SeaChange International, Inc.

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SeaChange International, Inc.

50 Nagog Park
Acton, Massachusetts 01720
U.S.A.
Telephone: (978) 897-0100
Fax: (978) 897-0132
Web site: http://www.schange.com

Public Company
Incorporated: 1993 as SeaView Technology, Inc.
Employees: 500
Sales: $126.26 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: SEAC
NAIC: 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing; 511210 Software Publishers

SeaChange International, Inc. is the leading supplier of digital video server systems to cable system operators, cable TV networks, and television stations in the United States and abroad. The firm's products are used for video-on-demand (VOD) services, storage and playback of video content, and to automate the insertion of advertisements into programming. The publicly traded SeaChange is run by cofounder and CEO William Styslinger, who owns about 7.5 percent of its stock.

BEGINNINGS

SeaChange International was founded in Massachusetts by a group of former Digital Equipment Corp. (DEC) employees led by William Styslinger. University of Buffalo applied mathematics graduate Styslinger had worked for DEC since 1978, most recently as head of its newly formed Cable Television Business unit. His staff had been seeking a way to store video digitally with compression software so it could be transmitted over cable television networks, but when financially strapped DEC cut the project's funding in 1992, Styslinger decided to quit and, with coworkers Edward Delaney, Jr., and director of engineering Ed McGrath, formed a new company they called SeaView Technology, Inc. After getting DEC's permission to continue their research, they borrowed more than $300,000 from family and friends and set up shop in McGrath's dining room in July 1993. They soon recruited several other key engineers from their former employer, and subsequently amended the company's name to SeaChange when the name SeaView was found to be in use.

The new firm's goal was to develop equipment that would enable cable television service providers to send different advertisements simultaneously to as many as a dozen separate geographic areas, or zones, in their systems. The cable firm could determine which demographic groups were most populous in each zone, and thus better serve advertisers seeking to reach audiences in a more precise manner. Several firms already offered tape-based analog systems for this purpose, but SeaChange's new digital technology was potentially more reliable and could offer quicker system upload times, as well as cost savings, because no physical tapes were involved.

The company's staff worked on the project for little pay until July 1994, when the first system was shipped to Time Warner Manhattan. Additional sales of the new Spot advertising insertion system followed over the next year to clients that included cable giants Tele-Communications, Inc., Cox Communications, and Continental Cable. By the summer of 1995 systems were operating in 40 cities, and the rapidly growing 45-employee company had relocated to a facility in Concord, Massachusetts. In addition to manufacturing the products from off-the-shelf hardware, the firm also offered 24-hour technical support with a guaranteed two-hour response time.

The success and reliability of the Spot product quickly brought SeaChange close to 60 percent of the U.S. market for ad insertion technology, and in the fall of 1995 the company created an international sales unit to pursue the European, African, and Middle Eastern markets. The year also had seen introduction of the new VideoServer 100 storage device, which boosted the capacity of the Spot system. Sales for 1995 jumped to $23 million from $5 million a year earlier, and the company recorded a profit of $1.2 million.

In March 1996 the firm changed its name to SeaChange International, Inc. as it sought to further position itself as a worldwide entity. Its headquarters were moved to a new 25,000-square-foot site in Maynard, Massachusetts, though manufacturing would continue to be performed in Acton, Massachusetts, and video server development in Greenville, New Hampshire.

The spring of 1996 saw the firm sign a multimillion-dollar deal with the largest cable company in the United Kingdom, Telewest PLC, and form a partnership with IBM, which would market the Spot system as part of its TV industry product line. In July the company added new features to Spot that automated the management of advertising traffic control and billing, using software licensed from Summit Software Systems of Boulder, Colorado.

INITIAL PUBLIC OFFERING IN THE FALL OF 1996

In November 1996 SeaChange went public on the NASDAQ with the sale of 2.3 million shares of stock for $15 each (representing 13 percent of the total), netting $24 million. The funds would be used for various purposes including development of a product that allowed television stations to geographically target ads through cable providers, as well as to expand into such new business areas as video-on-demand (VOD). The latter was a technology that enabled video content to be streamed over a cable network to individual users on request, typically for a fee. Although initially tape-based and controlled from the provider end, when offered through new interactive digital networks the ability to pause, fast-forward, and rewind would eventually become possible, along with a much greater breadth of content.

Shortly after the IPO, the firm partnered with IPC Interactive, Inc. to develop a VOD service for hotels and other multiple-dwelling units. SeaChange also bought Horizon Systems, Inc., a Colorado-based maker of software to manage ad traffic and billing, which would replace the licensed Summit product. For the year the company's revenues more than doubled, to $49.3 million, and it recorded a profit of $4.3 million.

The year 1997 saw the introduction of a satellite-based ad distribution system for broadcasters as well as the new Movie System for multichannel operators that broadcast long-form video programming. The latter used the firm's patent-pending MediaCluster storage technology to link multiple Video Server 100s together. Early customers included cable systems in The Netherlands and Austria.

