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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 000-23361
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INTERVU INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0680870
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6815 FLANDERS DRIVE, SAN DIEGO CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 623-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.001 PER SHARE)
(TITLE OF CLASS)
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Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 15, 1999 was $247,912,000 based on an average of the high
and low sales for the Common Stock on such date. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.
The number of shares outstanding of the Registrant's Common Stock on March
15, 1999 was 10,940,529.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, the
Company's expectations for growth, estimates of future revenue, expenses,
profit, cash flow, balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. These risks and uncertainties
include those identified in this Form 10-K in Item 1 -- "Business -- Factors
That May Affect Future Performance" and other risks identified from time to time
in the Company's filing with the Securities and Exchange Commission, press
releases and other communications. The Company assumes no obligation to update
forward-looking statements.
PART I
ITEM 1. BUSINESS
InterVU Inc. (referred to herein as the "Company," "INTERVU," "we," "our"
and "us" unless the context suggests otherwise) provides Web site owners and
content publishers with feature-rich, cost-effective services for the delivery
or "streaming" of live and on-demand video and audio content over the Internet.
INTERVU's customers use its video and audio distribution services to transmit
entertainment, sports, news, business to business, advertising and distance
learning content. INTERVU's current customers include Bloomberg, CNN, House of
Blues, Intel, Microsoft, MovieFone, MSNBC, NBC, OnRadio, RadioWave.com, Saatchi
and Saatchi and Turner Broadcasting.
INTERVU's streaming media services allow Internet users to, among other
things:
- view news, sports and other events from around the world,
- listen to live radio broadcasts,
- watch and listen to specialized content not widely available on
television or radio,
- hear a company's quarterly earnings report live, accompanied by a
graphical presentation,
- view a movie trailer before purchasing a movie ticket, videotape or DVD
and
- watch music videos or listen to songs on demand.
INTERVU has developed a suite of services that automate the publishing,
distribution and programming of video and audio content. Web site owners and
content publishers use INTERVU's automated solutions to: (1) more quickly and
efficiently add video and audio content to Web sites, (2) avoid purchasing or
developing costly software and hardware and hiring employees with video and
audio expertise and (3) benefit from the economies of scale INTERVU can generate
by buying Internet bandwidth in bulk. INTERVU typically charges its customers
monthly fees based on the particular bundle of services to be provided and
agreed upon amounts of video content to be stored and delivered.
The cornerstone of INTERVU's service strategy is a scaleable,
patent-pending distribution network. The INTERVU Network uses servers
strategically located in major Internet hosting centers. INTERVU's distributed
network architecture enables it to deliver streaming content to larger numbers
of simultaneous end-users than other service providers can achieve from
centrally located servers. The INTERVU Network also allows customers to make
large numbers of video and audio files available for on-demand viewing and
listening. INTERVU believes that its proprietary software for managing and
distributing video and audio content and its use of multiple delivery centers
significantly improve the quality, speed and reliability of delivery.
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MARKETING AND SALES
INTERVU employs a variety of marketing methods, including advertising,
trade show and conference participation, the INTERVU Web site, sales literature,
Internet promotions and placement of its name and logo on customers' Web sites.
A key element of INTERVU's marketing strategy is to continue to heighten
awareness for the "INTERVU" brand as it expands its sales and marketing
activities.
INTERVU has identified five principal target customer categories:
-- Entertainment and Sports. INTERVU's largest target market is
entertainment providers, especially providers of music, movies and
sports. INTERVU believes that entertainment content has the greatest
end-user demand and therefore targets providers of this content.
INTERVU's entertainment and sports customers include AIME (ComedyNet),
House of Blues, MovieFone, MUSICVIDEOS.COM, N2K, NBC, New England
Patriots, RadioWave.com, Showtime, Turner Broadcasting, Universal
Studios and Warner Brothers.
-- News and Information. News and information providers increasingly are
using the Internet as a distribution channel. End-users also are
accessing the Internet as a source for news and information with
increasing frequency. INTERVU's current customers in the news market
include Bloomberg, CNN, MSNBC and APB Online (police scanners in
multiple cities). CNN.com and INTERVU recently entered into an
agreement for INTERVU to provide all of CNN.com's live Internet video
broadcasts.
-- Business to Business. INTERVU believes there is a growing market for
video and audio used in business to business communications on the
Internet. The business to business market consists of investor
relations, internal corporate communications, business training,
online sales, conferences and tradeshows and government. For example,
INTERVU provides a virtual private network that allows Saatchi and
Saatchi to share work in progress with customers and employees.
INTERVU provides a similar service to BMG which archives recordings of
over 8,000 CDs, allowing retailers to preview music CDs and packaging
before placing orders.
-- Advertising. INTERVU believes that Internet advertisements will move
increasingly toward ads that include video and audio streams because
these ads are more engaging to consumers than static advertisements.
INTERVU believes advertisements containing video also increase "click
through" from the host Web site to the advertiser's own site. INTERVU
provides a variety of multimedia formats to meet the needs of
advertisers, including Macromedia Shockwave, Macromedia Flash and
V-Banners, the last of which is INTERVU's own video banner advertising
technology.
-- Distance Learning. The distance learning market is growing each year
as more higher education institutions put courses online to reach
students who otherwise would be unable to attend because of access
limitations or lack of institutions in students' home towns. INTERVU
believes that its presentation broadcasting service, INTERVU Presents,
is well suited to meet the needs of distance learning providers.
INTERVU also is seeking to develop relationships with companies that
provide distance learning products, which will resell INTERVU's
services to their customers.
INTERVU employs a dedicated sales force of 30 sales professionals to sell
its audio and video distribution services. INTERVU plans to significantly expand
its sales force during 1999 both in its current geographic markets and new
markets. INTERVU divides its sales representatives into groups, with each group
selling services to only one of INTERVU's target customer categories. INTERVU
believes that it can more effectively sell its services by using sales
professionals who specialize in a single target customer category. INTERVU has a
sales office or presence in San Diego, San Francisco, New York, Chicago, Los
Angeles, Atlanta and Detroit and plans to add a sales presence in Seattle,
Denver and the Mid-Atlantic region in 1999. INTERVU also seeks to leverage its
relationships with other Internet companies that resell INTERVU's delivery
services.
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INTERVU SERVICE SOLUTIONS
INTERVU provides live Webcasting and video and audio on-demand. Live
Webcasting includes both live events and 24-hour per day streaming services such
as continuous radio broadcasts. On-demand services allow INTERVU customers to
store video and audio clips on the INTERVU Network and to make them available to
end-users through their Web sites. INTERVU is a full-service provider, offering
all of the services necessary for both live Webcasting and video and audio
on-demand, including production, encoding, uplinking, Web site integration,
distribution, audience building, reporting and archiving. INTERVU supports and
enhances these services with the following software solutions and other
services:
INTERVU Workbench
INTERVU Workbench allows customers with large amounts of content to publish
video and audio clips to their Web pages, rapidly generate new pages that offer
end-user access to the clips, link the clips to files containing searchable
identifying information about the clip and collect usage data on a clip by clip
basis. INTERVU currently provides these services to NBC's VideoSeeker Web site.
INTERVU is marketing a version of this publishing and reporting solution to
other customers.
INTERVU AUDIENCE
INTERVU AUDIENCE, an Internet audience management system, provides Web site
owners with an easy to use, comprehensive solution for bringing people to live
events. INTERVU AUDIENCE includes an automated e-mail ticketing function and
generates a desktop reminder before the requested event. INTERVU AUDIENCE then
launches the end-user's browser, takes the end-user to the Web page with the
video or audio content, launches the appropriate streaming media player and
starts the audio or video stream. INTERVU AUDIENCE also simplifies the posting
of multimedia content on the Internet by combining publishing features with
automated labeling of the files, which allows end-users to quickly find video
and audio through a directory function. INTERVU AUDIENCE also incorporates the
processor serial number feature of Intel's Pentium III processor, designed to
provide INTERVU customers with the ability to limit access to certain events and
on-demand clips to recognized serial numbers. INTERVU AUDIENCE also allows Web
site owners to:
- customize the presentation of content on their Web sites,
- program and schedule events on their Web sites,
- conduct pay-per-view events and
- track content usage, which enables Web site owners to make more effective
programming decisions.
INTERVU Presents
INTERVU Presents enables Web site owners to distribute video and audio
presentations with synchronized Microsoft PowerPoint slides over the Internet.
This service is intended primarily for businesses and educational institutions.
INTERVU Presents includes a fully automated registration process to manage
end-user access to the content. In addition, INTERVU Presents interfaces with
the processor serial number feature of Intel's Pentium III processor, enabling
Web site owners to limit end-user access to confidential presentations. Among
other things, this security feature is designed to allow businesses to conduct
confidential sales training, business meetings and investor roadshows and
presentations.
V-Banner
V-Banners enable Web site owners and advertisers to more easily integrate
video into Web sites by turning an ordinary Internet advertising banner into a
video display. INTERVU's V-Banners are compatible with most video players
currently used by end-users. This enables INTERVU's advertising customers to
reach most end-users with their video advertisements.
