of our technology or
that our competitors will independently develop technologies that are
substantially equivalent or superior to our technology. In addition, the laws
of some foreign countries in which our products are or may be distributed do
not protect our proprietary rights to the same extent as do the laws of the
United States.
We are also subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights of others. We attempt to ensure
that our products do not infringe any existing proprietary rights of others.
A version of our Advertising and Management Software that is in limited
distribution was based on software we licensed from Summit Software Systems,
Inc. of Boulder, Colorado in May 1996. We have been granted a perpetual,
nonexclusive license to this software in return for the payment of an up-front
license fee and royalties for sales occurring prior to June 1998.
34
Employees
As of January 31, 2001, we employed 448 persons, including 157 in research
and development, 153 in customer service and support, 40 in selling and
marketing, 64 in manufacturing and 34 in finance and administration. One of our
employees is represented by a collective bargaining arrangement. We believe
that our relations with our employees are good.
Facilities
Our corporate headquarters, which is also our 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 $610,000. We purchased approximately 24,000 square feet of office
and manufacturing space in Greenville, New Hampshire on February 15, 2000 for
$280,000. We also lease two facilities totaling approximately 13,000 square
feet in Greenville, New Hampshire that are used for the development and final
assembly of our video servers. In connection with the acquisition in December
1999 of Digital Video Arts, we entered into a lease for approximately 8,000
square feet of office space in Fort Washington, Pennsylvania, which is
primarily used for the development of custom software products for companies
specializing in digital video and interactive television. We also lease small
research and development and/or sales and support offices in Atlanta, Georgia,
San Francisco, California, Denver, Colorado, St. Louis, Missouri, Reno, Nevada,
Valbonne, France, and Singapore.
Legal Proceedings
On March 17, 2000, Beam Laser Systems, Inc. and Frank L. Beam instituted a
claim (Civil Action No. 2:00-CV-195) in the federal courts in the Eastern
District of Virginia against one of our customers, Cox Communications, Inc.
This claim was later amended by Beam Laser on June 16, 2000 to also include two
related companies of Cox Communications: CableRep, Inc. and CoxCom, Inc. Beam
Laser has asserted that the ad insertion technology, which includes our spot ad
insertion system, used by Cox Communications, CableRep and CoxCom infringes two
of the patents held by Beam Laser (Patents No. 4,814,883 and 5,200,825). Beam
Laser is seeking both an injunction and monetary damages from the defendants in
that case. The defendants have made a counterclaim against Beam Laser seeking a
declaration of non-infringement, invalidity and unenforceability of the two
patents held by Beam Laser that are at question. On May 19, 2000, we filed a
motion seeking to intervene in the action between our customer and Beam Laser,
and to transfer the case to the District Court of Massachusetts. On June 23,
2000, the court granted our intervention motion and deferred ruling on the
issue of transfer. Also on June 23, 2000, we filed our intervenor complaint in
the Virginia action seeking, among other things, a declaratory judgment of non-
infringement, invalidity and unenforceability regarding the two patents of Beam
Laser that are at question. In addition, we have agreed to indemnify our
customer for claims brought against the customer that are related to the
customer's use of our products. On October 23, 2000, the court denied our
motion to transfer. On November 29, 2000, Beam Laser filed a motion to amend
its pleading to add claims against us seeking equitable relief, a finding of
willful or contributory infringement, and attorneys' fees. On January 26, 2001,
the magistrate denied Beam Laser's motion to amend. Beam Laser has filed an
objection to this denial, and on March 16, 2001, the court allowed Bearn's
motion to amend the complaint, to add charges of infringement against
SeaChange, but not allowing any claims for damages or willful infringement. In
addition, on April 20, 2001, the court denied a motion for summary judgement of
laches, stating it will schedule an evidentiary hearing. This dispute has no
scheduled trial date, though one is expected this year.
On June 13, 2000, we filed in the United States District Court for the
District of Delaware a lawsuit against one of our competitors, nCube Corp.,
whereby we alleged that nCube's MediaCube-4 product infringed a patent held by
us (Patent No. 5,862,312). In instituting the claim, we sought both a permanent
injunction and damages in an unspecified amount. nCube made a counterclaim
against us that the patent held by us was
35
invalid and that nCube's MediaCube-4 product did not infringe our patent. On
September 6, 2000, nCube conceded, based on the District Court's prior claim
construction ruling, that its MediaCube-4 product infringed our patent. On
September 25, 2000 the court upheld the validity of our patent. nCube has filed
motions challenging both the jury's verdict and the District Court's claim
construction ruling. The District Court has yet to rule on nCube's motions. At
this time we are awaiting the court's decision regarding a permanent
injunction. Damages will be determined in future proceedings.
On January 8, 2001, nCube Corp. filed a complaint against us in the United
States District Court for the District of Delaware alleging that our use of our
Media Cluster, Media Express and Media Server technology each infringe a patent
held by nCube (Patent No. 5,805,804). In instituting the claim, nCube has
sought both an injunction and monetary damages in an unspecified amount. We
responded on January 26, 2001, denying that the claim of infringement. We also
asserted a counterclaim seeking a declaration from the District court that U.S.
Patent No. 5,805,804 is invalid and not infringed.
On June 14, 1999, we filed a defamation complaint against Jeffrey Putterman,
Lathrop Investment Management, Inc. and Concurrent Computer Corporation in the
Circuit Court of Pulaski County, Arkansas alleging that the defendants
conspired to injure our business and reputation in the marketplace. The
complaint further alleges that Mr. Putterman and Lathrop Investment Management,
Inc. defamed us through false postings on an Internet message board. The
complaint seeks unspecified amounts of compensatory and punitive damages. On
June 14, 2000, Concurrent filed a counterclaim under seal against us seeking
unspecified damages. These motions are currently pending and no trial date has
been set.
We cannot be certain of the outcome of the foregoing litigation, but do plan
to oppose allegations against us and assert our claims against other parties
vigorously. In addition, as these claims are in the early stages of discovery
and certain claims for damages are as yet unspecified, we are unable to
estimate the impact to our business, financial condition, and results of
operations or cash flows.
36
MANAGEMENT
The following table sets forth for each of our Class I, Class II and Class
III Directors, each Class III Director and our executive officers, their ages
and the positions currently held by each such person with us:
Name Age Position
---- --- --------
William C. Styslinger, III..... 54 President, Chief Executive Officer,
Chairman of the Board and Director
William L. Fiedler............. 56 Chief Financial Officer, Treasurer,
Secretary and Vice President, Finance and
Administration
Scott Blais.................... 42 Vice President, Customer Services
Jeffrey M. Boone............... 37 Vice President, Software Engineering
Edward J. Delaney, Jr.......... 41 Vice President, Marketing
Ira Goldfarb................... 43 Vice President, Worldwide Sales
Bruce E. Mann.................. 52 Vice President, Network Storage Engineering
Martin R. Hoffmann (1)(2)...... 68 Director
Carmine Vona (1)(2)............ 63 Director
- --------
(1) Member of Compensation and Option Committee.
(2) Member of Audit Committee.
William C. Styslinger, III, has served as our President, Chief Executive
Officer and a Director since our inception in July 1993 and as Chairman of the
Board since January 1995. Prior to our formation in 1993, Mr. Styslinger was
employed at Digital Equipment Corporation since March 1978, most recently as
manager of the Cable Television Business Unit from October 1991 to May 1993.
Mr. Styslinger is a member of the Board of Directors of Omtool, Inc., a
provider of enterprise client/server facsimile software solutions.
Martin R. Hoffmann has served as one of our Directors since January 1995.
Mr. Hoffmann currently engages in consulting activities and is pursuing pro
bono opportunities. Mr. Hoffmann served as Of Counsel to the Washington D.C.
office of Skadden, Arps, Slate, Meagher & Flom LLP from January 1996 until July
2000. From April 1995 to January 1996, Mr. Hoffmann maintained a law practice
and business consulting practice. He was a Visiting Senior Fellow at the Center
for Policy, Industry and Industrial Development at Massachusetts Institute of
Technology from May 1993 to April 1995, prior to which, from April 1989, he
served as Vice President and General Counsel for Digital Equipment Corporation.
Mr. Hoffmann is a member of the Boards of Directors of Castle Energy
Corporation, an oil and gas exploration and production company, and Mitretek
Systems, a non-profit technology and services company.
Carmine Vona has served as one of our Directors since January 1995. Mr. Vona
has been President and Chief Executive Officer of Vona Information Systems,
Inc., a consulting firm, since June 1996. Prior to that, Mr. Vona was Executive
Vice President and Senior Managing Director for worldwide technology at Bankers
Trust Co. from November 1969 to June 1996. From August 1986 to June 1996 Mr.
Vona was Chairman of BT-FSIS, a software development company and a wholly owned
subsidiary of Bankers Trust Co.
Executive Officers
Scott Blais has served as our Vice President, Customer Services since
October 1998. Prior to joining us, Mr. Blais spent three years holding various
positions including Vice President and General Manager at Adra Systems, Inc., a
software company. Prior to that, Mr. Blais held the position of Director of
Customer Services and Quality Assurance for Keyfile Corporation, a software
company.
Jeffrey M. Boone has served as our Vice President, Software Engineering
since January 1998. Prior to that, Mr. Boone served as our Engineering Manager
from June 1996 to December 1997, and as a member of the our technical staff
from September 1995 to June 1996. Prior to joining us, Mr. Boone was a Systems
Architect at Logica North American, a software consulting company, from June
1994 to September 1995.
37
Edward J. Delaney, Jr. joined us in February 1994 as our Vice President,
Sales and Marketing and Mr. Delaney has served as our Vice President, Marketing
since January 1998. Prior to joining us, Mr. Delaney spent 12 years with
Digital Equipment Corporation in a variety of positions, including Marketing
and Operations Manager for Digital's Cable Television Business Unit, marketing
manager of media products for the Asia/Pacific region, executive assistant to
the Vice President of United States Sales, and sales manager.
William L. Fiedler has served as our Chief Financial Officer, Treasurer and
Vice President, Finance and Administration since September 1998 and as our
Secretary since May 2000. Prior to joining us, Mr. Fiedler served from July
1984 to June 1998 as the Chief Financial Officer, Treasurer and Senior Vice
President, Finance and Administration of Matrix One, Inc., a developer of
product data management systems. Prior to that, Mr. Fiedler served as the Chief
Financial Officer of Hendrix Electronics Inc., a developer of text processing
and graphics publishing systems, and had also held controllership positions at
Bose Corporation and GTE Sylvania.
Ira Goldfarb has served as our Vice President, Worldwide Sales since January
1998. Prior to that, Mr. Goldfarb served as our Vice President, U.S. Systems
Sales from August 1997 to January 1998, as our Vice President, Eastern Region
from January 1997 to August 1997, and as Vice President, Central Region, from
August 1994 to January 1997. Prior to joining us, Mr. Goldfarb held several
sales management positions at Digital Equipment Corporation from September 1983
to July 1994.
Bruce E. Mann joined us in September 1994 as Vice President, Network Storage
Engineering. Mr. Mann is also President of SeaChange Systems, Inc., one of our
subsidiaries which develops and manufactures video server-based products. Prior
to joining us, Mr. Mann served as Director of Engineering at Ungermann-Bass,
Inc., a subsidiary of Tandem Computers Inc., from March 1993 to September 1994.
Prior to that, from September 1976 to March 1993, Mr. Mann was an engineer at
Digital Equipment Corporation, most recently as Senior Consulting Engineer.
Our executive officers are appointed by, and serve at the discretion of, our
board of directors, and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the our executive
officers or directors.
Certain Relationships and Related Transactions
We have adopted a policy that all transactions between us and our officers,
directors, principal stockholders and affiliates will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will be on terms
no less favorable to us than could be obtained from unaffiliated third parties.
38
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS
Executive Compensation Summary
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during the fiscal year ended
January 31, 2001, the one-month period ended January 31, 2000, and the
preceding two fiscal years ended December 31, 1999 and 1998, respectively, by
our chief executive officer and each of our four other most highly compensated
executive officers who serve as of January 31, 2001. This presentation reflects
the change on April 14, 2000 in our fiscal year-end from December 31 to January
31. In addition, the disclosure regarding Mr. Fiedler for the fiscal year ended
December 31, 1998 reflects the fact that he began employment with us in
September 1998.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
----------------------- Underlying
Name and Principal Position Period Salary Bonus Options(#)
--------------------------- ------ -------- ------- ------------
William C. Styslinger, III 2001 $217,372 -- 41,000
President and Chief Executive 2000 15,545 -- --
Officer.............................. 1999 184,108 -- 30,000
1998 174,509 -- 6,000
William L. Fiedler 2001 $194,258 $22,862 32,400
Chief Financial Officer, Treasurer 2000 15,750 7,291 --
and Vice President, Finance and 1999 179,398 20,000 15,000
Administration....................... 1998 55,080 -- 112,500
Edward J. Delaney, Jr. 2001 $169,820 $19,800 32,400
Vice President, Marketing............ 2000 13,736 2,088 --
1999 154,071 -- 7,500
1998 147,388 -- 6,000
Bruce E. Mann 2001 $188,858 $30,329 78,000
Vice President, Network Storage 2000 15,580 -- --
Engineering.......................... 1999 173,852 15,739 7,500
1998 165,674 -- 6,000
Ira Goldfarb 2001 $298,510 $ -- 32,400
Vice President, Worldwide Sales...... 2000 10,417 -- --
1999 232,373 -- 7,500
1998 216,384 -- 16,050
Option Grants in Last Fiscal Year
The following table sets forth information as to stock options granted to
each of our named executive officers during the fiscal year ended January 31,
2001 under our amended and restated 1995 stock option plan. No stock options
were granted in the one month period ending January 31, 2000 to our named
executive officers. All options listed below were granted under our amended and
restated 1995 stock option plan and vest 20% on the first anniversary of the
date of grant and 5% each quarter thereafter.
The percentage of total options granted to our employees in the fiscal year
ended January 31, 2001 is based on options granted during that period to
purchase an aggregate of 1,022,717 shares.