In August 1997 the world's first fiber-optic VOD network system was launched in New York. SeaChange equipment was at the heart of the Time Warner Hotel Network, which would allow several different Manhattan hotels to offer multiple cable channels and pay-per-view movies.

COMPANY PERSPECTIVES

SeaChange International, Inc. is a leader in the market for digital video systems for television. We create powerful server and software systems that manage, store, and distribute professional-quality digital video. Our innovative products are based on a scalable, distributed software architecture and standard technology components. As a result, we enable broadband, broadcast, satellite and new media companies to streamline operations and reduce costs, allowing for expanded services, new applications, and increased revenues.

We're providing the foundation that is allowing the television industry to meet the ever-increasing market for on-demand entertainment and information.

In November the company formed an agreement to work with U.K.-based OmniBus Systems, a maker of broadcast operations automation software for use in newsrooms and similar facilities. The firm was starting to post quarterly losses as research-and-development costs rose above expected levels, sales growth slowed due to cable operators' uncertainty about converting to digital, and international markets proved harder than expected to enter.

Year's end saw acquisition of IPC Interactive Pte. Ltd. of Singapore and its U.S. subsidiary in a stock swap deal worth $6.7 million. Founded in 1984, IPC's tape-based Guestserve interactive television network system was the leading VOD product for the hospitality and commercial property markets, and would be converted to SeaChange's digital delivery systems following the purchase. After IPC's operations were consolidated, the firm would have a total of 270 employees.

In March 1998 the company introduced the Broadcast MediaCluster System, which would allow television stations and other users to store and play large amounts of digital video. In April a joint venture was formed with AMX Corp. to develop digital video products for use outside the television industry in places like corporate boardrooms.

INTRODUCING THE SEACHANGE ITV SYSTEM: FALL OF 1998

Spring also saw an alliance formed with cable software and set-top box maker Scientific-Atlanta to provide VOD equipment to cable operators. Early VOD experiments had failed because of the high per-subscriber start-up costs, but the SeaChange system cost half as much or less, though it was limited to fiber-optic cable systems, which then comprised only 15 percent of the U.S. total. In November the new SeaChange ITV System, the firm's first comprehensive digital VOD product, was officially made available. Trials were soon undertaken by Time Warner Cable and Comcast in the United States as well as other major companies in Canada and the United Kingdom.

In 1999 the firm bought Pennsylvania-based Digital Video Arts, Ltd., a developer of set-top software for digital video and interactive television, won a U.S. patent for MediaCluster, and began working with a firm called Optibase to develop video encoding systems. Revenues for the fiscal year ended January 2000 topped $85.2 million and net income was $1.1 million.

During early 2000 SeaChange launched a new satellite-based digital distribution service for commercials called MediaExpress and partnered with TV Guide, Inc. to market a version of the latter's interactive electronic program guide with VOD capability. In May an agreement was reached with Microsoft to develop a system to simultaneously encode video for television broadcasting or streaming over the Internet. Microsoft would also spend $18 million to buy a 2 percent stake in the firm.

In June 2000 SeaChange filed suit against a rival company called nCube, alleging patent infringement of its MediaCluster technology. A jury found in its favor that September, after which nCube revised its system to avoid using the patented program. In October SeaChange announced that it had been selected to provide set-top VOD software for 2.9 million users in New York, New Jersey, and Connecticut by Cablevision Systems Corp., and in December Comcast Corp. bought a $10 million stake in the firm, as well as signing a long-term agreement to buy its VOD systems and services.

In January 2001 nCube filed its own suit against SeaChange, alleging the company's VOD system infringed one of its patents. Meanwhile SeaChange was beginning to ramp up business in this area, with orders from the likes of Time Warner Cable helping sales top $10 million per quarter, about a third of the firm's total revenues. The year also saw the company begin working with 24/7 Media to integrate that firm's software and SeaChange's ITV System into a set-top box developed by Pace Micro Technology.

KEY DATES

1993:: SeaView (later SeaChange) Technology, Inc. is founded in Massachusetts.
1994:: The company ships the first digital ad insertion system to Time Warner Manhattan.
1996:: MediaCluster is introduced; an initial public offering is made on the NASDAQ.
1997:: IPC Interactive, Horizon Systems are purchased.
1998:: SeaChange ITV System for video-on-demand is unveiled.
1999:: MediaCluster is awarded a patent; Digital Video Arts, Ltd. is acquired.
2001:: SeaChange wins an Emmy Award for MediaCluster.
2002:: New Broadcast MediaLibrary, High-Definition video-on-demand products debut.
2004:: ZQ Interactive is purchased.
2005:: SeaChange acquires Liberate Technologies' non-U.S. business and On Demand.

In December the company issued 2.79 million new shares of stock in a secondary offering that netted more than $80 million, and for the fiscal year ending January 31, 2002, reported sales of $115.8 million and income of $381,000. VOD systems accounted for $43 million of the total, with a similar amount coming from advertising systems. The firm also had won an Emmy Award for MediaCluster during the year.