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Production Services
INTERVU provides production services for Web site owners that deliver
content through INTERVU. These production services include filming and producing
live events that Web site owners broadcast over the Internet. INTERVU's
customers have used its production services to broadcast events such as NASA's
coverage of the John Glenn Space Shuttle Discovery Launch, the X-Files movie
premier, the National Association of Television Program Executives' (NATPE)
conference and various Turner Broadcasting productions.
Encoding Services
INTERVU offers encoding and compression services to its customers through
its internal staff and through a subcontracting relationship with Encoding.com.
INTERVU offers encoding in a number of digital formats, including MPEG,
Quicktime, AVI, Vivo, Microsoft's Media Player and RealNetworks' G2 Player.
INTERVU NETWORK
INTERVU uses the INTERVU Network as the cornerstone for providing video and
audio distribution solutions to INTERVU customers. The INTERVU Network uses
proprietary software, systems and processes to manage large amounts of content
stored on more than 100 servers in Internet hosting centers. The INTERVU
Network's dispersed network architecture enables INTERVU to deliver streaming
content to larger numbers of simultaneous end-users than other service providers
can achieve from centrally located servers. Our dispersed network architecture
is designed to more evenly distribute streaming media traffic across the
Internet infrastructure. INTERVU has received three notices of allowance on
patents that cover the design and operation of INTERVU's dispersed network and
the method by which video files are indexed and retrieved.
The INTERVU Network enables Web site owners to provide video and audio to
end-users more cost-effectively and conveniently than through traditional
Internet distribution mechanisms. Customers deliver video and audio to the
INTERVU Network instead of managing large video and audio files and maintaining
expensive hardware. To an end-user visiting an INTERVU customer's Web site, the
content appears to come directly from that site, rather than from INTERVU.
INTERVU provides software for the customer's Web site that links end-users to
the INTERVU Network.
Reduces Transmission Time and Improves Quality
INTERVU's use of delivery centers in multiple Internet hosting centers
provides significant advantages in multimedia delivery. Through the use of
INTERVU's Smart Mirror technology, the INTERVU Network helps users bypass
bottlenecks on the Internet by determining which of its servers is
"electronically closest" to the end-user and sending the video from that
location. The electronically closest server is the one that provides the best
combination of delivery time and quality.
Scaleable Network
The delivery servers on the INTERVU Network consist of a title manager and
multiple "video pumps" which are designed to optimize and manage the delivery of
video and audio over the Internet. The title manager contains INTERVU's patent
pending software and acts as the "brain" of the network. The video pumps are
computers that have been customized to accelerate video and audio delivery. The
title manager selectively stores, allocates and replicates video and audio
content among the pumps based on end-user demand and directs end-users' requests
for multimedia content to the video pump capable of responding most quickly to
the request. Because the delivery centers use off-the-shelf hardware and INTERVU
software, INTERVU can add additional centers to the network quickly and
cost-effectively. This enables INTERVU to deploy network resources as additional
scale becomes necessary.
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Fully Compatible With Leading Multimedia Players
INTERVU's All Eyes software allows its customers to reach nearly all
end-users, regardless of the multimedia player software used. All Eyes software
determines the capabilities of the end-user's software and ensures that any
video and audio requested can be played by the end-user's multimedia player even
if the end-user has not downloaded All Eyes software. By contrast, traditional
methods of Internet video and audio distribution limit the number of end-users
able to view multimedia content to those who have the appropriate software for a
specific encoding format.
End-User Software Technologies
In conjunction with its automated delivery solutions, INTERVU provides its
EyeQ Multimedia Manager software package. This package includes MPEG video
players, as well as INTERVU's Get Smart technology. Get Smart installs and
manages the EyeQ multimedia software and keeps end-users' computers current with
other multimedia software players, such as Microsoft's MediaPlayer,
RealNetworks' G2 Player, Vivo, VDO and Apple Computer's QuickTime. With a single
mouse click, Get Smart downloads and installs software updates to the end-user's
computer from the Internet. Both the EyeQ Multimedia Manager and Get Smart are
available via INTERVU's Web site or its customers' Web sites.
KEY WORKING RELATIONSHIPS
INTERVU seeks to leverage its relationships with key customers to support
the development of its automated delivery solutions and build INTERVU's brand
identity.
In October 1997, INTERVU entered into a strategic alliance with NBC
Multimedia and became the exclusive distributor of most NBC entertainment
multimedia content over NBC Internet sites. The NBC strategic alliance agreement
provides for revenue sharing from the VideoSeeker Web site, which offers end-
users a single source for online multimedia entertainment and information.
INTERVU created the automated video search engine and directory functions used
on the VideoSeeker site and developed the proprietary software underlying the
site. A major benefit to INTERVU of the strategic relationship with NBC is the
opportunity VideoSeeker provides INTERVU to develop and test new solutions for
multimedia publishing and delivery.
INTERVU also has worked with Intel and Microsoft to integrate their
products into INTERVU's delivery solutions. For example, INTERVU has integrated
the security features of Intel's Pentium III Processor into INTERVU AUDIENCE and
INTERVU Presents to limit end-user access to certain events, on-demand clips and
presentations. INTERVU also has incorporated the features of Microsoft's
PowerPoint presentation software into INTERVU Presents to allow Web site owners
to integrate PowerPoint slides into streaming video presentations.
Moreover, INTERVU has established co-marketing arrangements with key
customers that provide INTERVU with the opportunity to promote its brand
identity by placing its logo on the customer's Web site next to the video being
delivered. For example, as part of INTERVU's agreement to provide video services
for CNN.com's live news coverage, CNN has agreed that INTERVU's banners will
appear on CNN.com/videoselect and in CNN's live video pop-up windows.
COMPETITION
The market for Internet services is relatively new, rapidly evolving and
highly competitive. INTERVU expects that competition will continue to intensify.
The streaming media distribution industry is characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
introductions. Although INTERVU believes it is the only company utilizing a
dispersed network supported by automated software solutions to deliver
multimedia content over the Internet, INTERVU faces substantial competition from
a number of companies. These competitors include: (1) Internet service
providers, (2) Web sites and content publishers, (3) hardware and system vendors
and (4) companies that utilize other streaming technologies. INTERVU currently
competes to a large extent with Web site owners and content publishers
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that employ in-house technical personnel to develop streaming media technology
and to manage their streaming media. INTERVU's competitors also include the
service divisions of Broadcast.com and RealNetworks. However, unlike these
competitors, INTERVU does not compete with its customers for Web site traffic or
sell software. Competitive factors in the Internet streaming media distribution
market include the quality and reliability of service, price, customer support,
brand recognition and traffic flow directed to Web sites. See "-- Factors that
May Affect Future Performance -- We Face Significant Competition" for further
discussion of the competitive conditions facing INTERVU.
SOFTWARE DEVELOPMENT; INTELLECTUAL PROPERTY
INTERVU develops most of its technologies in house and maintains a software
development staff of 32 people that designs and develops INTERVU's new services.
INTERVU had research and development expenses of approximately $1.4 million in
1996, $1.7 million in 1997 and $3.2 million in 1998. INTERVU believes that by
performing most of its software development in house it can more quickly and
cost-effectively develop new and innovative technologies and services. As a
result, INTERVU believes it is better equipped to incorporate customer
preferences identified by INTERVU's marketing and sales groups into development
plans.
INTERVU regards its technology as proprietary and attempts to protect it
with patents, copyrights, trade secret laws, restrictions on disclosure and
other methods. The U.S. Patent & Trademark Office has issued to INTERVU notices
of allowance for three patents covering the management, distribution and
delivery of multimedia content over the Internet as well as the architecture of
the INTERVU Network. INTERVU has nine United States patent applications and four
international patent applications pending. INTERVU also is in the process of
preparing additional patent applications for its technology.
INTERVU pursues registration of its trademarks and service marks in the
U.S. as well as other countries, although it has not secured registration of all
of its marks. As of March 29, 1999, INTERVU had one registered U.S. trademark
and had applications pending for an additional 14 U.S. trademarks.
EMPLOYEES
As of March 15, 1999, INTERVU had 120 full-time employees, of whom 32 were
in software development, 42 in operations, 34 in sales and marketing and 12 in
administration. None of INTERVU's employees is represented by a labor union, and
INTERVU considers its relations with its employees to be good.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
common stock of INTERVU. Each of these risks could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock.
WE HAVE A LIMITED OPERATING HISTORY. INTERVU was incorporated in August
1995 and launched the INTERVU Network in December 1996. INTERVU did not emerge
from the development stage until 1998. Accordingly, we have a limited operating
history on which to base an evaluation of our business and prospects. You must
consider our prospects in light of the risks and uncertainties encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets such as the delivery of video and audio over the
Internet. Our success will depend on many factors, including, but not limited
to, the following:
- the growth of the market for streaming media content on the Internet,
- our ability to implement our growth strategy, especially our sales and
marketing efforts,
- our ability to retain existing customers and attract a significant number
of new ones,
- the introduction of new technologies and Internet services by us and our
competitors,
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- price competition,
- market acceptance of our pricing structure,
- our ability to attract, retain and motivate qualified personnel and
- general economic conditions.