Amounts that may be realized upon exercise of the options immediately before
the expiration of their term, assuming the specified compound rates of
appreciation (5% and 10%) on the market value of the
39
common stock on the date of option grant over the term of the options. These
numbers are calculated based on rules promulgated by the SEC and do not reflect
our estimate of future stock price growth. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the timing of
exercise and the future performance of the common stock. However, the rates of
appreciation assumed in this table may not be realized or the amounts reflected
may not be received by the individuals.
Individual Grants
------------------------------------------
Potential Realizable
Value At Assumed
Percent of Annual Rates of
No. of Total Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to or Base Option Term
Options Employees Price Per Expiration --------------------
Name Granted in Year Share Date 5% 10%
---- ---------- ---------- --------- ---------- -------- -----------
William C. Styslinger,
III.................... 41,000 4.01% $26.75 5/24/10 $690,953 $ 1,743,833
William L. Fiedler...... 7,668 0.75% $34.00 4/14/10 $164,249 $ 414,532
10,332 1.01% $26.75 5/24/10 $174,120 $ 439,446
14,400 1.41% $23.31 11/30/10 $211,468 $ 533,706
Edward J. Delaney, Jr... 7,668 0.75% $34.00 4/14/10 $164,249 $ 414,532
10,332 1.01% $26.75 5/24/10 $174,120 $ 439,446
14,400 1.41% $23.31 11/30/10 $211,468 $ 533,706
Bruce E. Mann........... 7,668 0.75% $34.00 4/14/10 $164,249 $ 414,532
10,332 1.01% $26.75 5/24/10 $174,120 $ 439,446
60,000 5.87% $23.31 11/30/10 $881,118 $12,223,774
Ira Goldfarb............ 7,668 0.75% $34.00 4/14/10 $164,249 $ 414,532
10,332 1.01% $26.75 5/24/10 $174,120 $ 439,446
14,400 1.41% $23.31 11/30/10 $211,468 $ 533,706
Option Exercises and Fiscal Year-End Values
The following table sets forth as of January 31, 2001 information with
respect to options to purchase our common stock granted under our amended and
restated 1995 stock option plan to our named executive officers.
The value of unexercised in-the-money options as of January 31, 2001 is
based on the difference between the option exercise price and the fair market
value of our common stock at January 31, 2001, our fiscal year-end ($26.453 per
share as quoted on the Nasdaq National Market), multiplied by the number of
shares underlying the option.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares January 31, 2001 at January 31, 2001
Acquired Value ------------------------- ---------------------------
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ---------- ------------------------- ---------------------------
William C. Styslinger,
III.................... 40,500 $1,007,438 28,597/56,403 $ 316,159.70/$427,880.35
William L. Fiedler...... 11,500 $ 410,500 69,784/99,486 $1,469,409.31/$1,601,406.01
Edward J. Delaney, Jr... 31,575 $ 785,428 7,049/37,776 $ 51,838.35/$205,066.13
Bruce E. Mann........... -- -- 13,499/18,501 $ 181,441.58/$348,272.93
Ira Goldfarb............ -- -- 19,456/42,494 $ 269,256/$258,865
Compensation Committee Interlocks and Insider Participation
The members of our compensation and option committee are Messrs. Hoffmann
and Vona. In addition, prior to his resignation on December 14, 2000 as one of
our directors, Mr. Paul Saunders also served as a member of our compensation
and option committee. No person who served as a member of this committee was,
during the past fiscal year, an officer or employee of us or any of our
subsidiaries, was formerly an officer
40
of us or any of our subsidiaries, or had any relationship requiring disclosure
herein. In addition, none of our executive officers served as a member of the
compensation committee of another entity (or other committee of the board of
directors performing equivalent functions or, in the absence of any such
committee, the entire board of directors), one of whose executive officers
served as one of our directors.
Compensation of Directors
During the fiscal year ended January 31, 2001, directors who were also
employees of us received no cash compensation for their services as directors,
except for reimbursement of expenses incurred in connection with attending
meetings. In fiscal 2001, we paid directors who are not employees of us a fee
of $1,000 for each meeting of the Board of Directors that they attended in
person and such directors were reimbursed for their reasonable out-of-pocket
expenses incurred in attending such meetings. Messrs. Hoffmann and Saunders
were each paid $1,000 in fiscal 2001. Each non-employee director is also
entitled to participate in our 1996 non-employee director stock option plan.
Limitation of Liability and Indemnification of Officers and Directors
Our amended and restated certificate of incorporation provides that our
directors and officers will be indemnified by us to the fullest extent
permitted by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in connection with
their service for us or on our behalf. In addition, our amended and restated
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they:
. violated their duty of loyalty to us or our stockholders;
. acted or failed to act in bad faith;
. knowingly or intentionally violated the law;
. authorized illegal dividends or redemptions; or
. derived an improper benefit from their action as directors.
We have insurance that insures our directors and officers against certain
losses and us against our obligations to indemnify our directors and officers.
41
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 23, 2001 by:
. each person or entity who is known by us to beneficially own more than
5% of our common stock;
. each of our directors and named executive officers; and
. all of our directors and executive officers as a group.
Except as indicated below, none of these entities has a relationship with
us. Unless otherwise indicated, the address of each person or entity named in
the table is c/o SeaChange International, Inc., 124 Acton Street, Maynard,
Massachusetts 01754, and each person or entity has sole voting power and
investment power, (or shares such power with his or her spouse,) with respect
to all shares of capital stock listed as owned by such person or entity.
The number and percentage of shares beneficially owned is determined in
accordance with the rules of the SEC, and is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which a person has sole or shared voting
power or investment power and also any shares of common stock underlying
options or warrants that are exercisable by that person within 60 days of April
23, 2001. However, these shares underlying options or warrants are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person or entity. Unless otherwise indicated in the footnotes, each
person has sole voting and investment power, (or shares such powers with his or
her spouse,) with respect to the shares shown as beneficially owned. Percentage
of beneficial ownership prior to the offering is based on 22,825,233 shares of
our common stock outstanding as of April 23, 2001 and assumes the conversion of
all outstanding shares of our convertible preferred stock into shares of common
stock.
Percent of
Amount and Common Stock
Nature of Outstanding
Beneficial Before the
Name Ownership Offering
---- ---------- ------------
William C. Styslinger, III(1)..................... 2,235,525 9.8%
William L. Fiedler(2)............................. 70,623 *
Scott Blais(3).................................... 18,353 *
Jeffrey M. Boone(4)............................... 89,967 *
Edward J. Delaney, Jr.(5)......................... 1,363,143 6.0%
Ira Goldfarb(6)................................... 120,835 *
Martin R. Hoffmann(7)............................. 202,080 *
Bruce E. Mann(8).................................. 369,648 1.6%
Carmine Vona(9)................................... 29,053 *
Credit Suisse Asset Management, LLC............... 1,202,255 5.3%
466 Lexington Avenue New York,
New York 10017
All executive officers and directors as a group
(9 persons)(10).................................. 4,499,227 19.5%
- --------
* Less than 1%
(1) Includes 225,000 shares of Common Stock owned by Merrill Lynch, Trustee
f/b/o William C. Styslinger, III, IRA. Excludes (i) 96,429 shares of
Common Stock owned by Thomas and Emily Franeta as Trustees of The
Styslinger Family Trust; (ii) 10,147 shares of Common Stock held by Thomas
Franeta as Custodian for Kimberly J. Styslinger; and (iii) 75,000 shares
of Common Stock owned by his wife, Joyce Styslinger. Mr. Styslinger
disclaims beneficial ownership of the shares held by The Styslinger Family
Trust, by Thomas Franeta as Custodian for Kimberly J. Styslinger and by
his wife, Joyce Styslinger. Includes 32,846 shares of Common Stock
issuable pursuant to outstanding stock options that may be exercised
within 60 days of April 23, 2001.
42
(2) Includes 70,623 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of April 23, 2001.
(3) Includes 8,105 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of April 23, 2001.
(4) Includes 28,542 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of April 23, 2001.
(5) Includes (i) 540,000 shares of Common Stock held by The Delaney Family
Limited Partnership of which Mr. Delaney is both a general and a limited
partner; and (ii) 9,023 shares of Common Stock issuable pursuant to
outstanding stock options that may be exercised within 60 days of April
23, 2001. Excludes (i) 206,760 shares of Common Stock held by Merrill
Lynch, Trustee f/b/o Kathryn H. Delaney, IRA; (ii) 1,700 shares of Common
Stock owned by Mr. Delaney's son, Joseph; and (iii) 1,700 shares of Common
Stock owned by Mr. Delaney's daughter, Mary. Mr. Delaney disclaims
beneficial ownership of the shares held by Merrill Lynch and his children.
(6) Includes 22,201 shares of Common Stock issuable pursuant to outstanding
options that may be exercised within 60 days of April 23, 2001.
(7) Includes 12,178 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of April 23, 2001.
(8) Includes 18,098 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of April 23, 2001.
Excludes an aggregate of 23,824 shares of Common Stock held by Mr. Mann's
three children.
(9) Includes 12,178 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of April 23, 2001.
(10) Includes 215,937 shares of Common Stock issuable pursuant to outstanding
stock options that may be exercised within 60 days of April 23, 2001.
43
MARKET PRICE
Our 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.
High Low
------- -------
Three Month Period Ended:
March 31, 1998.......................................... $ 5.667 $ 4.417
June 30, 1998........................................... 8.667 3.959
September 30, 1998...................................... 7.833 3.833
December 31, 1998....................................... 5.833 3.833
March 31, 1999.......................................... 6.083 4.000
June 30, 1999........................................... 12.078 5.297
September 30, 1999...................................... 14.220 8.750
December 31, 1999....................................... 35.375 10.670
One Month Period Ended January 31, 2000................... 46.750 27.750
Three Month Period Ended:
April 30, 2000.......................................... 73.500 30.000
July 31, 2000........................................... 41.188 21.078
October 31, 2000........................................ 40.750 19.063
January 31, 2001........................................ 34.750 16.375
On May 2, 2001, the last reported sale price of our common stock on the
Nasdaq National Market was $16.050.
We have not paid any cash dividends on our capital stock since its
inception, and do not expect to pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain all of our future earnings
for use in the operation and expansion of the business.
44
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 100,000,000 shares of common stock,
$0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par
value per share. As of April 23, 2001, there were outstanding (1) 22,825,233
shares of common stock held by 126 stockholders of record, (2) no shares of
preferred stock and (3) options to purchase an aggregate of 3,464,964 shares of
common stock.
Common Stock
As of April 23, 2001 there were 22,825,233 shares of common stock
outstanding held by 126 stockholders of record. We believe that the number of
beneficial holders of our common stock exceeds 2,500. In addition, as of April
23, 2001, there were outstanding stock options to purchase 3,605,924 shares of
common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in this election.
Holders of common stock are entitled to receive ratably dividends, if any, as
may be declared by the board of directors out of funds legally available
therefor, after provision has been made for any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets
available after the payment of all of our debts and other liabilities, and
after the satisfaction of the rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights, nor are they entitled to the benefit of any sinking fund.
The outstanding shares of common stock are, and the shares offered in this
offering will be, when issued and paid for, validly issued, fully paid and non-
assessable. The rights, powers, preferences and privileges of holders of common
stock are subordinate to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
Preferred Stock
The board of directors generally will be authorized, without further
stockholder approval, to issue from time to time up to an aggregate of
5,000,000 shares of preferred stock, in one or more series. Each series of
preferred stock will have the number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
is determined by the board of directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine the rights and preferences of the preferred
stock in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of common stock will be
subordinate to the rights of holders of any preferred stock issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of common
stock, and could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock. We have no present plans to issue any shares of this
preferred stock.
Anti-takeover Effects of Provisions of Delaware Law and our Certificate of
Incorporation and By-Laws
Upon completion of this offering, the provisions of section 203 of the
Delaware General Corporation Law of Delaware will prohibit us from engaging in
a "business combination" with an "interested stockholder"
45
for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is generally defined as a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
Our amended and restated by-laws provides for the division of the board of
directors into three classes, as nearly equal in size as possible, with
staggered three-year terms. In addition, our amended and restated by-laws
provide that the number of directors will be determined from time to time by
resolution adopted by a majority of the board of directors, vacancies on the
board of directors may be filled by the board unless and until filled by the
stockholders, and directors may be removed only for cause by the vote of the
holders of at least 75% of the shares then entitled to vote at an election of
directors. The classification of the board of directors and the limitations on
the removal of directors and the filling of vacancies could make it more
difficult for a third party to acquire or discourage a third party from
acquiring control of us by increasing the time required for the stockholders
to change the composition of the board of directors. For example, in general,
at least two annual meetings of the stockholders will be necessary to effect a
change in a majority of the members of the board of directors.
Our amended and restated by-laws also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before the
meeting and may not be taken by written consent in lieu of a meeting. Our
amended and restated by-laws provide that special meetings of stockholders may
only be called by the board of directors, the chairman of the board of
directors or the president. Our amended and restated by-laws further provide
that in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with requirements regarding advance notice
to us. The foregoing provisions could have the effect of delaying until the
next stockholders' meeting actions that are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage a third party from making a tender offer for our common stock,
because, even if it acquired a majority of our outstanding voting securities,
the third party would only be able to take action as a stockholder, such as
electing new directors or approving a merger, at a duly called stockholders'
meeting, and not by written consent.
Our amended and restated certificate of incorporation empowers our board of
directors, when considering a tender offer or merger or acquisition proposal,
to take into account any factors that it determines to be relevant, including,
without limitation:
. the interests of our stockholders, including the possibility that these
interests might be best served by our continued independence;
. whether the proposed transaction might violate federal or state laws;
. not only the consideration being offered in the proposed transaction, in
relation to the then current market price for our outstanding capital
stock, but also to the market price for our capital stock over a period
of years, the estimated price that might be achieved in a negotiated
sale of our business as a whole or in part or through orderly
liquidation, the premiums over market price for the securities of other
corporations in similar transactions, current political, economic and
other factors bearing on securities prices and our financial condition
and future prospects;
. the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with us,
upon the communities in which we conduct our business and upon the
economy of the state, region and nation.