INTRODUCING BROADCAST MEDIALIBRARY, HD-VOD IN 2002

Early 2002 saw the introduction of the Broadcast MediaLibrary, which could store huge amounts of video, as well as a new VOD system that could handle High-Definition (HD) television content. SeaChange claimed that it had spent $20 million in research costs developing the latter. In May nCube's patent infringement suit was found against the company, and it quickly appealed the verdict and began development of a way to eliminate the disputed patent, which was soon completed.

In the fall SeaChange announced a new VOD offering that would allow DVDs to be streamed on demand complete with bonus features, and the company also invested $2.3 million to buy part of a U.K.-based firm called On Demand Group that provided VOD services in Europe. The following March a judge ordered SeaChange to pay nCube double the original damages assigned by the jury, or $4 million, as well as two-thirds of that firm's lawyers' fees, though the award was appealed.

VOD now accounted for half of SeaChange's revenue, and ad insertion systems just 16 percent. The company continued to be the industry leader in both categories, with deployments in 86 of 171 North American VOD markets (compared to nearest rival Concurrent Computer Corp., with 52), and an estimated 80 percent share of the ad insertion market. For the fiscal year ended January 31, 2004, the company recorded sales of $146.1 million and net income of $5.6 million. During the fourth quarter VOD sales had accounted for two-thirds of revenues.

The firm's VOD system was facing a new challenge from personal videorecorders including TiVo, however, which could record programs on a computer-like hard drive for playback. Rather than offering content on demand, the relatively inexpensive devices could be programmed to record and store up to 30 hours of material with minimal effort and no tapes. Cable providers were still eager to add VOD, however, because rival satellite broadcasters, who charged less to subscribe, did not have the technical capability to offer VOD services. Cable providers also began to make increasing amounts of VOD content free, rather than pay-per-view, and broadened the content available.

In 2004 the firm introduced the High-Definition enabled VOD Recording System 2.0, which allowed cable operators to automatically record and store HD broadcasts for later playback on demand, with insertion of ads also possible. SeaChange had recently won new work from NTL, Inc. to build Europe's largest VOD network to date, several large Israeli firms, and major telecommunications companies including Verizon and Japan's NTT, which were seeking a piece of the VOD pie as well. The year 2004 also saw the company acquire a China-based software developer called ZQ Interactive for $2 million. Profits for the year ending January 31, 2005, hit $9.9 million on revenues of $157.3 million.

VOD sales were now falling off, however, and the company was working hard to expand its product and service offerings in several different areas. In the spring of 2005 SeaChange bought the international business of Liberate Technologies for $23.5 million, which included contracts, patents, and other intellectual property. Liberate provided software for digital cable systems for European networks. The company also formed a partnership with several other firms to create a digital video system for use in courtrooms, and began working with Visible World and Atlas to develop new digital ad insertion capabilities. In June a new VOD recording system was introduced that allowed playback while a program was still being aired, enabling viewers to see a show that had started at 10:00 p.m. as soon as 10:01. The Recording System 2.5 device could handle hundreds of channels simultaneously. A federal appeals court also overturned the decision in SeaChange's 2000 lawsuit against nCube (now owned by C-COR, Inc.) and upheld the results of the 2001 nCube suit that SeaChange had lost. The total award was $7.8 million.

August saw the company join a global consortium to offer Internet protocol television (IPTV) equipment to telecommunications firms and reach an agreement with video encoder maker EGT, Inc. to provide VOD services to television companies. In September SeaChange also acquired full ownership of the London-based On Demand Group for $13.4 million. On Demand provided movies and other programming for VOD and pay-per-view services throughout Europe, and owned a stake in leading European VOD content provider FilmFlex. It had 50 employees and revenues of $10.7 million. A 19.8 percent stake also was acquired in Massachusetts-based video streaming software firm Casa Systems during the year.

The fiscal year ended in January 2006 saw a huge drop in earnings, with revenues falling to $126.3 million and a loss of $12.1 million posted. VOD system sales were off 51 percent, but CEO Styslinger nonetheless tried to paint an encouraging picture in a conference call to stock analysts, citing an uptick in sales late in the year, increasing VOD content choices, and the dramatic growth of HD, which required five times the storage of standard definition television. Another encouraging sign was that 40 percent of the firm's business now came from international sales, up from less than a quarter in fiscal 2005.

Early 2006 saw the company outfit Los Angeles PBS station KCET with digital broadcast equipment, bringing to nearly 30 the number of public TV stations that utilized its MediaCluster and MediaLibrary systems. SeaChange also was introducing new products for streaming video content to mobile phones, iPods, laptops, and other portable equipment. In March, the company moved its headquarters from Maynard to neighboring Acton, Massachusetts.

In slightly less than 15 years SeaChange International, Inc. had grown to become the leader in video-on-demand and advertising insertion equipment for cable providers and broadcasters. The market was evolving rapidly as technology changed and consumers began to sort out the many choices available, but the company had weathered numerous storms and with experienced management and engineering teams in place was well-positioned to continue as an industry leader in future years.