We may not successfully implement our growth strategies or successfully
address these risks and uncertainties. If we fail to do so, it could materially
harm our business and impair the price of our common stock. Even if we
accomplish these objectives, we may not generate positive cash flow or profits
in the future. Moreover, variations in these factors also may cause our
quarterly operating results to fluctuate significantly in the future. As a
result, our operating results in one or more future quarters may fail to meet
the expectations of securities analysts or investors. Failure to meet these
expectations could impair the price of our common stock.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES. Since the
formation of our company, we have incurred substantial net losses. As of
December 31, 1998, we had an accumulated deficit of $23.3 million. As we
continue to implement our growth strategy, we intend to spend significant
amounts on sales and marketing, research and development and general and
administrative activities. We expect that we generally will incur these costs in
advance of anticipated related revenues, which may further increase operating
losses in certain periods. As a result of our expansion, we expect to continue
to incur significant operating losses and negative cash flows from operations
for the foreseeable future. It is possible that we may never achieve favorable
operating results or profitability.
In addition, under the terms of our strategic alliance agreement with NBC,
NBC acquired shares of our Series G Preferred Stock, which, under some
circumstances must be returned to us. As the requirement to return shares to us
lapses, we must incur a non-cash charge for the fair value of those shares of
Series G Preferred Stock for which this requirement has lapsed. In January 1998,
we expensed $3.4 million for the then fair value of 680,000 shares of Series G
Preferred Stock and expect to expense the then fair value of the remaining
600,000 shares of Series G Preferred Stock during the fourth quarter of 1999.
Should INTERVU breach, renegotiate or waive this requirement, removing NBC's
obligation to return the shares of Series G Preferred Stock, INTERVU would
expense the fair value at that time. This non-cash charge is expected to
materially adversely affect our results of operations in the period we recognize
the expense, which could impair the price of our common stock.
WE FACE MARKET ACCEPTANCE RISKS. Our services are highly specialized and
are designed solely to meet Web site owners' Internet video and audio delivery
needs. The market for streaming media content on the Internet has only recently
developed, is rapidly evolving and thus far has been limited. Demand for
streaming media content on the Internet must develop further in order to offer
significant revenue opportunities for video and audio distribution service
providers such as INTERVU. If Internet-based content incorporating streaming
media technology does not become widely adopted by Web site owners, it would
materially harm our business, which would impair the price of our common stock.
Many of our customers may cease using our services either without notice or
upon short notice, including customers with which we have contracts. For
example, NBC may terminate its strategic alliance agreement with us for any
reason upon 90 days prior notice. If we were to lose certain customers that are
well known in their industry, it could adversely affect our ability to retain
customers and attract new ones.
WE FACE CHALLENGES MANAGING OUR GROWTH. We have rapidly expanded our
operations since INTERVU was founded in August 1995. In connection with the
expansion of our operations, we have grown from 34 employees on October 15, 1997
to 120 employees on March 15, 1999. We also plan to significantly expand our
sales and marketing and research and development activities, hire a significant
number of additional employees, expand our internal management, technical,
information, accounting and billing systems and establish additional sales
offices. In addition, we plan to expand the infrastructure of the INTERVU
Network by investing in additional software and hardware consisting primarily of
additional servers. This rapid expansion may place increasing strains on our
ability to manage our growth, including our ability to monitor operations, bill
customers, control costs and maintain effective quality controls. In order to
successfully
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manage our growth we must identify, attract, motivate, train and retain highly
skilled managerial, financial, engineering, business development, sales and
marketing and other personnel. Competition for this type of personnel is
intense. If we fail to manage our growth effectively, it could materially harm
our business and impair the price of our common stock.
WE MUST KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES. The markets for
Internet services are characterized by:
- rapidly changing technologies,
- changing customer demands,
- frequent new product introductions and
- evolving industry standards.
The emerging nature of Internet products and services and their rapid
evolution will require that we continually improve the performance, features and
reliability of our services and the INTERVU Network. We may not successfully
respond quickly or cost-effectively to these developments. We also may not
achieve widespread acceptance of our services before our competitors offer
products and services with speed, performance, features and quality similar to
or better than ours or that are more cost-effective than our services. In
addition, the widespread adoption of new technologies could require substantial
expenditures by us to modify or adapt our technology. Furthermore, new or
emerging technologies such as satellite transmission of content may reduce
demand for our services.
WE FACE SIGNIFICANT COMPETITION. The market for Internet-based services is
relatively new, rapidly evolving and highly competitive. We expect that
competition will continue to intensify. The streaming media industry is
characterized by rapidly changing technology, evolving industry standards and
frequent new product and service introductions. We face substantial competition
from a number of companies. These companies include: (1) Internet service
providers, (2) Web sites and content publishers, (3) hardware and system vendors
and (4) companies that utilize other streaming technologies. We currently
compete to a large extent with Web site operators and content publishers that
employ in-house technical personnel to develop streaming media technology and
manage their streaming media. We expect competition from other types of
competitors to increase significantly. Our competitors also include the service
divisions of Broadcast.com and RealNetworks.
Competitive factors include:
- the quality and reliability of services,
- ease of use and compatibility with existing network components and
software systems,
- content quality,
- transmission speed,
- ability to expand capacity,
- traffic flow directed to Web sites,
- price of services,
- the level of customer support offered and
- brand recognition.
Since our business is dependent on the overall success of the Internet as a
communication medium, we also compete with traditional media such as radio and
television. Many of our competitors and potential competitors have substantially
greater financial, technical, managerial and marketing resources, longer
operating histories, greater name recognition and more established relationships
with content providers than INTERVU.
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WE RUN THE RISK OF SYSTEM FAILURE AND FACE SECURITY RISKS. Our success in
marketing our services requires us to provide reliable service. Our operations
depend on our ability to protect our networks from physical damage, power loss,
capacity limitations, software defects and other factors, many of which are
beyond our control. Our ability to provide reliable services also depends on the
reliability of Internet service providers and online service providers, which
have in the past had periodic operational problems or experienced outages. We
expect these problems and outages to continue to occur periodically. Any of the
foregoing could impair our customer satisfaction, lead to a loss of customers or
increase our costs, which could materially harm our business and impair the
price of our common stock.
The INTERVU Network may be vulnerable to unauthorized access, computer
viruses and other disruptive problems despite our implementation of security
measures. Computer viruses or problems caused by third parties, such as hackers,
could lead to interruptions, delays or termination of service to our customers.
To alleviate problems caused by computer viruses or security breaches, we may
have to interrupt, delay or cease service to our customers, which could
materially harm our business. Security breaches or problems caused by computer
viruses also could materially impair customer acceptance of our services.
THE INTERNET MAY FAIL TO SUPPORT AN INCREASING NUMBER OF USERS. The
wide-spread commercial use of the Internet is a relatively new development.
Critical issues regarding the stability of the Internet's infrastructure remain
unresolved. For example, the rapid rise in the number of Internet users and
increased transmission of multimedia content over the Web continues to place
increasing strains on the Internet's communications and transmission
infrastructures. If these trends continue it could lead to significant declines
in transmission speeds and reliability of the Internet, reducing the usage of
the Internet by businesses and individuals. The failure of the Internet to
support an increasing numbers of users could materially harm our business and
impair the price of our common stock.
WE FACE RISKS RELATING TO FUTURE ACQUISITIONS AND INVESTMENTS. As part of
our growth strategy, we may acquire businesses, products and technologies and
enter into joint ventures and strategic relationships with other companies. Any
of these transactions would expose us to additional risks. In particular, risks
associated with the acquisition of high-technology companies include:
- the difficulty of assimilating and integrating the operations and
personnel of the combined companies,
- the potential disruption of our ongoing business,
- our inability to retain key technical, managerial and sales personnel,
- the potential additional expenses associated with amortization of
acquired intangible assets, integration costs and unanticipated
liabilities or contingencies and
- the diversion of management's attention during the acquisition and
integration process.
We do not have significant experience in the identification and management
of acquisitions. If we are unable to successfully address any of the foregoing
risks, it could materially harm our business and impair the price of our common
stock.
WE DEPEND ON KEY PERSONNEL. Given our company's early stage of development,
we depend on the performance and efforts of our senior management team and other
key employees. Our senior management includes Harry E. Gruber, our Chief
Executive Officer and Chairman of the Board, Brian Kenner, our Vice President
and Chief Technology Officer, Kenneth L. Ruggiero, our Vice President and Chief
Financial Officer, and Edward L. Huguez, our Vice President and Chief Operating
Officer. If we lost the service of any of our senior management or other key
employees it could materially harm our business and impair the price of our
common stock. We do not have employment agreements with any of our officers or
employees.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD AFFECT OUR BUSINESS. We
are not currently required to comply with direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to the Internet. However,
due to the increasing popularity of the Internet, it is possible that laws may
be adopted regarding the Internet, any of which could materially harm our
business. These laws may relate to issues such as user
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privacy, pricing, content, copyrights, distribution of products, characteristics
of products and quality of products and services. Furthermore, the growth and
development of Internet commerce may lead to more stringent consumer protection
laws that may impose additional burdens on companies conducting business online.
The adoption of any additional laws may decrease the growth of Internet use,
which could lead to a decrease in the demand for our services or increase the
cost of doing business. Also, the applicability to the Internet of existing laws
in various jurisdictions governing issues like property ownership, sales and
other taxes, libel and personal privacy is ambiguous and may take years to
resolve.