These provisions may discourage a third party from making a tender offer
for our common stock, as these provisions decrease the likelihood that our
board of directors would find such a transaction to be in the interests of our
stockholders.
46
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or by-laws, unless a
corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Our fifth amended and restated certificate of
incorporation requires the affirmative vote of the holders of at least 75% of
the shares of our capital stock that are issued and outstanding and entitled to
vote to amend or repeal any of the foregoing provisions of the fifth amended
and restated certificate of incorporation. Our third amended and restated by-
laws may generally be amended or repealed by a majority vote of the board of
directors and may also be amended or repealed by the affirmative vote of the
holders of at least 75% of the shares of our capital stock that are issued and
outstanding and entitled to vote. The 75% stockholder vote would be in addition
to any separate class vote that might in the future be required in accordance
with the terms of any series of preferred stock that might be outstanding at
the time these amendments are submitted to stockholders.
47
COMCAST SC INVESTMENT, INC.
The following table sets forth, as of the date of the prospectus, the number
and percentage of shares of our common stock beneficially owned by Comcast SC
prior to this offering and the maximum number of shares that Comcast SC, its
transferees, distributees, pledgees, donees or other successors in interest may
offer and sell under the terms of this prospectus. Since Comcast SC may sell
all, some or none of its shares, we cannot estimate the actual number of shares
of our common stock that will be sold by Comcast SC or the aggregate number or
percentage of shares of our common stock that Comcast SC will own upon
completion of this offering. See "Plan of Distribution."
The shares of our common stock offered under this prospectus may be offered
from time to time by and for the account of Comcast SC, a wholly-owned
subsidiary of Comcast Corporation. Accordingly, Comcast Corporation may be
deemed to exercise voting or investment control over the investment by Comcast
SC in us.
The applicable percentage of ownership listed below is based on 22,825,233
shares of our common stock outstanding as of April 23, 2001 and assumes the
exercise of the warrant held by Comcast SC that is currently exercisable to
purchase 125,000 shares of our common stock. As described below, this warrant
will be exercisable for an additional 333.33 shares of our common stock per day
beginning on and including May 1, 2001 for each day up to and including the day
this registration statement is declared effective.
Number and Percentage
of Shares Beneficially Number of Shares
Owned Prior to Offering Offered Under
-------------------------- the terms of
Selling Stockholder Number Percent this Prospectus
------------------- ------------- ------------ ----------------
Comcast SC Investment, Inc.... 881,144 3.8% 856,144
On December 1, 2000, we entered into a common stock and warrant purchase
agreement with Comcast SC under the terms of which we agreed to sell in a
private placement to Comcast SC in exchange for approximately $10,000,000 an
aggregate of 466,255 shares of common stock and a warrant to purchase 100,000
shares of our common stock with an exercise price of $21.4475 per share. This
agreement was terminated by Comcast SC and us on February 28, 2001.
On February 28, 2001, we signed and closed a new common stock and warrant
purchase agreement on terms similar to the prior agreement. Under the terms of
this new agreement, we sold in a private placement to Comcast SC for
approximately $10,000,000 an aggregate of 756,144 shares of our common stock
and a warrant to purchase 100,000 shares of our common stock with an exercise
price of $13.225 per share.
Under certain conditions determined upon the effectiveness of the
registration of the shares, the number of common shares purchased and the
number of common stock purchase warrants and related exercise price are subject
to adjustment. An additional number of shares of common stock shall be issued
to Comcast SC without any additional consideration as is equal to the
difference between 756,144, the number of shares of common stock issued on
February 28, 2001, and the number of shares obtained by dividing $10,000,000 by
the lower of 1) 92% of the closing market price of our common stock on the date
of effectiveness of this registration statement, and 2) the average of the
closing market price of our common stock for the five trading days ending on
the effective date of this registration statement, if either of such prices is
lower than $13.225. For example, were the closing price of our common stock on
the date of effectiveness of this registration statement to be $14.00, an
additional 20,253 shares of our common stock would be issued. This number of
additional shares is derived from the difference between 756,144, the number of
shares initially issued by us to Comcast SC, and 776,397, the quotient of
$10,000,000 divided by 92% of $14.00 ($12.88).
The warrant agreement contains an adjustment mechanism such that the warrant
is exercisable for an additional 25,000 shares of our common stock if this
registration has not been declared effective on or before March 31, 2001 and an
additional 333.33 shares of our common stock per day beginning on and including
May 1, 2001 for each day up to and including the day this registration
statement is declared effective. The warrant
48
agreement also provides that the exercise price of the warrant will be reduced
on the effective date of the registration statement to the lower 1) 92% of the
closing market price of our common stock on the effective date of the
registration statement, and 2) the average of the closing market prices of our
common stock for the five trading days ending on the date of effectiveness of
the registration statement if either of such prices is lower than $13.225, the
exercise price as of the closing date. For example, were the closing price of
our common stock on the date of effectiveness of this registration statement
to be $14.00, the per share exercise price of the warrant would be reduced
from $13.225 to $12.88 per share of common stock.
This registration statement covers only the 756,144 shares of our common
stock purchased pursuant to the purchase agreement and the initial 100,000
shares of our common stock that may be issued upon exercise of the warrant.
Comcast SC represented to us that it was acquiring these shares and the
warrant in the private placement without any present intention of effecting a
distribution of those shares, the warrant, or the shares of our common stock
issuable upon exercise of the warrant other than in compliance with applicable
securities laws. In recognition of the fact, however, that Comcast SC may
desire the ability to sell those shares of our common stock it owns or will
own upon exercise of the warrant when it considers it appropriate, in
connection with the private placement we agreed to file this registration
statement with the Securities and Exchange Commission to permit the public
sale of these shares and to use our best efforts to keep this registration
statement effective until the earlier of the second anniversary of the
effective date of this registration statement or the sale of all of the shares
covered by this registration statement. We will prepare and file amendments
and supplements to this registration statement as may be necessary to keep it
effective during this period.
PLAN OF DISTRIBUTION
The shares of our common stock offered hereby may be sold from time to time
by Comcast SC or its transferees, distributees, pledgees, donees or other
successors in interest, in each case for its own respective account. We are
responsible for the expenses incurred in the registration of the shares, other
than the underwriting discounts and selling commissions and stock transfer
fees and taxes applicable to the sale of the shares. In addition, we have
agreed to indemnify Comcast SC against certain liabilities, including
liabilities under the Securities Act, and Comcast SC has agreed to indemnify
us against certain liabilities, including liabilities under the Securities
Act.
The distribution of the shares by Comcast SC is not currently subject to
any underwriting agreement. Sales may be made at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
these prevailing market prices, or at negotiated prices. Sales may be effected
in the over-the-counter market, on the National Association of Securities
Dealers Automated Quotation System, on the Nasdaq National Market, or on any
exchange on which the shares may then be listed. Sales may be effected by one
or more of the following:
. one or more block trades in which a broker or dealer so engaged will
attempt to sell all or a portion of the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
. purchases by a broker or dealer as principal and resale by that broker
or dealer for its account under the terms of this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. in negotiated transactions, including short sales and transactions
relating to the purchase or sale of options to purchase shares; and
. through other means.
49
These transactions may be effected by selling shares to or through broker-
dealers, and these broker-dealers will receive compensation in negotiated
amounts in the form of underwriting discounts, concessions, commissions or fees
from the seller and/or the purchasers of the shares for whom these broker-
dealers may act as agent or to whom they sell as principal, or both (which
compensation to a particular broker-dealer might be in excess of customary
commissions). These brokers or dealers or the participating brokers or dealers
may be deemed to be "underwriters" within the meaning of the Securities Act, in
connection with these sales, and any commissions received by these broker-
dealers may be deemed to be underwriting compensation.
We have informed Comcast SC that the antimanipulation rules under the
Securities Exchange Act of 1934 (including, without limitation, Rule 10b-5 and
Regulation M--Rule 102) may apply to sales in the market and will furnish
Comcast SC upon request with a copy of these Rules. We will also inform Comcast
SC of the need for delivery of copies of this prospectus.
Any shares of our common stock covered by the prospectus that qualify for
sale under Rule 144 under the Securities Act may be sold under Rule 144 rather
than under this prospectus.
We agreed to file a registration statement to register the resale of the
shares and to use our best efforts to maintain the effectiveness of the
registration statement until the earlier of the second anniversary of the
effective date of this registration statement and the sale of all of the shares
covered by this registration statement.
Sales of shares offered hereby are not restricted as to the price or prices
at which these sales may be effected. Sales of these shares at less than the
market prices may depress the market price of our common stock. During the
effective time of this prospectus, Comcast SC has agreed to potential
restrictions on resale if notified by us of certain potential material events,
the disclosure of which could have a material adverse effect on our business
and financial condition, for a period commencing upon the date of that notice
and ending upon the earlier of forty-five days after we have notified Comcast
SC of that event and the time we notify Comcast SC that the event has been
disclosed to the public or has ceased to be material or that sales under this
registration statement may otherwise be resumed. Notwithstanding the foregoing,
we have agreed that no sales blackout shall occur within ninety days of the
purchase by Comcast SC of our shares covered hereby or any other sales blackout
period and that no more than two sales blackouts shall be commenced by us in
any twelve month period. There is no restriction as to the number of shares
which may be sold at any one time, and it is possible that a significant number
of shares could be sold at the same time.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C., 111 Founders Plaza, Suite 1100,
East Hartford, Connecticut 06108 is the transfer agent for our common stock.
50
LEGAL MATTERS
Certain legal matters with respect to the issuance of the shares offered
hereby will be passed upon for SeaChange International by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts. As of the date of this prospectus,
certain attorneys with the firm of Testa, Hurwitz & Thibeault, LLP beneficially
own an aggregate of 2,250 shares of our common stock.
EXPERTS
The consolidated financial statements as of December 31, 1999, January 31,
2000 and January 31, 2001 and for each of the two years in the period ended
December 31, 1999, the one month ended January 31, 2000 and the year ended
January 31, 2001, included in this prospectus have been so included in reliance
upon the report of PricewaterhouseCoopers LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and accordingly file reports, proxy statements and
other information with the Securities and Exchange Commission. Reports, proxy
statements and other information filed by SeaChange International may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. Our common stock is traded on the Nasdaq National
Market. Reports, proxy statements and other information concerning SeaChange
International may be inspected at the offices of the National Association of
Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C.
20006.
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933, as amended, with
respect to the shares of our common stock offered hereby. This prospectus does
not contain all information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information regarding us and
the shares of our common stock offered hereby, we refer you to the registration
statement and to the exhibits and schedules filed with it. Statements contained
in this prospectus regarding the contents of any agreement or other document
filed as an exhibit to the registration statement are necessarily summaries of
those documents, and in each instance we refer you to the copy of that document
filed as an exhibit to the registration statement for a more complete
description of the matters involved. The registration statement, including the
exhibits and schedules thereto, may be inspected at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and copies of all or any part thereof may
be obtained from that office upon payment of the prescribed fees. In addition,
the Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Securities and Exchange Commission.
We will provide without charge to each person who is delivered a prospectus,
on written or oral request, a copy of any or all of the documents incorporated
by reference in this document (other than exhibits to those documents unless
those exhibits are specifically incorporated by reference into those
documents). Requests for copies should be directed to Investor Relations,
SeaChange International, Inc., 124 Acton Street, Maynard, Massachusetts 01754,
Telephone: (978) 897-0100.
51
SEACHANGE INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS......................................... F-2
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND AS OF JANUARY 31,
2000 AND 2001............................................................ F-3
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1999, THE ONE MONTH ENDED JANUARY 31, 2000, THE YEAR ENDED JANUARY
31, 2001 AND THE ONE MONTH ENDED JANUARY 31, 1999........................ F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999, THE ONE MONTH ENDED JANUARY 31, 1999 AND
JANUARY 31, 2000 AND THE YEAR ENDED JANUARY 31, 2001..................... F-5
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1999, THE ONE MONTH ENDED JANUARY 31, 2000, THE YEAR ENDED JANUARY
31, 2001 AND THE ONE MONTH ENDED JANUARY 31, 1999........................ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-7
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE......... F-26
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES............................. F-27
F-1
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, 1999,
January 31, 2000 and January 31, 2001 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1999, the one month ended January 31, 2000 and the year ended January 31, 2001,
in conformity with accounting principles generally accepted in the United
States of America. 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 of America 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 our opinion.
As discussed in Note 3 to the consolidated financial statements, during
the year ended January 31, 2001, the Company changed its method of recognizing
revenue.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 2001 (except for the
information presented in Note 12
for which the date is April 30, 2001)
F-2
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
December 31, January 31, January 31,
1999 2000 2001
------------ ----------- -----------
Assets
Current assets
Cash and cash equivalents.............. $11,318 $ 2,721 $ 6,145
Accounts receivable, net of allowance
for doubtful accounts of $908 at
December 31, 1999 and January 31, 2000
and $742 at January 31, 2001.......... 17,840 16,756 27,112
Inventories............................ 17,128 20,089 24,907
Prepaid expenses and other current
assets................................ 1,568 1,634 2,671
Deferred income taxes.................. 2,243 3,400 7,001
------- ------- -------
Total current assets................. 50,097 44,600 67,836
Property and equipment, net.............. 10,538 10,492 15,886
Other assets............................. 884 869 1,833
Goodwill and intangibles................. 785 751 2,698
------- ------- -------
$62,304 $56,712 $88,253
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities
Line of credit......................... $ -- $ -- $ 4,000
Current portion of equipment line of
credit and obligations under capital
lease................................. 1,048 1,045 2,532
Accounts payable....................... 15,038 10,451 17,332
Accrued expenses....................... 3,499 2,776 1,816
Customer deposits...................... 2,092 2,428 3,946
Deferred revenue....................... 4,380 6,292 8,435
Income taxes payable................... 675 625 956
------- ------- -------
Total current liabilities............ 26,732 23,617 39,017
------- ------- -------
Long-term portion of equipment line of
credit and obligations under capital
lease................................... 1,231 1,144 3,934
------- ------- -------
Commitments and contingencies (Note 12)
Stockholders' Equity
Convertible preferred stock, 5,000,000
shares authorized, none outstanding..... -- -- --
Common stock, $.01 par value; 100,000,000
shares authorized; 21,285,855,
21,300,185 and 22,037,811 shares issued
at December 31, 1999 and January 31,
2000 and 2001, respectively............. 213 213 221
Additional paid-in capital............... 35,633 35,695 50,157
Accumulated deficit...................... (1,440) (3,898) (4,905)
Accumulated other comprehensive loss..... (65) (59) (171)
------- ------- -------
Total stockholders' equity........... 34,341 31,951 45,302
------- ------- -------
$62,304 $56,712 $88,253
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year ended One One
December 31, Month ended Year ended Month ended
---------------- January 31, January 31, January 31,
1998 1999 2000 2001 1999
------- ------- ----------- ----------- -----------
(unaudited)
Revenues
Systems................. $58,033 $68,457 $ 226 $74,986 $ 697
Services................ 14,891 16,764 1,484 23,482 1,211
------- ------- ------- ------- -------
72,924 85,221 1,710 98,468 1,908
------- ------- ------- ------- -------
Costs of revenues
Systems................. 35,772 38,889 633 39,928 670
Services................ 13,611 14,962 1,445 18,798 1,049
------- ------- ------- ------- -------
49,383 53,851 2,078 58,726 1,719
------- ------- ------- ------- -------
Gross profit (loss)..... 23,541 31,370 (368) 39,742 189
------- ------- ------- ------- -------
Operating expenses
Research and
development............ 15,763 16,302 1,764 20,283 1,324
Selling and marketing... 8,566 8,595 1,034 12,472 522
General and
administrative......... 6,132 5,335 457 7,372 447
Restructuring of
operations............. 676 -- -- -- --
Acquisition costs....... -- 684 -- -- --
------- ------- ------- ------- -------
31,137 30,916 3,255 40,127 2,293
------- ------- ------- ------- -------
Income (loss) from
operations.............. (7,596) 454 (3,623) (385) (2,104)
Interest income
(expense), net.......... 235 28 9 (212) 9
------- ------- ------- ------- -------
Income (loss) before
income taxes........... (7,361) 482 (3,614) (597) (2,095)
Provision (benefit) for
income taxes............ (2,789) (15) (1,156) (690) (691)
------- ------- ------- ------- -------
Income (loss) before
cumulative effect of
change in accounting
principle............... (4,572) 497 (2,458) 93 (1,404)
Cumulative effect of
change in accounting
principle, net of tax of
$732.................... -- -- -- (1,100) --
------- ------- ------- ------- -------
Net income (loss)........ $(4,572) $ 497 $(2,458) $(1,007) $(1,404)
======= ======= ======= ======= =======
Basic and diluted
earnings (loss) per
share before cumulative
effect of change in
accounting principle.... $ (0.24) $ 0.02 $ (0.12) $ 0.00 $ (0.07)
Cumulative effect of
change in accounting
principle............... -- -- -- (0.05) --
------- ------- ------- ------- -------
Basic and diluted
earnings (loss) per
share................... $ (0.24) $ 0.02 $ (0.12) $ (0.05) $ (0.07)
======= ======= ======= ======= =======
Pro forma amounts
assuming the change in
accounting principle is
applied retroactively:
Net income (loss)....... $(5,276) $ 323 $(2,163) $ 93
======= ======= ======= =======
Earnings (loss) per
share--Basic........... $ (0.28) $ 0.02 $ (0.10) $ 0.00
======= ======= ======= =======
Earnings (loss) per
share--Diluted......... $ (0.28) $ 0.01 $ (0.10) $ 0.00
======= ======= ======= =======
Shares used in
calculating:
Basic earnings (loss)
per share.............. 18,982 20,883 21,269 21,745 20,901
======= ======= ======= ======= =======
Diluted earnings (loss)
per share.............. 18,982 21,774 21,269 23,234 20,901
======= ======= ======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Retained Total Compre-
----------------- Additional earnings Cumulative stock- hensive
Number of Par paid-in (accumulated) translation holders' income
shares value capital deficit adjustment equity (Loss)
---------- ----- ---------- ------------- ----------- -------- -------
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
Issuance of common stock
pursuant to exercise of
stock options.......... 13,905 -- 50 50
Translation adjustment.. 25 25 25
Net loss................ -- -- -- (1,404) -- (1,404) (1,404)
---------- ---- ------- ------- ----- ------- -------
Comprehensive loss...... (1,379)
Balance at January 31,
1999 (unaudited)....... 20,932,165 209 33,157 (3,341) (34) 29,991
Issuance of common stock
pursuant to exercise of
stock options.......... 296,848 3 1,145 -- -- 1,148
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 and retirement
of treasury stock...... (47,250) -- (1) -- -- (1)
Tax benefit from stock
options................ -- -- 382 -- -- 382
Translation adjustment.. -- -- -- -- (31) (31) (31)
Net income.............. -- -- -- 1,901 -- 1,901 1,901
---------- ---- ------- ------- ----- ------- -------
Comprehensive income.... $ 1,870
Balance at December 31,
1999................... 21,285,855 213 35,633 (1,440) (65) 34,341
Issuance of common stock
pursuant to exercise of
stock options.......... 14,330 -- 62 -- -- 62
Translation adjustment.. -- -- -- -- 6 6 6
Net loss................ -- -- -- (2,458) -- (2,458) (2,458)
---------- ---- ------- ------- ----- ------- -------
Comprehensive loss...... $(2,452)
Balance at January 31,
2000................... 21,300,185 213 35,695 (3,898) (59) 31,951
Issuance of common stock
pursuant to exercise of
stock options.......... 392,669 4 1,802 -- -- 1,806
Issuance of common stock
in connection with
employee stock purchase
plan................... 67,795 1 1,013 -- -- 1,014
Issuance of common stock
in connection with
Microsoft Corporation
investment............. 277,162 3 9,997 -- -- 10,000
Tax benefit from stock
options................ -- -- 1,650 -- -- 1,650
Translation adjustment.. -- -- -- -- (112) (112) (112)
Net loss................ -- -- -- (1,007) -- (1,007) (1,007)
---------- ---- ------- ------- ----- ------- -------
Comprehensive loss...... $(1,119)
Balance at January 31,
2001................... 22,037,811 $221 $50,157 $(4,905) $(171) $45,302
========== ==== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SEACHANGE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Year ended One Month One Month
December 31, ended Year ended ended
---------------- January 31, January 31, January 31,
1998 1999 2000 2001 1999
------- ------- ----------- ----------- -----------
(unaudited)
Cash flows from
operating activities...
Net income (loss)....... $(4,572) $ 497 $(2,458) $ (1,007) $(1,404)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 4,813 4,218 355 4,920 379
Inventory valuation
allowance............. 2,016 458 -- 823 --
Compensation expense
associated with stock
and stock options..... 47 -- -- -- --
Acquisition costs...... -- 684 -- -- --
Deferred income
taxes................. (876) (933) (1,156) (3,601) (691)
Changes in operating
assets and
liabilities:
Accounts receivable.... (6,525) (177) 1,084 (10,356) 5,019
Inventories............ (4,368) (4,257) (2,961) (5,126) (1,630)
Prepaid expenses and
other current assets
and other assets...... (1,610) 2,249 (46) (2,113) (743)
Accounts payable....... 1,255 4,935 (4,587) 6,881 (2,678)
Accrued expenses....... 656 (61) (723) (960) (652)
Customer deposits...... (345) 388 336 1,518 188
Deferred revenue....... 1,644 441 1,912 2,143 1,037
Income taxes payable... 390 200 (50) 1,981 (115)
------- ------- ------- -------- -------
Net cash provided by
(used in) operating
activities.......... (7,475) 8,642 (8,294) (4,897) (1,290)
------- ------- ------- -------- -------
Cash flows from
investing activities
Purchases of property
and equipment......... (3,816) (3,130) (275) (10,276) (62)
Proceeds from sale and
maturity of
marketable
securities............ 10,212 -- -- -- --
Purchases of
marketable
securities............ (902) -- -- -- --
Increase in intangible
assets................ -- -- -- (2,500) --
------- ------- ------- -------- -------
Net cash provided by
(used in) investing
activities.......... 5,494 (3,130) (275) (12,776) (62)
------- ------- ------- -------- -------
Cash flows from
financing activities
Proceeds from
borrowings under line
of credit............. 2,000 -- -- 4,000 --
Proceeds from
borrowings under
equipment line of
credit................ 1,226 1,106 -- 4,823 --
Proceeds from
borrowings under
construction loan..... -- -- -- 1,183 --
Repayments under line
of credit and
equipment line of
credit................ -- (2,245) (72) (1,569) (2,039)
Repayment of
obligation under
capital lease......... (18) (500) (18) (160) (11)
Proceeds from issuance
of common stock....... 914 2,003 62 12,820 50
------- ------- ------- -------- -------
Net cash provided by
(used in) financing
activities.......... 4,122 364 (28) 21,097 (2,000)
------- ------- ------- -------- -------
Net increase (decrease)
in cash and cash
equivalents............ 2,141 5,876 (8,597) 3,424 (3,352)
Cash and cash
equivalents, beginning
of period.............. 3,301 5,442 11,318 2,721 5,442
------- ------- ------- -------- -------
Cash and cash
equivalents, end of
period................. $ 5,442 $11,318 $ 2,721 $ 6,145 $ 2,090
======= ======= ======= ======== =======
Supplemental disclosure
of cash flow
information:
Income taxes paid....... $ 132 $ 81 $ -- $ 303 $ --
Interest paid........... $ 35 $ 210 $ 19 $ 473 $ 17
Supplemental disclosure
of noncash activity:
Transfer of items
originally classified
as inventories to fixed
assets................. $ 584 $ 227 $ -- $ -- $ 109
Transfer of items
originally classified
as fixed assets to
inventories............ $ 668 $ 3,055 $ -- $ 515 $ --
Equipment acquired under
capital lease.......... $ 374 $ 336 $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
SeaChange develops, manufactures and sells systems, known as video
storage servers, that automate the management and distribution of both short-
form video streams, such as advertisements, and long-form video streams, such
as movies or other feature presentations, each of which requires precise,
accurate and continuous execution, to television operators, telecommunications
companies and broadcast television companies. Through January 31, 2001,
substantially all of SeaChange's revenues were derived from the sale of
broadband and broadcast systems and related services and content to cable
television operators, broadcast and telecommunications companies in the United
States and internationally.
In April 2000, SeaChange's Board of Directors voted to change
SeaChange's fiscal accounting year from December 31 to January 31, such that
its fiscal year began on February 1, 2000 and ended on January 31, 2001.
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 SeaChange
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Revenue Recognition
Revenues from 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 or determinable and collection of the related
receivable is probable. Installation, project management and training revenue
is deferred and recognized as these services are performed. Revenue from
technical support and maintenance is deferred and recognized ratably over the
period of the related agreements, generally twelve months. Customers are billed
for installation, project management, training and maintenance at the time of
the product sale. If a portion of the sales price is not due until installation
of the system is complete, that portion of the sales price is deferred until
installation is complete. Revenue from content fees, primarily movies, is
recognized based on the volume of monthly purchases that are made by hotel
guests. Revenue from product development contract services is recognized based
on the time and materials incurred to complete the work. Shipping and handling
costs are included in revenue and cost of revenues.
SeaChange's transactions frequently involve the sales of systems and
services under multiple element arrangements. Systems sales always include one
year of free technical support and maintenance services. Revenue under multiple
element arrangements is allocated to all elements except systems based upon the
fair value of those elements. The amounts allocated to training, project
management, technical support and maintenance and content fees is based upon
the price charged when these elements are sold separately and unaccompanied by
the other elements. The amount allocated to installation revenue is based upon
hourly rates and the estimated time required to complete the service. The
amount allocated to systems is done on a residual method basis. Under this
method, the total arrangement value is allocated first to undelivered elements,
based on their fair values, with the remainder being allocated to systems
revenue. Installation, training and project management services are not
essential to the functionality of systems as these services do not alter the
equipment's capabilities, are available from other vendors and the systems are
standard products.
F-7
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments which potentially expose SeaChange to
concentrations of credit risk include trade accounts receivable. To minimize
this risk, SeaChange 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, and at January 31, 2000 and 2001,
SeaChange had an allowance for doubtful accounts of $870,000, $908,000,
$908,000, and $742,000, respectively, to provide for potential credit losses
and such losses to date have not exceeded management's expectations.
In the years ended December 31, 1998 and 1999, the month ended January
31, 2000, and the year ended January 31, 2001, revenues from SeaChange's five
largest customers represented approximately 55%, 47%, 47%, and 44%
respectively, of SeaChange's total revenues. In the years ended December 31,
1998 and 1999, the one month ended January 31, 2000, and the year ended January
31, 2001, two customers each accounted for more than 10% of SeaChange's
revenues. The same two customers accounted for more than 10% of SeaChange's
revenues in the years ended December 31, 1998 and 1999, and the one month ended
January 31, 2000.
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
SeaChange considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. SeaChange 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, 1998 and 1999, the one month ended January 31,
2000 and the year ended January 31, 2001, the cost of which is based upon the
specific identification method, were not significant.
Property and Equipment
Property and equipment consist of land and buildings, office and
computer equipment, leasehold improvements, demonstration equipment, deployed
assets and spare components and assemblies used to service SeaChange's
installed base. Demonstration equipment consists of systems manufactured by
SeaChange 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 are the movie systems owned and
manufactured by us that are installed in a hotel environment. 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.
F-8
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, SeaChange
evaluates inventory levels and expected usage on a periodic basis and records
valuation allowances as required.
SeaChange 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, SeaChange 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 SeaChange'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. SeaChange determines
whether an impairment has occurred based on gross expected future cash flows
and measures the amount of impairment based on the related future flow
estimated discounted cash flows. The cash estimates used to determine the
impairment, if any, contain management's best estimates, using appropriate and
customary assumptions and projections at that time.