Although we do not actively program or edit the content on our network, we
could be held liable if customers use our network to distribute content deemed
to be indecent or obscene. While we do not actively market our services to sites
that host adult video content, one or more of our customers may use our services
to transmit this type of content. Even though the United States Supreme Court
has upheld lower court decisions declaring the anti-indecency provisions of the
Telecommunications Act of 1996 unconstitutional, the law relating to liability
for transmitting obscene or indecent material over the Internet remains
unsettled. The imposition of potential liability for materials distributed
through the Internet could require us to implement measures to reduce our
exposure to this liability. These measures may require the expenditure of
substantial resources or the discontinuation of some services, which could
materially harm our business and impair the price of our common stock.
WE FACE RISKS RELATING TO INTELLECTUAL PROPERTY RIGHTS. Our success depends
on our internally developed technologies and other intellectual property. We
regard our technology as proprietary and attempt to protect it with patents,
copyrights, trade secret laws, restrictions on disclosure and other methods. The
U.S. Patent & Trademark Office has issued notices of allowance on three of our
patent applications, which cover the management, distribution and delivery of
video and audio content over the Internet as well as the architecture of the
INTERVU Network. Some or all of these patents may not be issued. Even if they
are issued, they may not sufficiently protect our technology. If any patents are
not issued or if they fail to provide protection to our technology, it may make
it easier for our competitors to offer technology equivalent or superior to
ours. In addition, we have nine United States patent applications and four
international patent applications pending. We are also in the process of
preparing additional patent applications for our technology. We cannot assure
you that any patent will issue from these applications.
We commonly enter into confidentiality agreements with our employees and
consultants, and generally control access to and distribution of our proprietary
information. Despite these precautions, it may be possible for a third party to
obtain and use our services or technology without authorization. Third parties
may also develop similar technology independently.
We have applied for registration of a number of key trademarks and service
marks such as "INTERVU," "INTERVU AUDIENCE," "INTERVU Presents," "V-Banner,"
"Smart Mirror," "Virtual URL" and the INTERVU logo. We also intend to introduce
new trademarks and service marks. We may not be successful in obtaining
registration for one or more of these trademarks. Furthermore, we cannot assure
you that any trademark or service mark obtained will sufficiently protect our
rights.
We may need to resort to litigation in the future to enforce or to protect
our intellectual property rights, including our patent and trademark rights.
Moreover, our technologies and trademarks may be claimed to conflict with or
infringe upon the patent, trademark or other proprietary rights of third
parties. If any of these claims, conflicts or infringements should arise, we
would have to defend ourselves against the challenge. This type of litigation
could result in substantial costs and the diversion of resources. We also may
have to obtain a license to use those proprietary rights or possibly cease using
those rights altogether. Any of these events could materially harm our business
and impair the price of our common stock.
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS. We face risks arising from Year
2000 issues. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of Year 2000" for discussion of
these risks.
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WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE. The market price of
our common stock has fluctuated in the past and is likely to continue to
fluctuate in the future. In addition, the market prices of securities of other
technology companies, particularly Internet-related companies, currently are
highly volatile. Factors that may have a significant effect on the market price
of our common stock, many of which are beyond our control, include:
- fluctuations in our operating results,
- announcements of technological innovations,
- new products or services offered by our competitors,
- analysts' reports and projections,
- changes in the market valuations of other Internet companies,
- announcements by us or our competitors relating to significant
acquisitions, strategic relationships, joint ventures, capital
commitments or customer relationships,
- our ability or failure to implement our growth strategy,
- stock market price and volume fluctuations generally,
- regulatory developments,
- additions or departures of key personnel and
- sales of our common stock by us or our stockholders.
Fluctuations in the market price of our common stock may in turn adversely
affect (1) our ability to complete any targeted acquisitions, (2) our access to
capital and financing and (3) our ability to attract and retain qualified
personnel. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation against that
company often results. We may become involved in this type of litigation in the
future. Litigation is often expensive and diverts management's attention and
resources, which could materially harm our business.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS. Some of the
provisions of our Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws could discourage, delay or prevent an acquisition of our
company at a premium price. These provisions:
- permit the Board of Directors to increase its own size and fill the
resulting vacancies,
- provide for a staggered board,
- authorize the issuance of "blank check" preferred stock,
- limit the removal of directors by the stockholders to removal for cause,
- require a supermajority stockholder vote to effect some amendments to our
Certificate of Incorporation and Bylaws,
- limit the persons who may call special meetings of stockholders,
- prohibit stockholder action by written consent and
- establish advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law also imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our common stock.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE. The
market price of our common stock could drop due to sales of a large number of
shares of our common stock or the perception that such sales could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock. As of March 15, 1998, 10,940,529 of our shares of
common stock are outstanding. All of these shares are eligible for sale in the
public market, including shares of restricted stock that have not yet vested but
will be eligible for sale upon vesting. Also, 806,144 shares of our common stock
issuable upon
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conversion of the Series G Preferred Stock are eligible for sale under Rule 144
under the Securities Act of 1933. An additional 2,231,789 shares of common stock
are issuable upon the exercise of options and warrants, although a substantial
number of our options currently are subject to vesting.
EXISTING STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE. Our present executive
officers and directors and their affiliates beneficially own approximately 32.5%
of our outstanding common stock. As a result, these stockholders may
significantly influence our management and affairs and all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, such as a merger, consolidation or sale of
substantially all of our assets.
ITEM 2. PROPERTIES
INTERVU is headquartered in facilities consisting of approximately 23,575
square feet in San Diego, California, under a sublease expiring in 2003.
Additionally, INTERVU maintains offices in New York City, San Francisco and
Chicago.
ITEM 3. LEGAL PROCEEDINGS
From time to time, INTERVU may be involved in litigation arising in the
ordinary course of its business. INTERVU is not presently a party to any
material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTER TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitations of proxies or otherwise during the fourth quarter of the fiscal
year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol ITVU. Trading of the Company's common stock commenced on November 20,
1997. The following table represents the quarterly high and low sales prices of
shares of common stock as reported by The Nasdaq Stock Market since the stock
commenced trading.
HIGH LOW
---- ---
Fourth Quarter (November 23, 1997 to December 31, 1997)..... 10 1/4 8 1/8
First Quarter 1998.......................................... 14 1/2 7 5/8
Second Quarter 1998......................................... 32 3/8 12 5/8
Third Quarter 1998.......................................... 21 1/2 5 1/8
Fourth Quarter 1998......................................... 19 1/2 6
As of March 15, 1999, there were 124 holders of record of the Company's
common stock.
The Company has never declared dividends or paid any cash dividends on its
capital stock. The Company currently intends to retain all future earnings, if
any, for use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on its Common Stock in the
foreseeable future.
In August 1997, the Company filed a registration statement under the
Securities Act of 1993 to sell up to 2.3 million shares of Common Stock in its
initial public offering ("IPO"). The effective date of registration of the IPO
was November 19, 1997, under Commission file No. 333-33521. The offering was
managed by Josephthal Lyon & Ross and Cruttenden Roth and closed on November 23,
1997 after the Company sold an aggregate of 2,210,526 shares of Common Stock in
the IPO and a direct offering to NBC Multimedia, Inc. Expenses related to the
IPO and direct offering incurred through December 31, 1997 were as follows:
Proceeds from IPO.................................. $19,000,000
Proceeds from Direct Offering...................... 2,000,000
-----------
TOTAL PROCEEDS........................... 21,000,000
Underwriters' Discount............................. $1,330,000
Underwriter's advisor fee.......................... 140,000
Securities and Exchange Commission registration
fee.............................................. 9,000
NASD filing fee.................................... 2,000
Nasdaq National Market listing fee................. 40,000
Non-accountable expense allowance.................. 190,000
Legal fees and expenses............................ 199,000
Accounting fees and expenses....................... 191,000
Printing and engraving expenses.................... 169,000
Blue Sky fees and expenses......................... 13,000
Transfer agent and registrar fees.................. 3,000
Miscellaneous...................................... 146,000
----------
TOTAL OFFERING COSTS..................... 2,432,000
-----------
NET PROCEEDS....................................... $18,568,000
===========
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Since completion of the IPO and direct offering in November 1997, the
Company has used $14,042,000 of the proceeds in the following manner:
Payment to NBC Multimedia, for production, operating and
advertising costs associated with certain NBC websites.... $ 1,250,000
Purchase of property and equipment.......................... 2,537,000
General and administrative and working capital.............. 2,573,000
Research and Development expenditures....................... 2,878,000
Sales & Marketing expenditures.............................. 4,804,000
-----------
Total proceeds used through December 31, 1998..... $14,042,000
===========
Except where noted, no proceeds were paid directly or indirectly to
directors, officers, general partners of the Company or to persons holding ten
percent or more of any class of equity security issued by the Company, or to any
other affiliate of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with summary historical financial data
of INTERVU. We have prepared this information using the financial statements of
INTERVU for the period from August 2, 1995 (inception) to December 31, 1995 and
for three years ended December 31, 1998. The financial statements for the period
from August 2, 1995 (inception) to December 31, 1995 and for the three years
ended December 31, 1998 have been audited by Ernst & Young LLP, independent
auditors.