SeaChange defers legal costs associated with defending its existing
patents. If the patent defense is successful, the costs are capitalized and
amortized over their estimated remaining useful life. If the patent defense is
unsuccessful, the amounts deferred are charged to operating expense. Included
in goodwill and intangible assets at January 31, 2001 is approximately
$2,500,000 of capitalized legal costs associated with the successful defense of
SeaChange's patents. The patent intangible is being amortized over four years.
Included in other assets at January 31, 2001 is approximately $715,000 in
deferred legal costs associated with the on-going defense of certain of our
patents. Accumulated amortization of goodwill and intangible assets was
$850,000, $884,000 and $1,438,000 at December 31, 1999, January 31, 2000 and
January 31, 2001, respectively.
Research and Development and Software Development Costs
Costs incurred in the research and development of SeaChange's products
are expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to
establishing technological feasibility and capitalized thereafter until the
product is released for sale. Software development costs eligible for
capitalization to date have not been material to SeaChange'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 SeaChange's and its subsidiaries'
compensation plans are accounted for in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
F-9
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employees", ("APB 25") and related interpretations. SeaChange 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, "Accounting for Equity Instruments
That are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services".
Foreign Currency Translation
SeaChange 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" ("SFAS 130") requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. SeaChange 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 $624,000, $857,000, $40,000, and $1,089,000, for the years ended December
31, 1998 and 1999, the month ended January 31, 2000, and the year ended January
31, 2001, 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 year ended December 31, 1998, the one month ended January 31,
2000 and the one month ended January 31, 1999, 2,114,000, 2,055,000 and
2,057,000 common shares issuable upon the exercise of stock options,
respectively, and 1,792,000 shares of unvested restricted common stock for the
year ended December 31, 1998, are antidilutive because SeaChange recorded a net
loss for the periods and, therefore, have been excluded from the diluted
earnings per share computations.
F-10
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Below is a summary of the shares used in calculating basic and diluted
earnings per share for the periods indicated:
Year Ended
December 31, Month Ended Year Ended Month Ended
--------------------- January 31, January January 31,
1998 1999 2000 31, 2001 1999
---------- ---------- ----------- ---------- -----------
(unaudited)
Weighted average shares
used in calculating
earnings per share--
Basic.................. 18,982,000 20,883,000 21,269,000 21,745,000 20,901,000
Dilutive common stock
equivalents............ -- 891,000 -- 1,489,000 --
---------- ---------- ---------- ---------- ----------
Weighted average shares
used in calculating
earnings per share--
Diluted................ 18,982,000 21,774,000 21,269,000 23,234,000 20,901,000
========== ========== ========== ========== ==========
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. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of SFAS No. 133. This accounting standard amended the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. We will adopt SFAS No. 133, as amended, in fiscal year
2002. To date we have 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.
3. Change in Accounting Principle
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Historically, for
some of SeaChange's sales transactions, a portion of the sales price, typically
25%, was not due until installation occurred. Under SAB 101 and the new
accounting method adopted retroactive to February 1, 2000, SeaChange now defers
the portion of the sales price not due until installation is complete. During
the fourth quarter of the twelve months ended January 31, 2001, SeaChange
implemented the SEC's SAB 101 guidelines, retroactive to the beginning of the
year. This was reported as a cumulative effect of a change in accounting
principle as of February 1, 2000. The cumulative effect of the change in
accounting principle on prior years resulted in a charge to income of $1.1
million (net of income taxes of $732,000), or $0.05 per diluted share, which
has been included in income for the twelve months ended January 31, 2001. For
the twelve months ended January 31, 2001, SeaChange recognized $1.5 million in
revenue that is included in the cumulative effect adjustment as of February 1,
2000. During the twelve months ended January 31, 2001, SeaChange changed its
standard payment terms such that no portion of the sales price is due upon
installation. The results for the first three quarters of twelve months ended
January 31, 2001 have been restated to conform with SAB 101. The pro forma
results for prior periods presented in the consolidated statement of operations
were calculated assuming the accounting change was made retroactively to all
prior periods presented.
F-11
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Consolidated Balance Sheet Detail
Inventories consist of the following:
January 31,
December -----------------------
31, 1999 2000 2001
----------- ----------- -----------
Components and assemblies............... $14,739,000 $17,602,000 $18,695,000
Finished products....................... 2,389,000 2,487,000 6,212,000
----------- ----------- -----------
$17,128,000 $20,089,000 $24,907,000
=========== =========== ===========
Property and equipment consist of the following:
Estimated
useful January 31,
life December -----------------------
(years) 31, 1999 2000 2001
--------- ----------- ----------- -----------
Land......................... $ -- $ -- $ 283,000
Buildings.................... 20 -- -- 1,201,000
Office furniture and
equipment................... 5 1,645,000 2,268,000 2,454,000
Computer and demonstration
equipment................... 3 12,213,000 11,752,000 17,317,000
Deployed assets.............. 3-7 4,065,000 4,209,000 5,413,000
Service and spare
components.................. 5 2,584,000 2,584,000 2,951,000
Leasehold improvements....... 1-7 1,096,000 1,065,000 1,676,000
Automobiles.................. 5 56,000 56,000 101,000
----------- ----------- -----------
21,659,000 21,934,000 31,396,000
Less--Accumulated
depreciation and
amortization................ 11,121,000 11,442,000 15,510,000
----------- ----------- -----------
$10,538,000 $10,492,000 $15,886,000
=========== =========== ===========
Depreciation expense was $3,857,000, $3,806,000, $319,000, and
$4,345,000 for the years ended December 31, 1998 and 1999, for the month ended
January 31, 2000, and the year ended January 31, 2001, respectively.
Accrued expenses consist of the following:
January 31,
December 31, ---------------------
1999 2000 2001
------------ ---------- ----------
Accrued software license fees............ $1,565,000 $1,565,000 $ 157,000
Accrued sales and use taxes.............. 647,000 -- 581,000
Other accrued expenses................... 1,287,000 1,211,000 1,078,000
---------- ---------- ----------
$3,499,000 $2,776,000 $1,816,000
========== ========== ==========
5. Segment Information
SeaChange has three reportable segments: broadband systems, broadcast
systems and services. The broadband systems segment provides products to
digitally manage, store and distribute digital video for television operators
and telecommunications companies. The broadcast systems segment provides
products for the storage, archival, on-air playback of advertising and other
video programming for the broadcast television industry. The service segment
provides installation, training, product maintenance and technical support for
all
F-12
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the above systems and content which is distributed by the broadband product
segment. SeaChange does not measure the assets allocated to the segments.
SeaChange measures results of the segments based on the respective gross
profits. There were no inter-segment sales or transfers. Long-lived assets are
principally located in the United States. SeaChange has changed its reportable
segments from the prior year and has reclassed prior period amounts to conform
to these current segments. The following summarizes the revenues and cost of
revenues by reportable segment:
One month One month
Year ended December 31, ended Year ended ended
----------------------- January January 31, January 31,
1998 1999 31, 2000 2001 1999
----------- ----------- ---------- ----------- -----------
(unaudited)
Revenues
Broadband...... $53,810,000 $51,664,000 $ 190,000 $54,412,000 $ 467,000
Broadcast...... 4,223,000 16,793,000 36,000 20,574,000 230,000
Services....... 14,891,000 16,764,000 1,484,000 23,482,000 1,211,000
----------- ----------- ---------- ----------- ----------
$72,924,000 $85,221,000 $1,710,000 $98,468,000 $1,908,000
=========== =========== ========== =========== ==========
Costs of revenues
Broadband...... $33,352,000 $29,702,000 $ 503,000 $28,481,000 $ 463,000
Broadcast...... 2,420,000 9,187,000 130,000 11,447,000 207,000
Services....... 13,611,000 14,962,000 1,445,000 18,798,000 1,049,000
----------- ----------- ---------- ----------- ----------
$49,383,000 $53,851,000 $2,078,000 $58,726,000 $1,719,000
=========== =========== ========== =========== ==========
The following summarizes revenues by geographic locations:
One month One month
Year ended December 31, ended Year ended ended
----------------------- January January 31, January 31,
1998 1999 31, 2000 2001 1999
----------- ----------- ---------- ----------- -----------
(unaudited)
Revenues
United States......... $63,497,000 $65,730,000 $1,398,000 $78,025,000 $1,185,000
Canada and South
America.............. 691,000 5,371,000 44,000 4,161,000 626,000
Europe................ 4,272,000 9,777,000 234,000 8,827,000 19,000
Rest of world......... 4,464,000 4,343,000 34,000 7,455,000 78,000
----------- ----------- ---------- ----------- ----------
$72,924,000 $85,221,000 $1,710,000 $98,468,000 $1,908,000
=========== =========== ========== =========== ==========
For the years ended December 31, 1998 and 1999, the one month ended
January 31, 2000, and the year ended January 31, 2001, certain customers
accounted for more than 10% of SeaChange's revenues. Individual customers
accounted for 24% and 15% in 1998; 15% and 10% in 1999; 16% and 11% in the one
month ended January 31, 2000; and 12% and 10% in twelve months ended January
31, 2001. The following summarizes revenues by significant customer:
Year ended One month
December 31, ended Year ended
--------------- January 31, January 31,
1998 1999 2000 2001
------ ------ ----------- -----------
Customer A........................... 24% 15% 16% --
Customer B........................... 15% 10% 11% 12%
Customer C........................... -- -- -- 10%
F-13
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. ACQUISITION AND RESTRUCTURING OF OPERATIONS
Acquisition
On December 30, 1999, SeaChange acquired all of the authorized and
outstanding common stock of Digital Video Arts, Ltd. in exchange for 330,000
shares of SeaChange's common stock using an exchange ratio of 0.033 of one
share of SeaChange's common stock for each share of Digital Video Arts. The
acquisition was accounted for as a pooling of interests. Digital Video Arts is
a developer of custom software products specializing in digital video and
interactive television. As a result of the acquisition, Digital Video Arts
became a wholly-owned subsidiary of SeaChange. Total revenues of $85.2 million
for the year ended December 31, 1999 consisted of $84.2 million of SeaChange's
revenues and $1.0 million of Digital Video Arts' revenues. Net income of
$497,000 for the same period consisted of SeaChange's net income of $1.1
million and Digital Video Arts' 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, Digital Video Arts' 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 Digital Video Arts.
Restructuring of Operations
In March 1998, SeaChange 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,
SeaChange had notified all terminated employees. All restructuring charges were
paid as of December 31, 1998.
7. Lines of Credit and Long-Term Bank Debt
SeaChange had a $6.0 million revolving line of credit and a $5.0 million
equipment line of credit with a bank. This revolving line of credit expired in
March 2000 and SeaChange's ability to make purchases under the equipment line
of credit expired in March 2000. In July 2000, SeaChange renewed its revolving
line of credit and equipment line of credit with a bank. The revolving line of
credit was extended until March 2001 and borrowings under the facility
increased to $7.5 million. The equipment line of credit was extended to provide
SeaChange additional equipment financing of $4.0 million through March 2001. In
addition, SeaChange entered into a $3.0 million line of credit facility with
the Export-Import Bank of the United States ("EXIM") which allows SeaChange to
borrow money based upon eligible foreign customer account balances. The ability
to borrow funds by SeaChange under this facility also expired in March 2001.
SeaChange is currently in the process of negotiating the renewal of all the
lines of credit. Borrowings under all the lines of credit are collateralized by
substantially all of SeaChange's assets. Loans made under the revolving line of
credit would generally bear interest at a rate per annum equal to the LIBOR
rate plus 2% (9.05% at January 31, 2001). Loans under the EXIM line of credit
bear interest at a rate per annum equal to the prime rate (9.5% at January 31,
2001). 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% (10.5% at January 31, 2001).
The loan agreement relating to the lines of credit requires that SeaChange
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 ratio of at least .80 to 1.0. At
January 31, 2001, SeaChange was not in compliance with certain financial
covenants of the loan agreement for all the lines of credit. Subsequent to
year-end, SeaChange received a waiver of non-
F-14
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compliance from the bank. As of January 31, 2001, there were $4.0 million in
borrowings against the revolving line of credit and borrowings outstanding
under the equipment line of credit were $4.9 million. There were no borrowings
outstanding under the EXIM line of credit at January 31, 2001.
In October 2000, SeaChange entered into an agreement with a bank to
finance $1.2 million of the construction costs related to the purchase and
renovation of a manufacturing mill in New Hampshire that SeaChange previously
purchased in February 2000. During the construction period, interest is accrued
and payable at a per annum rate of 8.875%. Upon occupancy of the building, the
loan converted into two promissory notes whereby SeaChange will pay principal
and interest based upon a fixed interest rate per annum over a five and ten
year period, respectively (8.875% at January 31, 2001). Borrowings under the
loan are secured by the land and buildings of the renovated mill. The loan
agreement requires that SeaChange provide the bank with certain periodic
financial reports and comply with certain financial ratios. At January 31,
2001, SeaChange were in compliance with all covenants. As of January 31, 2001,
borrowings outstanding under the loan were $1.2 million.