When you read this summary historical financial data, it is important that
you read along with it the historical financial statements and related notes in
our annual and quarterly reports filed with the Commission, as well as the
section of our annual and quarterly reports titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PERIOD FROM
AUGUST 2, 1995
(INCEPTION) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------
1995 1996 1997 1998
-------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ -- $ -- $ 144 $ 1,712
Operating expenses:
Research and development................. 33 1,420 1,703 3,154
Selling, general and administrative...... 16 910 3,148 10,892
Charges associated with the NBC Strategic
Alliance Agreement(1).................. -- -- 750 4,622
---- ---------- ---------- ----------
Total operating expenses.................... 49 2,330 5,601 18,668
---- ---------- ---------- ----------
Loss from operations........................ (49) (2,330) (5,457) (16,956)
Interest income............................. 3 52 192 1,246
---- ---------- ---------- ----------
Net loss.................................... $(46) $ (2,278) $ (5,265) $ (15,710)
==== ========== ========== ==========
Basic and diluted net loss per share(2)..... $ (0.66) $ (0.95) $ (1.73)
========== ========== ==========
Shares used in computing basic and diluted
net loss per share(2).................... 3,441,000 5,571,000 9,074,000
========== ========== ==========
DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 2,508 $21,380 $27,046
Working capital.......................................... 2,365 20,947 24,799
Total assets............................................. 2,776 22,130 30,364
Long-term liabilities.................................... 27 7 --
Total stockholders' equity............................... 2,597 21,532 27,313
- ---------------
(1) In January 1998, INTERVU expensed the then fair value of 680,000 shares of
the Series G Preferred Stock in the amount of $3.4 million. INTERVU expects
to expense the then fair value of the remaining 600,000 shares of Series G
Preferred Stock during the fourth quarter of 1999. The charges also include
$750,000 and $1,250,000 in nonrefundable cash payments due to NBC under the
strategic alliance agreement expensed during the fourth quarter of 1997 and
during 1998, respectively.
(2) See Note 1 of Notes to Financial Statements for an explanation of the number
of shares used in computing basic and diluted net loss per share.
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ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, the risks detailed under the caption "Item 1.
Business -- Factors that May Affect Future Performance."
OVERVIEW
INTERVU provides Web site owners and content publishers with services for
the delivery or "streaming" of live and on-demand video and audio content over
the Internet. INTERVU's customers use its video and audio distribution services
to transmit entertainment, sports, news, business to business, advertising and
distance learning content. INTERVU's services automate the publishing,
distribution and programming of video and audio content.
Revenues
INTERVU derives revenues from delivering live and on-demand video and audio
content over the Internet and providing related services, including production,
encoding, uplinking, Web site integration, distribution, audience building,
reporting and archiving. INTERVU typically charges its customers fees with fixed
and variable components. The fixed component consists of a monthly fee based on
the particular bundle of services provided and an agreed upon amount of content
to be stored and streams to be delivered. To the extent that a customer exceeds
agreed upon storage and delivery amounts, INTERVU typically charges variable
fees based on the amount by which content delivered exceeds the agreed upon
amount. For customers for which INTERVU performs specific projects, it charges a
combination of fixed and variable fees depending on the project. INTERVU also
derives revenues from consulting services relating to streaming media
technologies, although this is not expected to constitute a material portion of
INTERVU's revenues.
Expenses
INTERVU's expenses consist of research and development and selling, general
and administrative expenses. Research and development expenses consist primarily
of salaries and related expenses for personnel, fees to outside contractors and
consultants, allocated costs of facilities and depreciation and amortization of
capital equipment. Research and development expenses to date have been focused
in three areas: (1) development of software to improve the INTERVU Network's
ability to deliver video and audio content, (2) development of software to
analyze Internet performance and redirect individual end-users to optimal
servers and (3) development of software to help Web sites publish and promote
their events.
Selling, general and administrative expenses consist primarily of salaries,
commissions, promotional expenses, professional services and general operating
costs. Also included are the costs INTERVU incurs for bandwidth. INTERVU expects
that as it adds additional customers, the corresponding increase in video
delivery volumes will allow INTERVU to generate economies of scale relative to
its bandwidth costs because it will be able to obtain larger volume discounts.
To the extent that INTERVU does not realize such economies of scale, INTERVU's
business will be adversely affected.
As INTERVU expands its business in 1999 and beyond, its research and
development and selling, general and administrative expenses will increase
substantially. Research and development expenses will increase as INTERVU adds
engineers to its in-house software development team. INTERVU's selling, general
and administrative expenses will increase as INTERVU, among other things, hires
additional personnel, increases its advertising expenditures and establishes
additional sales offices.
INTERVU also expects to expand the INTERVU Network by adding servers in
additional Internet hosting centers. INTERVU will depreciate equipment added to
the INTERVU Network over the useful life of the asset and include this expense
in selling, general and administrative expense.
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NBC Strategic Alliance
In connection with entering into a strategic alliance with NBC Multimedia,
Inc., INTERVU issued 1,280,000 shares of its Series G Convertible Preferred
Stock to NBC. INTERVU charged $3.4 million to expense in January 1998,
representing the fair value of 680,000 shares of Series G Preferred Stock at the
time NBC's obligation to return those shares lapsed. INTERVU expects to charge
the then fair value of the remaining 600,000 shares of Series G Preferred Stock
to expense during the fourth quarter of 1999 when NBC's obligation to return
those shares is expected to lapse, although if INTERVU breaches, renegotiates or
removes the provision of the NBC strategic alliance agreement relating to this
obligation, it may need to expense the charge at that time. INTERVU believes
that the fair value of each share of Series G Preferred Stock will roughly
approximate the price per share at which INTERVU's common stock is then trading,
multiplied by the 0.6298 conversion ratio applicable to the Series G Preferred
Stock. The non-cash charge with respect to the remaining 600,000 shares of
Series G Preferred Stock is expected to be substantial and to materially impact
INTERVU's results of operations in the period the expense is recognized. NBC
Multimedia is not required to return any shares upon termination until it
receives $2.0 million of non-refundable payments from INTERVU.
RESULTS OF OPERATIONS
INTERVU has incurred net losses in each fiscal period since its inception
and, as of December 31, 1998, had an accumulated deficit of $23.3 million. To
date, INTERVU has not generated any significant revenues, and, as a result of
the significant expenditures INTERVU plans to make as described above, INTERVU
expects to continue to incur significant operating losses and negative cash
flows from operations for the foreseeable future.
1998 Compared to 1997
Total revenue for 1998 increased to $1.7 million from $144,000 in the prior
year. The increase in revenues reflects the expansion of INTERVU's streaming
media services. INTERVU also generated additional revenue from its services to
NBC's VideoSeeker Web site and from consulting and seminar management services.
Research and development expenses for 1998 increased to $3.2 million from
$1.7 million in the prior year. The increase in research and development
expenses was attributable to the increase in personnel and related expenses.
Selling, general and administrative expenses for 1998 increased to $10.9
million from $3.1 million in the prior year. The increase was attributable
primarily to an increase of $4.3 million in personnel and associated costs, an
increase of $1.3 million in expenditures for trade shows and other marketing
efforts, an increase of $529,000 in consulting fees, an increase of $554,000 for
bandwidth costs and an increase of $382,000 for travel and entertainment
expenses.
Charges associated with the NBC strategic alliance agreement for the year
ended December 31, 1998 increased to $4.6 million from $750,000 in the prior
year. The charges in the 1998 period reflected (1) a non-cash charge of $3.4
million relating to the lapse of NBC's obligation to return 680,000 shares of
Series G Preferred Stock to INTERVU and (2) a charge of $1.3 million relating to
nonrefundable cash payments due to NBC Multimedia under the strategic alliance
agreement for the costs of producing and operating NBC's VideoSeeker Web site
and the costs of advertising and promotions to be placed by INTERVU on NBC
Internet sites. The 1997 charges reflected the payment of $750,000 of
nonrefundable cash payments to NBC Multimedia under the strategic alliance
agreement.
Interest income for 1998 increased to $1.2 million from $192,000 in the
prior year. Interest income represents interest earned by INTERVU on its cash,
cash equivalents and short-term investments. The increase in interest income
over the comparable period in 1997 was the result of higher cash, cash
equivalents and short-term investments balances INTERVU obtained from sales of
equity securities.
INTERVU's net loss for 1998 increased to $15.7 million from $5.3 million
for the prior year.
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INTERVU has not recorded any income tax benefit for net losses and credits
incurred for any period from inception to December 31, 1998. The utilization of
these losses and credits is contingent upon INTERVU's ability to generate
taxable income in the future. Because of that uncertainty, INTERVU has recorded
a full valuation allowance with respect to these deferred tax assets. See Note 7
of Notes to Financial Statements for further discussion of these deferred tax
assets.
1997 Compared to 1996
Total revenues were $144,000 for 1997, most of which was derived from
delivery fees and customer services provided to INTERVU's initial customers.
INTERVU had no revenues for 1996.
Research and development expenses for 1997 increased to $1.7 million from
$1.4 million in the prior year. The increase in research and development
expenses was attributable to the increase in personnel and related expenses.