Principal payments under the lines of credit and the construction loan
are payable over the next five years as follows:
Payments
-----------
Year ended January 31, 2002................................... $ 6,329,000
2003........................................................ 2,074,000
2004........................................................ 938,000
2005........................................................ 186,000
2006........................................................ 203,000
Thereafter.................................................. 349,000
-----------
Total......................................................... $10,079,000
===========
8. INCOME TAXES
The components of income (loss) before income taxes are as follows:
Year ended December
31, Month ended Year ended
--------------------- January 31, January 31,
1998 1999 2000 2001
----------- -------- ----------- -----------
Domestic................... $(7,361,000) $331,000 $(3,614,000) $(2,704,000)
Foreign.................... -- 151,000 -- 2,107,000
----------- -------- ----------- -----------
$(7,361,000) $482,000 $(3,614,000) $ (597,000)
=========== ======== =========== ===========
F-15
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the provision (benefit) for income taxes are as
follows:
Year ended December Year
31, Month ended ended
---------------------- January 31, January
1998 1999 2000 31, 2001
----------- --------- ----------- ---------
Current provision
(benefit):
Federal................. $(1,913,000) $ 532,000 $ -- $ --
State................... -- 354,000 -- --
Foreign................. -- 56,000 -- --
----------- --------- ----------- ---------
(1,913,000) 942,000 -- --
----------- --------- ----------- ---------
Deferred benefit:
Federal................. (124,000) (586,000) (889,000) (538,000)
State................... (752,000) (371,000) (267,000) (86,000)
Foreign................. -- -- -- (66,000)
----------- --------- ----------- ---------
(876,000) (957,000) (1,156,000) (690,000)
----------- --------- ----------- ---------
$(2,789,000) $ (15,000) $(1,156,000) $(690,000)
=========== ========= =========== =========
The components of deferred income taxes are as follows:
December 31, January 31, January 31,
1999 2000 2001
------------ ----------- -----------
Deferred tax assets:
Inventories...................... $ 1,282,000 $ 1,133,000 $ 1,396,000
Allowance for doubtful accounts.. 405,000 366,000 207,000
Deferred revenue................. 115,000 -- --
Software......................... 107,000 106,000 97,000
Accrued expenses................. 135,000 335,000 8,000
Property and equipment........... 104,000 200,000 57,000
Research and development credit
carryforwards................... 198,000 268,000 1,358,000
Federal net operating loss
carryforwards................... -- 1,339,000 3,769,000
State net operating loss
carryforwards................... 554,000 573,000 717,000
Foreign net operating loss
carryforwards................... -- -- 66,000
Acquired net operating loss
carryforwards and basis
differences..................... 3,361,000 3,361,000 3,361,000
----------- ----------- -----------
6,261,000 7,681,000 11,036,000
Valuation allowance................ (3,361,000) (3,361,000) (3,361,000)
----------- ----------- -----------
Total deferred tax assets...... 2,900,000 4,320,000 7,675,000
----------- ----------- -----------
Deferred tax liabilities:
Property and equipment........... -- -- --
Deferred Revenue................. -- 246,000 --
----------- ----------- -----------
Total deferred tax
liabilities................... -- 246,000 --
----------- ----------- -----------
Net deferred income taxes.......... $ 2,900,000 $ 4,074,000 $ 7,675,000
=========== =========== ===========
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
F-16
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, January 31,
2000 and January 31, 2001 relates to net operating loss carryforwards and tax
basis differences acquired in SeaChange'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.
SeaChange 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.
Although realizability is not assured, based on the weight of available
evidence, SeaChange believes it is more likely than not that all remaining
deferred tax assets will be realized. The amount of the deferred tax asset
considered realizable is subject to change based on future events, including
generating taxable income in future periods. SeaChange will continue to assess
the need for the valuation allowance at each balance sheet date based on all
available evidence. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if SeaChange does not generate
sufficient taxable income in future periods.
In accordance with APB 23, SeaChange does not provide for U.S. federal
income taxes on the earnings of its non-U.S. subsidiaries, as it is
management's plan to permanently reinvest in operations outside the U.S. At
January 31, 2001, undistributed earnings of approximately $163,000 are
considered by SeaChange to be permanently invested in certain foreign
subsidiaries. The amount of tax that would be owed if the profits were
distributed is $56,000.
At January 31, 2001, SeaChange had federal and state net operating loss
carryforwards of approximately $10,341,000 and $15,467,000, respectively, which
expire at various dates through 2021. Of these amounts, $4,030,000 and
$4,030,000, respectively, relate to deductions for disqualifying dispositions
of incentive stock options that will be credited to paid-in capital, when
realized.
At January 31, 2001, SeaChange had federal and state research and
development tax credit carryforwards of approximately $1,098,000 and $359,000,
respectively, which expire at various dates through 2016. Of these amounts,
$38,000 and $0, respectively, relate to qualified wage expenses incurred as a
result of disqualifying dispositions of incentive stock options by employees
that will be credited to paid-in capital, when realized.
F-17
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The income tax provision (benefit) computed using the federal statutory
income tax rate differs from SeaChange's effective tax rate primarily due to
the following:
Year Ended December Year
31 Month Ended Ended
--------------------- January 31, January
1998 1999 2000 31, 2001
----------- -------- ----------- ---------
Statutory U.S. federal tax
rate........................ $(2,552,000) $164,000 $(1,239,000) $(203,000)
State taxes after state tax
credits, net of federal
tax benefits.............. (496,000) (12,000) (176,000) (28,000)
Other...................... 355,000 98,000 278,000 (93,000)
Research and development
tax credits............... (316,000) (446,000) (25,000) (443,000)
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................... 220,000 140,000 6,000 77,000
----------- -------- ----------- ---------
$(2,789,000) $(15,000) $(1,156,000) $(690,000)
=========== ======== =========== =========
SeaChange's effective tax benefit rate was 38% and 3% in the year ended
December 31, 1998 and 1999, respectively, 32% in the month ended January 31,
2000 and 116% in the year ended January 31, 2001. 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 SeaChange's acquisition of Digital Video Arts, SeaChange
recorded a tax benefit of $192,000 in the second quarter of 1999 related to the
use of Digital Video Arts 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, SeaChange recorded a
tax benefit of $446,000 in the fourth quarter of 1999 related to the
utilization of these tax credits.
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. Common Stock
Microsoft investment
On May 8, 2000, SeaChange and Microsoft Licensing, Inc. entered into a
licensing and development agreement whereby Microsoft agreed to license to
SeaChange certain technology to be used by SeaChange in connection with the
development by SeaChange of plug-ins for the streaming media server software
update currently being developed by Microsoft to its Windows NT/Windows 2000
operating system. Under the terms of the agreement, SeaChange is also entitled
to use the Microsoft technology to enhance SeaChange's software to use the
updated streaming media server software being developed by Microsoft. The
parties intend that SeaChange will be able to promote and ship the enhanced
SeaChange software as its primary streaming media system for all Microsoft
Windows 2000-based SeaChange systems.
F-18
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the ability to use the technology owned by Microsoft and
licensed to SeaChange pursuant to the licensing and development agreement,
Microsoft purchased 277,162 shares of SeaChange's common stock for $10 million.
In addition, under the terms of the agreement, Microsoft may purchase
approximately $10 million of additional shares of SeaChange's common stock upon
the satisfaction of certain commercial milestones. The initial shares purchased
for $10 million was completed by SeaChange and Microsoft on May 23, 2000.
Stock Split
On December 10, 1999, the Board of Directors authorized a 3-for-2 stock
split of SeaChange'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.
Treasury Stock
In 1999, SeaChange repurchased and retired 47,250 shares of its common
stock from employees of SeaChange. All of the shares were held for more than
six months from the time the shares became vested. Accordingly, no compensation
expense was recorded for the difference between the repurchase price and the
original purchase price paid by the stockholder.
Reserved Shares
At January 31, 2001, SeaChange had 3,982,183 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.
11. Stock Plans
Employee Stock Purchase Plan
In September 1996, SeaChange'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 SeaChange's stock and
directors who are not employees of SeaChange 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 the year ended December 31, 1998, and 1999,
the one month ended January 31, 2000 and the year ended January 31, 2001,
79,157, 87,014, 0, and 67,795 shares of common stock, respectively, were issued
under the Stock Purchase Plan. As of January 31, 2001, 171,992 shares are
available under the Stock Purchase Plan for issuance.
1995 Stock Option Plan
The Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option
Plan") provides for the grant of incentive stock options and nonqualified stock
options for the purchase of up to an aggregate of 4,800,000 shares of
SeaChange's common stock by officers, employees, consultants and directors of
SeaChange. 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.
SeaChange may
F-19
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 SeaChange'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 SeaChange'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 SeaChange's voting stock).
Director Stock Option Plan
In June 1996, SeaChange'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 SeaChange 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, 1998 and 1999, the one month ended
January 31, 2000 and the year ended January 31, 2001 are summarized as follows:
Month ended Year ended
Year ended December 31, January 31, January 31,
--------------------------------------- ------------------- -------------------
1998 1999 2000 2001
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
--------- -------- --------- -------- --------- -------- --------- --------
Outstanding at beginning
of period.............. 1,714,586 $7.60 2,113,824 $ 5.34 2,040,053 $ 7.79 2,054,539 $ 8.29
Granted................. 1,334,594 4.95 524,739 14.76 35,400 35.50 2,006,977 26.82
Exercised............... (135,790) 3.71 (310,753) 3.94 (14,330) 4.28 (392,669) 4.57
Cancelled............... (799,566) 9.99 (287,757) 6.00 (6,584) 6.61 (203,883) 19.57
========= ========= ========= =========
Outstanding at period
end.................... 2,113,824 $5.34 2,040,053 $ 7.79 2,054,539 $ 8.29 3,464,964 $18.80
========= ========= ========= =========
Options exercisable at
period end............. 473,465 594,265 625,387 834,024
Weighted average fair
value of options
granted during the
period................. $3.54 $ 7.11 $26.57 $22.36
F-20
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about employee and director stock
options outstanding at January 31, 2000 and January 31, 2001:
Options outstanding at Options outstanding at
January 31, 2000 January 31, 2001
-------------------------------- --------------------------------
Weighted Weighted
average average
remaining Weighted remaining Weighted
contractual average contractual average
Number life exercise Number life exercise
outstanding (years) price outstanding (years) price
----------- ----------- -------- ----------- ----------- --------
Range of exercise prices
$0.33 to 0.82......... 142,580 3.48 $0.75 34,496 4.68 $ 0.70
2.80 to 4.00......... 540,831 8.51 3.87 393,814 7.72 3.95
4.45 to 6.25......... 697,412 8.01 5.48 543,049 7.02 5.47
6.58 to 10.00........ 285,505 8.50 7.47 237,247 7.59 7.49
10.33 to 14.33........ 143,677 9.17 11.55 128,271 8.24 11.46
19.17 to 23.31........ 74,138 6.73 19.46 1,017,361 9.60 23.08
26.75 to 39.13........ 170,396 9.91 33.92 1,110,726 9.22 30.49
--------- ---- ----- --------- ---- ------
2,054,539 8.09 $8.29 3,464,964 8.62 $18.80
========= ==== ===== ========= ==== ======
Options exercisable Options exercisable
at at
January 31, 2000 January 31, 2001
-------------------- --------------------
Weighted Weighted
average average
Number exercise Number exercise
exercisable price exercisable price
----------- -------- ----------- --------
Range of exercise prices
$0.33 to 0.82.................... 117,781 $0.76 34,496 $ 0.70
2.80 to 4.00.................... 152,791 3.72 143,364 3.87
4.45 to 6.25.................... 250,966 5.41 288,960 5.41
6.58 to 10.00................... 48,899 7.64 97,122 7.54
10.33 to 14.33................... 12,812 12.91 41,847 11.63
19.17 to 23.31................... 42,138 19.33 39,343 19.47
26.75 to 39.13................... -- -- 188,892 30.68
------- ----- ------- ------
625,387 $5.39 834,024 $11.90
======= ===== ======= ======
F-21
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value Disclosures
SeaChange applies APB 25 in accounting for employee stock awards.
Compensation expense associated with equity awards of $47,000 has been recorded
for the year ended December 31, 1998. Had compensation expense for SeaChange's
employee stock plans been determined based on the fair value at the grant
dates, as prescribed in SFAS 123, SeaChange's net income (loss) and earnings
(loss) per share would have been as follows:
Year ended December
31, Month ended Year ended
--------------------- January 31, January 31,
1998 1999 2000 2001
----------- -------- ----------- ------------
Net income (loss)
As reported............. $(4,572,000) $497,000 $(2,458,000) $ (1,007,000)
Pro forma............... $(6,456,000) $122,000 $(2,703,000) $(14,825,000)
Basic earnings (loss) per
share
As reported............. $ (0.24) $ 0.02 $ (0.12) $ (0.05)
Pro forma............... $ (0.34) $ 0.01 $ (0.13) $ (0.68)
Diluted earnings (loss)
per share
As reported............. $ (0.24) $ 0.02 $ (0.12) $ (0.05)
Pro forma............... $ (0.34) $ 0.01 $ (0.13) $ (0.68)
The fair value of each option granted was estimated on the date of grant
assuming a weighted average volatility factor of 67% for the year ended
December 31, 1998, 46% for the year ended December 31, 1999, and 100% for the
month ended January 31, 2000 and twelve months ended January 31, 2001.
Additional weighted average assumptions used for grants during the years ended
December 31, 1998 and 1999, the one month ended January 31, 2000 and the year
ended January 31, 2001 included: dividend yield of 0.0% for all periods; risk-
free interest rates of 6.00% for options granted during the year ended December
31, 1998, 5.54% for options granted during the year ended December 31, 1999 and
the one month ended January 31, 2000 and 4.94% for option granted the year
ended January 31, 2001; 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 SeaChange ("Committee") determined that, because certain stock
options held by employees of SeaChange had an exercise price significantly
higher than the fair market value of SeaChange'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 SeaChange's
common stock at the close of the market on January 22, 1998. With the exception
of one executive officer, SeaChange's directors and executive officers were not
eligible to participate in this stock option repricing. During the execution of
the stock option repricing plan, SeaChange's stock price was below $5.50 per
share and, therefore, no compensation charge was recorded as a result of the
stock option repricing.
F-22
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Commitments and Contingencies
SeaChange leases its operating facilities and certain office equipment
under non-cancelable capital and operating leases, which expire at various
dates through 2007. Rental expense under operating leases was approximately
$1,341,000, $1,681,000, $167,000, and $2,307,000 for the years ended December
31, 1998 and 1999, the month ended January 31, 2000, and the year ended January
31, 2001, respectively. Future commitments under minimum lease payments as of
January 31, 2001 are as follows:
Capital Operating
-------- ----------
Year ended January 31, 2002............................. $221,000 $1,638,000
2003.................................................. 145,000 1,334,000
2004.................................................. 60,000 871,000
2005.................................................. -- 861,000
2006.................................................. -- 295,000
Thereafter.............................................. -- 327,000
-------- ----------
Minimum lease payments.................................. 426,000 $5,326,000
==========
Less: Amount representing interest...................... 39,000
--------
$387,000
========
SeaChange had non-cancelable purchase commitments for inventories of
approximately $5,400,000 at January 31, 2001.