Selling, general and administrative expenses for 1997 increased to $3.1
million from $910,000 in the prior year. The increase in 1997 over 1996 was
attributable primarily to an increase of $1.2 million in personnel and
associated costs, primarily related to sales and marketing, an increase of
$297,000 in expenditures for trade shows and other public relations expenses, an
increase of $237,000 in amortization of deferred compensation, an increase of
$229,000 for bandwidth costs and an increase of $175,000 for travel and
entertainment expenses.
Charges associated with the strategic alliance agreement with NBC for 1997
were $750,000. No such charges were recorded in 1996. The 1997 charges reflected
the payment of $750,000 of nonrefundable cash payments to NBC Multimedia under
the strategic alliance agreement.
Interest income for 1997 increased to $192,000 from $52,000 in the prior
year. The increase in interest income for 1997 was the result of higher cash and
cash equivalents balances resulting from sales of equity securities.
INTERVU's net loss for 1997 increased to $5.3 million from $2.3 million in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, INTERVU has financed its operations primarily through
sales of stock. Through December 31, 1998, INTERVU had raised $46.8 million from
the sale of preferred stock and common stock. At December 31, 1998, the
principal source of liquidity for INTERVU was $27.0 million of cash, cash
equivalents and short-term investments.
INTERVU has had significant negative cash flows from operating activities
since inception. Cash used in operating activities was $9.8 million for 1998,
$4.6 million for 1997 and $2.1 million for 1996. Cash used in operating
activities in each of these periods was primarily the result of increased
business activity and related operating expenses.
Cash used in investing activities was $20.1 million for 1998, primarily
representing purchases of short-term investments and capital expenditures for
equipment, software and furniture and fixtures. Cash used in investing
activities was $485,000 for 1997 and $305,000 for 1996, primarily representing
capital expenditures for equipment, software and furniture and fixtures. As of
December 31, 1998, INTERVU has no material commitments for capital expenditures.
However, in March 1999, INTERVU financed $1.1 million of equipment under a
three-year non-cancelable leaseline with an interest rate of 7.75%.
Additionally, INTERVU expects to expend significant amounts for equipment,
software and fixtures over the next 24 months to expand the INTERVU Network,
much of which it plans to finance through capital leases.
Cash provided by financing activities was $17.9 million for 1998, $23.9
million for 1997 and $4.4 million for 1996. In 1998, the cash provided by
financing activities was primarily from the $17.8 million in net proceeds from
the sale of common stock in a public offering completed in June 1998. Cash
provided in 1997, was primarily due to net proceeds received by INTERVU from the
sale of preferred stock and completion of
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INTERVU's initial public offering and direct offering to NBC in November 1997.
Net proceeds from INTERVU's initial public offering and direct offering to NBC
in 1997 aggregated $18.6 million.
In connection with the strategic alliance agreement INTERVU entered into
with NBC in October 1997, INTERVU became obligated to make $2,000,000 in
non-refundable payments to NBC Multimedia for certain production, operating and
advertising costs associated with some of NBC's Web sites, including payments of
(1) $750,000 paid on the completion of the initial public offering in November
1997, (2) $500,000 paid in April 1998, (3) $500,000 due in May 1998 and (4)
$250,000 due in August 1998. Through December 31, 1998, INTERVU has made a total
of approximately $1.3 million in payments to NBC Multimedia and $750,000 is
currently payable.
In June 1998, INTERVU relocated its headquarters to office space subleased
in San Diego, California. The sublease commenced in May 1998 and will expire in
June 2003. Over the term of the lease INTERVU will pay total rents of
approximately $1.9 million.
INTERVU believes existing cash and cash equivalents will be sufficient to
meet its working capital and capital expenditure requirements through at least
the end of 2000. Thereafter, if cash generated by operations is insufficient to
satisfy INTERVU's liquidity requirements, INTERVU may need to sell additional
equity or debt securities or obtain credit facilities. INTERVU currently does
not have any lines of credit.
IMPACT OF YEAR 2000
Many computer systems and software products are coded to accept only
two-digit entries in date code fields. Beginning the year 2000, these date code
fields will need to distinguish 21st century dates from 20th century dates. As a
result, computer systems and/or software used by many companies may need to be
upgraded to comply with "Year 2000" requirements. Although INTERVU believes that
the INTERVU Network is Year 2000 compliant, INTERVU may discover coding errors
or other defects in the future. INTERVU has appointed a Year 2000 Task Force to
assess the scope of its risks and bring its applications into compliance. This
Task Force is undertaking its assessment of INTERVU's compliance and has begun
testing its corporate business and information systems. To date, INTERVU has
discovered few problems during its Year 2000 testing, and INTERVU has fixed
those identified in its day to day operating environment. INTERVU intends to
complete the compliance testing in September 1999. To date, INTERVU has incurred
minimal expenses related to Year 2000 compliance. It expects to incur
approximately $50,000 of expenses in 1999 related to Year 2000 compliance.
INTERVU has not adopted a contingency plan to address possible risks to its
systems.
INTERVU relies on a number of software and systems provided by third
parties to operate the INTERVU Network, any of which could contain coding which
is not Year 2000 compliant. These systems include server software used to
operate the network servers, software controlled routers, switches and other
components of the data network, firewall, security, monitoring and back-up
software used by INTERVU, as well as desktop PC applications software. In each
case, INTERVU employs widely available software applications from leading
third-party vendors and expects that such vendors will provide any required
upgrades or modifications in a timely fashion. However, if any third party
software suppliers fail to provide Year 2000 compliant versions of the software,
INTERVU's operations, including the INTERVU Network, could be disrupted.
Year 2000 compliance problems also could undermine the general
infrastructure necessary to support INTERVU's operations. For instance, INTERVU
depends on third-party Internet service providers (known as "ISPs") or hosting
centers to provide connections to the Internet and to customer information
systems. Any interruption of service from ISPs or hosting centers could result
in a temporary interruption of the INTERVU Network and other services. INTERVU
has attempted to address this risk by obtaining the same service capacity from
multiple ISPs. Any interruption in the security, access, monitoring or power
systems at the ISPs or hosting centers could result in an interruption of
services. Moreover, it is difficult to predict what effects Year 2000 compliance
problems will have on the integrity and stability of the Internet. If businesses
and consumers are not able to reliably access the Internet, the demand for
INTERVU's services could decline, resulting in an adverse impact to INTERVU's
business, financial condition and results of operations.
20
21
INTERVU's operations also could be adversely affected if its customers fail
to ensure that their software systems are Year 2000 compliant. INTERVU cannot
assess or control the degree of Year 2000 compliance in its customers'
information systems. Disruptions in the information systems of customers could
temporarily prevent such customers from accessing or using the INTERVU Network,
which could materially affect INTERVU's business, financial condition and
results of operations. The spending patterns of current or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct or update their systems for Year 2000 compliance. Because of these
expenditures, INTERVU's customers may have less money available to pay for
services, which could have a material adverse affect on INTERVU's business,
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to change in interest rates primarily from its
investments in certain available for sale securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially effect the fair value of interest sensitive financial instruments at
December 31, 1998.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERVU INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 23
Balance Sheets as of December 31, 1998 and 1997............. 24
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996....................................... 25
Statement of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.......................... 26
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996....................................... 27
Notes to Financial Statements............................... 28
22
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterVU Inc.
We have audited the accompanying balance sheets of InterVU Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years ended December
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterVU Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Diego, California
February 12, 1999
except for the last paragraph of
Note 6, as to which the date is
March 19, 1999
23
24
INTERVU INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 9,346 $21,380
Short-term investments.................................... 17,700 --
Accounts receivable, net of $122,000 and $4,000 allowance,
respectively........................................... 729 88
Prepaid and other current assets.......................... 75 70
------- -------
Total current assets........................................ 27,850 21,538
Property and equipment, net................................. 2,469 585
Other assets................................................ 45 7
------- -------
Total assets...................................... $30,364 $22,130
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,334 $ 437
Accrued liabilities....................................... 299 10
Payable to NBC Multimedia................................. 750 --
Accrued payroll and related............................... 661 132
Current portion, lease commitments........................ 7 12
------- -------
Total current liabilities......................... 3,051 591
Lease commitments........................................... -- 7
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000,000 shares
authorized
Series G convertible preferred stock,
Designated -- 1,280,000 shares;
Issued and outstanding -- 1,280,000 shares at
December 31, 1998
and 1997, respectively............................... 1 1
Common stock, $0.001 par value: Authorized -- 20,000,000
shares;
Issued and outstanding 10,894,487 shares and 9,377,404
shares at
December 31, 1998 and 1997, respectively............... 11 9
Additional paid-in capital................................ 51,346 29,821
Deferred compensation..................................... (746) (710)
Accumulated deficit....................................... (23,299) (7,589)
------- -------
Total stockholders' equity........................ 27,313 21,532
------- -------
Total liabilities and stockholders' equity........ $30,364 $22,130
======= =======
See accompanying notes.