On March 17, 2000, Beam Laser Systems, Inc. and Frank L. Beam instituted
a claim (Civil Action No. 2:00-CV-195) in the federal courts in the Eastern
District of Virginia against one of our customers, Cox Communications, Inc.
This claim was later amended by Beam Laser on June 16, 2000 to also include two
related companies of Cox Communications: CableRep, Inc. and CoxCom, Inc. Beam
Laser has asserted that the ad insertion technology, which includes our spot ad
insertion system, used by Cox Communications, CableRep and CoxCom infringes two
of the patents held by Beam Laser (Patents No. 4,814,883 and 5,200,825). Beam
Laser is seeking both an injunction and monetary damages from the defendants in
that case. The defendants have made a counterclaim against Beam Laser seeking a
declaration of non-infringement, invalidity and unenforceability of the two
patents held by Beam Laser that are at question. On May 19, 2000, we filed a
motion seeking to intervene in the action between our customer and Beam Laser,
and to transfer the case to the District Court of Massachusetts. On June 23,
2000, the court granted our intervention motion and deferred ruling on the
issue of transfer. Also on June 23, 2000, we filed our intervenor complaint in
the Virginia action seeking, among other things, a declaratory judgment of non-
infringement, invalidity and unenforceability regarding the two patents of Beam
Laser that are at question. In addition, we have agreed to indemnify our
customer for claims brought against the customer that are related to the
customer's use of our products. On October 23, 2000, the court denied our
motion to transfer. On November 29, 2000, Beam Laser filed a motion to amend
its pleading to add claims against us seeking equitable relief, a finding of
willful or contributory infringement, and attorneys' fees. On January 26, 2001,
the magistrate denied Beam Laser's motion to amend. Beam Laser has filed an
objection to this denial, and on March 16, 2001, the court allowed Bearn's
motion to amend the complaint, to add charges of infringement against
SeaChange, but not allowing any claims for damages or willful infringement. In
addition, on April 20, 2001, the court denied a motion for summary judgement of
laches, stating it will schedule an evidentiary hearing. This dispute has no
scheduled trial date, though one is expected this year.
On June 13, 2000, we filed in the United States District Court for the
District of Delaware a lawsuit against one of our competitors, nCube Corp.,
whereby we alleged that nCube's MediaCube-4 product infringed
F-23
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a patent held by us (Patent No. 5,862,312). In instituting the claim, we sought
both a permanent injunction and damages in an unspecified amount. nCube made a
counterclaim against us that the patent held by us was invalid and that nCube's
MediaCube-4 product did not infringe our patent. On September 6, 2000, nCube
conceded, based on the District Court's prior claim construction ruling, that
its MediaCube-4 product infringed our patent. On September 25, 2000 the court
upheld the validity of our patent. nCube has filed motions challenging both the
jury's verdict and the District Court's claim construction ruling. The District
Court has yet to rule on nCube's motions. At this time we are awaiting the
court's decision regarding a permanent injunction. Damages will be determined
in future proceedings.
On January 8, 2001, nCube Corp. filed a complaint against us in the
United States District Court for the District of Delaware alleging that our use
of our Media Cluster, Media Express and Media Server technology each infringe a
patent held by nCube (Patent No. 5,805,804). In instituting the claim, nCube
has sought both an injunction and monetary damages in an unspecified amount. We
responded on January 26, 2001, denying that the claim of infringement. We also
asserted a counterclaim seeking a declaration from the District Court that U.S.
Patent No. 5,805,804 is invalid and not infringed.
On June 14, 1999, we filed a defamation complaint against Jeffrey
Putterman, Lathrop Investment Management, Inc. and Concurrent Computer
Corporation in the Circuit Court of Pulaski County, Arkansas alleging that the
defendants conspired to injure our business and reputation in the marketplace.
The complaint further alleges that Mr. Putterman and Lathrop Investment
Management, Inc. defamed us through false postings on an Internet message
board. The complaint seeks unspecified amounts of compensatory and punitive
damages. On June 14, 2000, Concurrent filed a counterclaim under seal against
us seeking unspecified damages. These motions are currently pending and no
trial date has been set.
We cannot be certain of the outcome of the foregoing litigation, but do
plan to oppose allegations against us and assert our claims against other
parties vigorously. In addition, as these claims are in the early stages of
discovery and certain claims for damages are as yet unspecified, we are unable
to estimate the impact to our business, financial condition, and results of
operations or cash flows.
13. Employee Benefit Plan
SeaChange 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. SeaChange matches contributions
up to 25% of the first 6% of compensation contributed by the employee to the
Plan. During the years ended December 31, 1998 and 1999, the month ended
January 31, 2000, and the year ended January 31, 2001, SeaChange contributed
$189,000, $225,000, $19,000, and $286,000, respectively, to the Plan.
14. Comcast Equity Investment and Video-on-Demand Purchase Agreements
On December 1, 2000, SeaChange and Comcast Cable Communications, Inc.
entered into a video-on-demand purchase agreement for SeaChange's interactive
television video servers and related services. Under the terms of the video-on-
demand purchase agreement, Comcast has committed to purchase SeaChange's
equipment capable of serving a minimum of one million cable subscribers by
approximately December 2002. In addition, Comcast may earn up to an additional
450,000 incentive common stock purchase warrants through December 2003 based on
the number of cable subscribers in excess of one million who are served by
SeaChange's equipment which has been purchased by Comcast. In connection with
the execution of this
F-24
SEACHANGE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commercial agreement, SeaChange entered into a common stock and warrant
purchase agreement, dated as of December 1, 2000, with Comcast SC Investment,
Inc., whereby Comcast SC agreed to purchase, subject to certain closing
conditions including registration of the shares purchased thereby, 466,255
shares of SeaChange's common stock for approximately $10 million and Comcast SC
would receive a warrant to purchase 100,000 shares, exercisable at $21.445 per
share, of SeaChange's common stock. This stock and warrant purchase agreement
was terminated by SeaChange and Comcast SC on February 28, 2001. The terms and
conditions of the video-on-demand purchase agreement have not been modified.
On February 28, 2001, SeaChange and Comcast SC signed and closed a new
common stock and warrant purchase agreement on terms similar to the prior
agreement. Under the terms of this new agreement, SeaChange sold in a private
placement to Comcast SC for approximately $10,000,000 an aggregate of 756,144
shares of SeaChange's common stock and a warrant to purchase 100,000 shares of
SeaChange's common stock with an exercise price of $13.225 per share. Under
certain conditions determined upon the effectiveness of the registration of the
shares, the number of common shares purchased and the number of common stock
purchase warrants and related exercise price are subject to adjustment. An
additional number of shares of common stock shall be issued to Comcast SC
without any additional consideration as is equal to the difference between
756,144, the number of shares of common stock issued on February 28, 2001, and
the number of shares obtained by dividing $10,000,000 by the lower of 1) 92% of
the closing market price of SeaChange's common stock on the date of
effectiveness of this registration statement, and 2) the average of the closing
market price of SeaChange's common stock for the five trading days ending on
the effective date of this registration statement, if either of such prices is
lower than $13.225. The warrant agreement contains an adjustment mechanism such
that the warrant is exercisable for an additional 25,000 shares of SeaChange's
common stock if the registration statement has not been declared effective on
or before March 31, 2001 and an additional 333.33 shares of SeaChange's common
stock per day beginning on and including May 1, 2001 for each day up to and
including the day the registration statement is declared effective. The warrant
agreement also provides that the exercise price of the warrant will be reduced
on the effective date of the registration statement to the lower of 1) 92% of
the closing market price of SeaChange's common stock on the effective date of
the registration statement, and 2) the average of the closing market prices of
SeaChange's common stock for the five trading days ending on the date of
effectiveness of the registration statement, if either of such prices is lower
than $13.225, the exercise price as of the closing date.
SeaChange will determine the intrinsic value of the common stock
purchase and will measure the fair value of the 100,000 common stock purchase
warrants at the closing date and will record these amounts as contra-equity.
Upon effectiveness of the registration statement, SeaChange will measure the
fair value of the additional common shares issued, if any, and the incremental
fair value of the common stock warrants, and will add those amounts to the
amount of contra-equity initially recorded at the closing date. The contra-
equity amount will be amortized in future periods as an offset to gross revenue
in proportion to the revenue recognized from the sale of equipment with respect
to the first one million subscribers Comcast has committed to under the video-
on-demand purchase agreement. The fair value of the additional incentive common
stock purchase warrants will also be recorded as an offset to gross revenue as
the warrants are earned by Comcast, if any.
F-25
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 March 5, 2001, except for the information presented in Note 12 for
which the date is April 30, 2001, appearing in the Annual Report to
Shareholders of SeaChange International Inc. also included an audit of the
financial statement schedule listed in Item 14(a)(2) of 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
March 5, 2001
F-26
Schedule II
SEACHANGE INTERNATIONAL, INC.
VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
Balance at Charged to Deductions Balance at
beginning costs and and write- end of
of period expenses offs Other period
---------- ---------- ---------- ----- ----------
Allowance for Doubtful
Accounts:
Year ended December 31,
1998.................... $ 559,000 $ 497,000 $(186,000) $-- $ 870,000
Year ended December 31,
1999.................... $ 870,000 $ 225,000 $(187,000) $-- $ 908,000
Month ended January 31,
2000.................... $ 908,000 $ -- $ -- $-- $ 908,000
Year ended January 31,
2001.................... $ 908,000 $ 516,000 $(682,000) $-- $ 742,000
Inventory Valuation
Allowance:
Year ended December 31,
1998.................... $1,504,000 $2,016,000 $(919,000) $-- $2,601,000
Year ended December 31,
1999.................... $2,601,000 $ 458,000 $(395,000) $-- $2,664,000
Month ended January 31,
2000.................... $2,664,000 $ 11,000 $ -- $-- $2,675,000
Year ended January 31,
2001.................... $2,675,000 $ 823,000 $(722,000) $-- $2,776,000
F-27
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. Comcast SC Investment, Inc. is offering to sell,
and seeking offers to buy, the securities only in jurisdictions where offers
and sales are permitted. Neither the delivery of this prospectus nor any sales
made hereunder after the date of this prospectus shall create an implication
that the information contained in this document is correct as of any time
subsequent to the date hereof or that the affairs of SeaChange have not
changed since the date hereof. In this prospectus, references to "SeaChange
International," "we," "our" and "us" refer to SeaChange International, Inc.
----------------
TABLE OF CONTENTS
Page
----
SeaChange International.................................................. 2
Risk Factors............................................................. 4
Forward-Looking Statements............................................... 9
Use of Proceeds.......................................................... 9
Selected Financial Data.................................................. 10
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 12
Quantitative and Qualitative Disclosures About Market Risk............... 24
Business................................................................. 25
Management............................................................... 37
Principal Stockholders................................................... 42
Market Price............................................................. 44
Description of Capital Stock............................................. 45
Comcast SC Investment, Inc............................................... 48
Plan of Distribution..................................................... 49
Legal Matters............................................................ 51
Experts.................................................................. 51
Where You Can Find More Information...................................... 51
Index to Financial Statements............................................ F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
856,144 Shares
SEACHANGE INTERNATIONAL, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
, 2001
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
SEC Registration Fee............................................ $ 3,076.78
Nasdaq Filing Fees.............................................. 8,561.44
Legal fees and expenses......................................... 100,000.00
Accounting fees and expenses.................................... 10,000.00
-----------
Total......................................................... $121,638.22
===========
We will bear all expenses shown above. Comcast SC will bear all
underwriting discounts and selling commissions and stock transfer fees and
taxes applicable to the sale of the shares sold under this prospectus.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our Certificate of Incorporation
provide for indemnification of our directors and officers for liabilities and
expenses that they may incur in those capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
SeaChange, and with respect to any criminal action or proceeding, actions that
the indemnitee had no reasonable cause to believe were unlawful. We refer you
to our Certificate of Incorporation filed as Exhibit 4.2 to our registration
statement on Form S-8 filed with the SEC on December 8, 1996 (File No. 333-
17379) and the amendment thereto filed as Exhibit 4.2 to our registration
statement on Form S-3 filed with the SEC on December 6, 2000 (File No. 333-
51386).
We maintain directors' and officers' liability insurance to insure our
directors and certain officers against certain liabilities and expenses which
arise out of or in connection with their capacities as directors and officers.
In addition, the stock purchase agreement executed in connection with the
private placement provides that Comcast SC is obligated, under certain
circumstances, to indemnify SeaChange and its directors and officers against
certain liabilities, including liabilities under the Securities Act. Reference
is made to the common stock and warrant purchase agreement filed as Exhibit
10.1 to this registration statement on Form S-1.
Item 15. Recent Sales of Unregistered Securities
On December 30, 1999, in connection with the acquisition by us of all of
the issued and outstanding shares of capital stock of Digital Video Arts, Ltd.,
we 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.
On May 23, 2000, we sold 277,162 shares of our common stock to Microsoft
Corporation in exchange for an aggregate purchase price of $10,000,004.96. This
sale was exempt from the registration requirements of the Securities Act,
pursuant to Rule 506 of Regulation D of the rules promulgated by the SEC
pursuant to the Securities Act as we did not make any general solicitation
relating to the sale of these shares and Microsoft Corporation represented to
us that it was an accredited investor as such term is defined pursuant to Rule
501 of Regulation D of the rules promulgated by the SEC pursuant to the
Securities Act.
II-1
On February 28, 2001, we sold in a private placement to Comcast SC
Investment, Inc. for approximately $10,000,000 an aggregate of 756,144 shares
of our common stock and a warrant to purchase 100,000 shares of our common
stock with an exercise price of $13.225 per share. The number of shares
purchased under the purchase agreement, the number of shares for which the
warrant is exercisable and the per share exercise price of the warrant is
subject to adjustment, as detailed in the prospectus under the heading "Comcast
SC Investment, Inc." This sale was exempt from the registration requirements of
the Securities Act, pursuant to Rule 506 of Regulation D of the rules
promulgated by the SEC pursuant to the Securities Act as we did not make any
general solicitation relating to the sale of these shares and Comcast SC
represented to us that it was an accredited investor as such term is defined
pursuant to Rule 501 of Regulation D of the rules promulgated by the SEC
pursuant to the Securities Act.
Item 16. Exhibits.
Exhibit No. Description
----------- -----------
3.1 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on
Form S-1 previously filed on November 4, 1996 with the Commission
(File No. 333-12233) and incorporated herein by reference).
3.2 --Certificate of Amendment, filed May 25, 2000 with the Secretary
of State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.1
to the Company's Quarterly Report on 10-Q previously filed on
December 15, 2000 with the Commission (Filed No. 000-21393) and
incorporated herein by reference).
3.3 --Amended and Restated By-laws of the Company (filed as Exhibit
3.5 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.1 --Specimen certificate representing the Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.2 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on
Form S-1 previously filed on November 4, 1996 with the Commission
(File No. 333-12233) and incorporated herein by reference).
4.3 --Certificate of Amendment, filed May 25, 2000 with the Secretary
of State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.2
to the Company's registration statement on Form S-3 previously
filed on December 6, 2000 with the Commission (Filed No. 333-
51386) and incorporated herein by reference).
5.1* --Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 --Amended and Restated 1995 Stock Option Plan (filed as Annex A to
the Company's Proxy Statement on Form 14a previously filed on
April 28, 2000 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.2 --1996 Non-Employee Director Stock Option Plan (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
10.3* --Second Amended and Restated 1996 Employee Stock Purchase Plan of
the Company.
10.4 --Loan Agreement, dated as of October 16, 2000, by and between the
Company and the Bank of New Hampshire, N.A. (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q previously
filed on December 15, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
II-2
Exhibit No. Description
----------- -----------
10.5 --Loan and Security Agreement, dated as of November 10, 1998, by
and between Silicon Valley Bank and the Company (filed as Exhibit
10.5 to the Company's Annual Report on Form 10-K previously filed
on March 24, 1999 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.6 --First Loan Modification Agreement, dated as of March 27, 2000,
by and between the Company and Silicon Valley Bank (filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K/A
previously filed on April 14, 2000 with the Commission (File
No.000-21393) and incorporated herein by reference).
10.7 --Second Loan Modification Agreement, dated as of July 25, 2000,
by and among the Company, Silicon Valley Bank and Silicon Valley
Bank, doing business as Silicon Valley East (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q previously
filed on September 14, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
10.8 --Revolving Line of Credit Amendment, dated as of March 1, 2000,
by and between the Company and Silicon Valley Bank (filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K/A
previously filed on April 14, 2000 with the Commission (File
No.000-21393) and incorporated herein by reference).
10.9 --Export-Import Bank Loan and Security Agreement, dated as of July
25, 2000, by and among the Company, Silicon Valley Bank and
Silicon Valley Bank, doing business as Silicon Valley East (filed
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
previously filed on September 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.10 --Common Stock Purchase Agreement, dated as of May 23, 2000, by
and between the Company and Microsoft Corporation (filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
previously filed on September 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.11 --Registration Rights Agreement, dated as of May 23, 2000, by and
between the Company and Microsoft Corporation (filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q previously
filed on September 14, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
10.12** --License and Development Agreement, dated as of May 8, 2000, by
and between the Company and Microsoft Licensing, Inc. (filed as
Exhibit 10.5 to the Company's Amended Quarterly Report on 10-Q
for the quarterly period ended July 31, 2000 filed on March 1,
2001 with the Commission (File No. 000-21393) and incorporated
herein by reference).
10.13** --Investment Term Sheet, dated as of May 8, 2000, by and between
the Company and Microsoft Corporation (filed as Exhibit 10.6 to
the Company's Amended Quarterly Report on 10-Q for the quarterly
period ended July 31, 2000 filed on March 1, 2001 with the
Commission (File No. 000-21393) and incorporated herein by
reference).
10.14** --Video-on-Demand Purchase Agreement, dated as of December 1,
2000, by and between the Company and Comcast Cable Communications
of Pennsylvania, Inc. (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed on December 15, 2000 with the
Commission (File No. 000-21393) and incorporated herein by
reference).
10.15* --Stock Purchase Agreement, dated as of February 28, 2001, by and
between the Company and Comcast SC Investment, Inc.
10.16* --Amended and Restated Registration Rights Agreement, dated as of
February 28, 2001, by and between the Company and Comcast SC
Investment, Inc.
II-3
Exhibit No. Description
----------- -----------
10.17 --Stock Purchase Agreement, dated as of December 10, 1997, by and
among the Company, IPC Interactive Pte. Ltd. and the shareholders
of IPC Interactive Pte. Ltd. (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K previously filed on December
24, 1997 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.18 --Stock Purchase Agreement, dated as of December 30, 1999, by and
among the Company, Digital Video Arts, Ltd. and the stockholders
of Digital Video Arts, Ltd. and Corum Group Ltd. (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
previously filed on January 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.19 --Registration Rights Agreement, dated as of December 30, 1999, by
and among the Company, Digital Video Arts, Ltd. and the
stockholders of Digital Video Arts, Ltd. and Corum Group Ltd.
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
previously filed on January 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.20 --License Agreement dated May 30, 1996 between Summit Software
Systems, Inc. and the Company (filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 previously filed on
November 4, 1996 with the Commission (File No. 333-12233) and
incorporated herein by reference).
10.21 --Lease Agreement dated May 28, 1998 between Robert Quirk, Trustee
of Maynard Industrial Properties Associates Trust and the Company
(filed as Exhibit 10.3 to the Company's Annual Report on Form 10-
K previously filed on March 24, 1999 with the Commission (File
No. 000-21393) and incorporated herein by reference).
21.1 --List of Significant Subsidiaries (filed as Exhibit 21.1 to the
Company's Annual Report on Form 10-K/A previously filed on April
14, 2000 with the Commission (File No.000-21393) and incorporated
herein by reference).
23.1*** --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit
5.1)
24.1 --Power of Attorney (included on signature page).
- --------
* Previously filed.
** Confidential treatment requested as to certain portions of the document,
which portions have been omitted and filed separately with the Commission.
*** Filed herewith.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in this
registration statement.
II-4
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amended registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Maynard and
Commonwealth of Massachusetts on May 3, 2001.
Seachange International, Inc.
*
By: _________________________________
William C. Styslinger, III
President, Chief Executive
Officer, Director and Chairman
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of SeaChange International,
Inc., hereby severally constitute and appoint William C. Styslinger, III and
William L. Fiedler, and each of them singly, our true and lawful attorneys,
with full power to them and each of them singly, to sign for us in our names in
the capacities indicated below, all pre-effective and post-effective amendments
to this registration statement, and generally do all things in our names and on
our behalf in such capacities to enable SeaChange International, Inc. to comply
with the provisions of the Securities Act of 1933 and all requirements of the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Titles Date
--------- ------ ----
* President, Chief Executive May 3, 2001
______________________________________ Officer, Director and
William C. Styslinger, III Chairman (Principal
Executive Officer)
/s/ William L. Fiedler Chief Financial Officer, May 3, 2001
______________________________________ Secretary, Treasurer and
William L. Fiedler Vice President, Finance
and Administration
(Principal Financial
Officer and Principal
Accounting Officer)
* Director May 3, 2001
______________________________________
Martin R. Hoffmann
* Director May 3, 2001
______________________________________
Carmine Vona
/s/ William L. Fiedler Attorney-in-fact
*By: _________________________________
William L. Fiedler
II-6
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on
Form S-1 previously filed on November 4, 1996 with the Commission
(File No. 333-12233) and incorporated herein by reference).
3.2 --Certificate of Amendment, filed May 25, 2000 with the Secretary
of State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.1
to the Company's Quarterly Report on 10-Q previously filed on
December 15, 2000 with the Commission (Filed No. 000-21393) and
incorporated herein by reference).
3.3 --Amended and Restated By-laws of the Company (filed as Exhibit
3.5 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.1 --Specimen certificate representing the Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
4.2 --Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.3 to the Company's Registration Statement on
Form S-1 previously filed on November 4, 1996 with the Commission
(File No. 333-12233) and incorporated herein by reference).
4.3 --Certificate of Amendment, filed May 25, 2000 with the Secretary
of State in the State of Delaware, to the Amended and Restated
Certificate of Incorporation of the Company (filed as Exhibit 4.2
to the Company's registration statement on Form S-3 previously
filed on December 6, 2000 with the Commission (Filed No. 333-
51386) and incorporated herein by reference).
5.1* --Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 --Amended and Restated 1995 Stock Option Plan (filed as Annex A to
the Company's Proxy Statement on Form 14a previously filed on
April 28, 2000 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.2 --1996 Non-Employee Director Stock Option Plan (filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
previously filed on November 4, 1996 with the Commission (File
No. 333-12233) and incorporated herein by reference).
10.3* --Second Amended and Restated 1996 Employee Stock Purchase Plan of
the Company.
10.4 --Loan Agreement, dated as of October 16, 2000, by and between the
Company and the Bank of New Hampshire, N.A. (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q previously
filed on December 15, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
10.5 --Loan and Security Agreement, dated as of November 10, 1998, by
and between Silicon Valley Bank and the Company (filed as Exhibit
10.5 to the Company's Annual Report on Form 10-K previously filed
on March 24, 1999 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.6 --First Loan Modification Agreement, dated as of March 27, 2000,
by and between the Company and Silicon Valley Bank (filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K/A
previously filed on April 14, 2000 with the Commission (File No.
000-21393) and incorporated herein by reference).
Exhibit No. Description
----------- -----------
10.7 --Second Loan Modification Agreement, dated as of July 25, 2000,
by and among the Company, Silicon Valley Bank and Silicon Valley
Bank, doing business as Silicon Valley East (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q previously
filed on September 14, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
10.8 --Revolving Line of Credit Amendment, dated as of March 1, 2000,
by and between the Company and Silicon Valley Bank (filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K/A
previously filed on April 14, 2000 with the Commission (File
No.000-21393) and incorporated herein by reference).
10.9 --Export-Import Bank Loan and Security Agreement, dated as of July
25, 2000, by and among the Company, Silicon Valley Bank and
Silicon Valley Bank, doing business as Silicon Valley East (filed
as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
previously filed on September 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.10 --Common Stock Purchase Agreement, dated as of May 23, 2000, by
and between the Company and Microsoft Corporation (filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
previously filed on September 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.11 --Registration Rights Agreement, dated as of May 23, 2000, by and
between the Company and Microsoft Corporation (filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q previously
filed on September 14, 2000 with the Commission (File No. 000-
21393) and incorporated herein by reference).
10.12** --License and Development Agreement, dated as of May 8, 2000, by
and between the Company and Microsoft Licensing, Inc. (filed as
Exhibit 10.5 to the Company's Amended Quarterly Report on 10-Q
for the quarterly period ended July 31, 2000 filed on March 1,
2001 with the Commission (File No. 000-21393) and incorporated
herein by reference).
10.13** --Investment Term Sheet, dated as of May 8, 2000, by and between
the Company and Microsoft Corporation (filed as Exhibit 10.6 to
the Company's Amended Quarterly Report on 10-Q for the quarterly
period ended July 31, 2000 filed on March 1, 2001 with the
Commission (File No. 000-21393) and incorporated herein by
reference).
10.14** --Video-on-Demand Purchase Agreement, dated as of December 1,
2000, by and between the Company and Comcast Cable Communications
of Pennsylvania, Inc. (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed on December 15, 2000 with the
Commission (File No. 000-21393) and incorporated herein by
reference).
10.15* --Stock Purchase Agreement, dated as of February 28, 2001, by and
between the Company and Comcast SC Investment, Inc.
10.16* --Amended and Restated Registration Rights Agreement, dated as of
February 28, 2001, by and between the Company and Comcast SC
Investment, Inc.
10.17 --Stock Purchase Agreement, dated as of December 10, 1997, by and
among the Company, IPC Interactive Pte. Ltd. and the shareholders
of IPC Interactive Pte. Ltd. (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K previously filed on December
24, 1997 with the Commission (File No. 000-21393) and
incorporated herein by reference).
10.18 --Stock Purchase Agreement, dated as of December 30, 1999, by and
among the Company, Digital Video Arts, Ltd. and the stockholders
of Digital Video Arts, Ltd. and Corum Group Ltd. (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
previously filed on January 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
Exhibit No. Description
----------- -----------
10.19 --Registration Rights Agreement, dated as of December 30, 1999, by
and among the Company, Digital Video Arts, Ltd. and the
stockholders of Digital Video Arts, Ltd. and Corum Group Ltd.
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
previously filed on January 14, 2000 with the Commission (File
No. 000-21393) and incorporated herein by reference).
10.20 --License Agreement dated May 30, 1996 between Summit Software
Systems, Inc. and the Company (filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 previously filed on
November 4, 1996 with the Commission (File No. 333-12233) and
incorporated herein by reference).
10.21 --Lease Agreement dated May 28, 1998 between Robert Quirk, Trustee
of Maynard Industrial Properties Associates Trust and the Company
(filed as Exhibit 10.3 to the Company's Annual Report on Form 10-
K previously filed on March 24, 1999 with the Commission (File
No. 000-21393) and incorporated herein by reference).
21.1 --List of Significant Subsidiaries (filed as Exhibit 21.1 to the
Company's Annual Report on Form 10-K/A previously filed on April
14, 2000 with the Commission (File No. 000-21393) and
incorporated herein by reference).
23.1*** --Consent of PricewaterhouseCoopers LLP.
23.2 --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit
5.1).
24.1 --Power of Attorney (included on signature page).
- --------
* Previously filed.
** Confidential treatment requested as to certain portions of the document,
which portions have been omitted and filed separately with the Commission.
*** Filed herewith.