24
25
INTERVU INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenues............................................... $ 1,712 $ 144 $ --
Operating expenses:
Research and development............................. 3,154 1,703 1,420
Selling, general and administrative.................. 10,892 3,148 910
Charges associated with the NBC
Strategic Alliance Agreement...................... 4,622 750 --
---------- ---------- ----------
Total operating expenses............................... 18,668 5,601 2,330
---------- ---------- ----------
Loss from operations................................... (16,956) (5,457) (2,330)
Interest income........................................ 1,246 192 52
---------- ---------- ----------
Net loss............................................... $ (15,710) $ (5,265) $ (2,278)
========== ========== ==========
Basic and diluted net loss per
share................................................ $ (1.73) $ (0.95) $ (0.66)
========== ========== ==========
Shares used in calculating basic
and diluted net loss per share....................... 9,073,876 5,570,609 3,440,931
========== ========== ==========
See accompanying notes.
25
26
INTERVU INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
NOTES
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
------------------- ------------------- PAID-IN COMMON DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- ------ ---------- ------ ---------- ------------ ------------
Balance at December 31, 1995....... 172,500 $-- 2,398,278 $ 2 $ 154 $-- $ --
Issuance of common stock......... -- -- 1,608,509 2 17 (6) --
Issuance of convertible preferred
stock, net of issuance costs of
$81............................ 1,021,638 1 -- -- 4,733 -- --
Deferred compensation............ -- -- -- -- 421 -- (421)
Amortization of deferred
compensation................... -- -- -- -- -- -- 18
Net loss......................... -- -- -- -- -- -- --
---------- -- ---------- --- ------- -- -----
Balance at December 31, 1996....... 1,194,138 1 4,006,787 4 5,325 (6) (403)
Issuance of common stock in
initial public offering, net of
issuance costs of $2,432....... -- -- 2,210,526 2 18,566 -- --
Issuance of convertible preferred
stock, net of issuance costs of
$39............................ 832,164 1 -- -- 5,395 -- --
Conversion of preferred stock.... (2,026,302) (2) 3,237,286 3 (1) -- --
Issuance of Series G convertible
preferred stock, net of
issuance costs of $24.......... 1,280,000 1 -- -- (25) -- --
Repayments of notes receivable
from common shareholders....... -- -- -- -- -- 4 --
Repurchase of restricted stock... -- -- (108,685) -- (3) 2 --
Issuance of shares for exercise
of stock options............... -- -- 31,490 -- 1 -- --
Deferred compensation............ -- -- -- -- 563 -- (563)
Amortization of deferred
compensation................... -- -- -- -- -- -- 256
Net loss......................... -- -- -- -- -- -- --
---------- -- ---------- --- ------- -- -----
Balance at December 31, 1997....... 1,280,000 1 9,377,404 9 29,821 -- (710)
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under
The Strategic Alliance
Agreement...................... -- -- -- -- 3,373 -- --
Issuance of Common Stock in
connection with a public
offering net of issuance costs
of $1,973...................... -- -- 1,495,000 2 17,834 -- --
Repurchase of restricted stock... -- -- (28,334) -- (1) -- --
Issuance of common stock for
services....................... -- -- 2,628 -- 22 -- --
Issuance of shares for exercise
of stock options............... -- -- 47,789 -- 80 -- --
Deferred compensation............ -- -- -- -- 217 -- (217)
Amortization of deferred
compensation................... -- -- -- -- -- -- 181
Net loss......................... -- -- -- -- -- -- --
---------- -- ---------- --- ------- -- -----
Balance at December 31, 1998....... 1,280,000 $1 10,894,487 $11 $51,346 $-- $(746)
========== == ========== === ======= == =====
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31, 1995....... $ (46) $ 110
Issuance of common stock......... -- 13
Issuance of convertible preferred
stock, net of issuance costs of
$81............................ -- 4,734
Deferred compensation............ -- --
Amortization of deferred
compensation................... -- 18
Net loss......................... (2,278) (2,278)
-------- --------
Balance at December 31, 1996....... (2,324) 2,597
Issuance of common stock in
initial public offering, net of
issuance costs of $2,432....... -- 18,568
Issuance of convertible preferred
stock, net of issuance costs of
$39............................ -- 5,396
Conversion of preferred stock.... -- --
Issuance of Series G convertible
preferred stock, net of
issuance costs of $24.......... -- (24)
Repayments of notes receivable
from common shareholders....... -- 4
Repurchase of restricted stock... -- (1)
Issuance of shares for exercise
of stock options............... -- 1
Deferred compensation............ -- --
Amortization of deferred
compensation................... -- 256
Net loss......................... (5,265) (5,265)
-------- --------
Balance at December 31, 1997....... (7,589) 21,532
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under
The Strategic Alliance
Agreement...................... -- 3,373
Issuance of Common Stock in
connection with a public
offering net of issuance costs
of $1,973...................... -- 17,836
Repurchase of restricted stock... -- (1)
Issuance of common stock for
services....................... -- 22
Issuance of shares for exercise
of stock options............... -- 80
Deferred compensation............ -- --
Amortization of deferred
compensation................... -- 181
Net loss......................... (15,710) (15,710)
-------- --------
Balance at December 31, 1998....... $(23,299) $ 27,313
======== ========
See accompanying notes.
26
27
INTERVU INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
OPERATING ACTIVITIES
Net loss.................................................... $(15,710) $(5,265) $(2,278)
Adjustments to reconcile net loss to net cash used in
operating activities:
Recognition of lapse of NBC's obligation to return 680,000
shares of Series G convertible preferred stock issued
under the NBC Strategic Alliance Agreement............. 3,373 -- --
Issuance of common stock for services..................... 22 -- --
Amortization of deferred compensation..................... 181 256 18
Depreciation and amortization............................. 495 178 59
Changes in operating assets and liabilities:
Accounts receivable.................................... (641) (89) --
Prepaid and other current assets....................... (5) (59) (10)
Accounts payable....................................... 897 350 87
Accrued liabilities.................................... 289 -- 10
Payable to NBC Multimedia.............................. 750 -- --
Accrued payroll and related............................ 529 76 56
-------- ------- -------
Net cash used in operating activities....................... (9,820) (4,553) (2,058)
INVESTING ACTIVITIES
Purchase of short-term investments.......................... (42,232) -- --
Proceeds from sale of short-term investments................ 24,532 -- --
Purchases of property and equipment......................... (2,390) (484) (299)
Loss on disposal of property and equipment.................. 11 -- --
Other assets................................................ (38) (1) (6)
-------- ------- -------
Net cash used in investing activities....................... (20,117) (485) (305)
FINANCING ACTIVITIES
Payments on capital leases.................................. (12) (8) --
Issuance of common stock.................................... 17,916 18,569 13
Issuance of preferred stock................................. -- 3,336 2,429
Advances from stockholders.................................. -- 2,010 1,920
Repurchase of common stock.................................. (1) (1) --
Repayment of stockholder notes receivable................... -- 4 --
-------- ------- -------
Net cash provided by financing activities................... 17,903 23,910 4,362
Net increase (decrease) in cash and cash equivalents........ (12,034) 18,872 1,999
Cash and cash equivalents at beginning of year.............. 21,380 2,508 509
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 9,346 $21,380 $ 2,508
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered into for equipment........ $ -- $ 27 $ --
-------- ------- -------
Conversion of advances from stockholders to convertible
preferred stock........................................... $ -- $ 2,036 $ 2,305
-------- ------- -------
Issuance of common stock in exchange for notes receivable... $ -- $ -- $ 6
-------- ------- -------
Cancellation of stockholder notes receivable................ $ -- $ 1 $ --
-------- ------- -------
Issuance of Series G convertible preferred stock as
consideration for the formation of NBC Strategic Alliance
Agreement................................................. $ -- $ 1 $ --
-------- ------- -------
Recognition of lapse of NBC's obligation to return 680,000
shares of Series G convertible preferred stock issued
under the NBC Strategic Alliance Agreement................ $ 3,373 $ -- $ --
-------- ------- -------
Expense related to issuance of common stock................. $ 22 $ -- $ --
-------- ------- -------
See accompanying notes.
27
28
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterVU Inc. (the "Company" or "INTERVU") was incorporated in Delaware on
August 2, 1995 to provide services for the delivery or "streaming" of live and
on-demand video and audio content over the Internet. The Company utilizes a
distributed network to accelerate the speed and improve the quality of video and
audio delivery. In 1998, the Company emerged from the development stage.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. Such investments are made in accordance with the Company's investment
policy, which establishes guidelines relating to diversification, maturities and
credit quality designed to maintain safety and liquidity. The Company applies
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115), to its short-term
investments. Under SFAS No. 115, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheets with unrealized gains and losses, if any, reported
in stockholders' equity. As of December 31, 1998, the cost of short-term
investments approximated fair value. The Company has not experienced any losses
on its cash, cash equivalents, or short-term investments.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, payable to NBC
Multimedia, accrued payroll and related and lease commitments approximates fair
value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and depreciated over the estimated useful lives of the assets, ranging from
three to five years, using the straight-line method. Leasehold improvements are
stated at cost and amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the lease term. Amortization of
equipment under capital leases is reported with depreciation of property and
equipment.
Software Development Costs
SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, provides for the capitalization of certain software
development costs after technological feasibility of the software is attained.
No such costs have been capitalized to date because costs incurred subsequent to
reaching technological feasibility have not been material.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs incurred during the
application development stage and amortize them over the software's useful life.
In 1998, the Company capitalized $872,000 of development costs related to
internal use software. Such costs will be amortized once the software is placed
in service over the software's useful life, three years, and the amortization
will be reported with depreciation of property and equipment.
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 amounts reported in the financial
28
29
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
statements and disclosures made in the accompanying notes to the financial
statements. Actual results could differ from those estimates.
Revenue Recognition
Revenue is generated primarily from video encoding and distribution
services. Revenue from video encoding services is recognized as the service is
provided and revenue from video distribution services is recognized at the time
of delivery. The Company also performs services on development contracts and
recognizes related revenues on a percentage-of-completion method as services are
performed. Substantially all revenue is generated from domestic customers.
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have been
minimal and such losses have been within management's expectations. Revenue from
two customers accounted for 26% and 13%, respectively, of the Company's total
revenue for the year ended December 31, 1998, the largest of which is from NBC
Multimedia. The Company had significant accounts receivable balances due from
three customers individually representing 38%, 15% and 12% of total accounts
receivable at December 31, 1998.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of governmental
agencies. The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. The Company has identified no such impairment
losses. Substantially all of the Company's long-lived assets are located in the
United States.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $1.0
million in advertising costs for the year ended December 31, 1998. Advertising
costs prior to December 31, 1997 were not significant.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use
of the fair value based method of accounting for stock-based compensation
arrangements, under which compensation cost is determined using the fair value
of stock-based compensation determined as of the grant date, and is recognized
over the periods in which the related services are rendered. SFAS No. 123 also
permits companies to elect to continue using the intrinsic value accounting
method specified in Accounting Principles Board (APB) Opinion No. 25 to account
for stock-based compensation. The Company has decided to retain the intrinsic
value based method, and has disclosed the pro forma effect of using the fair
value based method to
29
30
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
account for its stock-based compensation (Note 5). Options or stock awards
issued to non-employees are valued using the fair value method and expensed over
the period services are provided.
Loss Per Share
Historical basic and diluted net loss per share has been computed in
accordance with SFAS No. 128. Earnings Per Share, using the weighted-average
number of shares of common stock outstanding during the period. Options,
warrants, common shares issuable on conversion of Series G preferred stock were
not included in the computation of diluted net loss per share because the effect
would be anti-dilutive.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, common shares issued in each of the periods presented for normal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No such shares have been
issued.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in computing
certain loss per share data. The Company previously considered preferred stock
as outstanding in pre-IPO periods from the date of original issuance on an "as
converted" basis in computing loss per share. To conform with the recent
interpretations, the Company has revised its calculation of loss per share for
all pre-IPO periods to exclude the impact of preferred shares.
Included in the shares used in calculating basic and diluted net loss per
share for the twelve months ended December 31, 1998 and 1997 are the weighted
average effect of actual conversion of preferred stock totaling 0 and 2,947,792,
respectively, and weighted average common shares totaling 9,073,876 and
2,622,817, respectively. Common equivalent shares result from Series G Preferred
Stock, stock options, warrants and unvested restricted stock of which 4,065,391
and 3,365,614 shares were excluded from the computation of diluted earnings per
share for the twelve months ended December 31, 1998 and 1997, respectively, as
their effect would be anti-dilutive.
New Accounting Standards
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Segment Information. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during the period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments shall be reported, net of their
related tax effect, to arrive at comprehensive income. Comprehensive loss was
not materially different than net loss. SFAS No. 131 amends the requirements for
public enterprises to report financial and descriptive information about their
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by a company in deciding how to allocate
resources and in assessing performance. The financial information is required to
be reported on the basis that is used internally for evaluating the segment
performance. The Company believes it operates in one business and operating
segment and adoption of this standard did not have a material impact on the
Company's financial statements.
Reclassifications
Certain prior period amounts have been classified to conform to current
year presentation.
30
31
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHORT-TERM INVESTMENTS
As of December 31, 1998, all of the Company's short-term investments were
in government backed debt securities. As of December 31, 1998, the cost of
short-term investments approximated fair value. Substantially all short-term
investments held at December 31, 1998 have contractual maturities in excess of
10 years.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
---------------
1998 1997
------ -----
(IN THOUSANDS)
Equipment.................................................. $ 81 $ 18
Computers.................................................. 1,908 607
Furniture and fixtures..................................... 125 105
Equipment under capital lease.............................. 27 27
Leasehold improvements..................................... 21 24
Internally developed software.............................. 872 --
Purchased software......................................... 152 42
------ -----
3,186 823
Less accumulated depreciation.............................. (717) (238)
------ -----
$2,469 $ 585
====== =====
4. STOCKHOLDER ADVANCES
At December 31, 1996, the Company received $26,500 in cash advances from
certain stockholders that was subsequently converted into Series E convertible
preferred stock in January 1997 at a per share price of $10.00.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Upon completion of the Company's initial public offering, the Company had
authorized 5,000,000 shares of preferred stock, of which 1,280,000 shares were
designated as Series G convertible preferred stock. The Board of Directors is
authorized, without further stockholder approval, to issue the remaining
3,720,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, and restrictions granted or imposed upon any unissued
shares of preferred stock and to fix the number of shares constituting any
series and the designation of such series.
In connection with the formation of a strategic alliance in October 1997,
the Company issued 1,280,000 shares of Series G convertible preferred stock. The
Series G convertible preferred stock ($0.001 par value) has an aggregate
liquidation preference of $10,240,000, a dividend rate of $0.64 per share and a
conversion rate of 0.6298 common shares to one preferred share, subject to
adjustment for dilution. Noncumulative dividends are payable quarterly, when, as
and if declared by the Board of Directors. The shares of Series G convertible
preferred stock are convertible into common stock at the option of the holder
commencing July 10, 1998. The holder of each share of Series G convertible
preferred stock has the right to one vote for each share of common stock into
which it would convert.
31
32
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock
In August 1995, 2,398,278 shares of common stock were issued to the
founders of the Company at a price of $0.0004 per share under founder stock
purchase agreements. In March 1996, an additional 886,758 shares of common stock
were issued to three of the founders at a price of $0.002 per share under the
founder stock purchase agreements. In January 1996, the Company issued 147,373
shares of common stock to employees at $0.004 per share under restricted stock
agreements. Also, in April and December 1996, the Company issued 444,639 and
129,739 shares of common stock, respectively, to employees at $0.024 and $0.04
per share, respectively, under restricted stock agreements. In connection with
the founder stock purchase agreements and the restricted stock agreements, the
Company has the option to repurchase, at the original issue price, unvested
common shares in the event of termination of employment. Shares issued under the
agreements generally vest 20% on the first anniversary of the employee's hire
date and daily thereafter for four years. Shares subject to repurchase by the
Company totaled 1,107,247 and 1,615,470 at December 31, 1998 and 1997,
respectively. In 1998 and 1997, the Company repurchased a total of 28,334 shares
for $1,000 and 108,685 shares for $1,000, respectively, pursuant to the
agreements.
In April 1996, the Board of Directors declared a two-for-one stock dividend
of the Company's common stock, effectuated as a stock split. Also, in July 1997,
the Company declared a two-for-one stock split of the Company's common stock.
All applicable share and stock option information have been restated to reflect
the split.
In August 1997, the Board of Directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock to the public. Concurrent with the closing of the
offering, all of the preferred stock outstanding, excluding 1,280,000 shares of
Series G convertible preferred stock, automatically converted into 3,328,717
shares of common stock.
In November 1997, the Company effected a reverse stock split in which
0.6298 shares of common stock were exchanged for one share of common stock. All
applicable share and stock option information have been restated to reflect the
reverse stock split. Upon completion of the public offering, the Company had
authorized 20,000,000 shares of common stock.
Stock Options
The Company has established stock option plans to grant options to purchase
common stock to consultants, employees, officers and directors of the Company.
The Company has authorized for grant under the plans stock options to purchase
up to 3,037,975 shares of its common stock.
Under the terms of the plans, non-qualified and incentive options may be
granted to consultants, employees, officers and directors at prices not less
than 100% of the fair value on the date of grant. Options generally vest 20%
after the first year of employment and daily thereafter for four years. The
options expire ten years from the date of grant.
32
33
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option activity under the plans:
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------------
Granted................................................... 157,000 $ 0.04
---------
Balance at December 31, 1996................................ 157,000 0.04
Granted................................................... 711,000 3.15
Exercised................................................. (32,000) 0.03
Canceled.................................................. (92,000) 0.03
---------
Balance at December 31, 1997................................ 744,000 3.00
Granted................................................... 1,491,000 12.66
Exercised................................................. (50,000) 1.77
Canceled.................................................. (363,000) 9.70
---------
Balance at December 31, 1998................................ 1,822,000 $ 9.60
=========
Options exercisable as of December 31, 1998 and 1997 were 234,000 and
77,000, respectively and approximately 1.2 million shares are available for
future grant under the Company's stock option plans. Additional information
regarding stock options outstanding at December 31, 1998 is as follows:
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED-AVERAGE -------------------
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES PRICE LIFE (IN YEARS) SHARES PRICE
------------------------ --------- --------- --------------------- ------- ---------
$0.04 to $0.28....................... 288,000 $ 0.25 3.54 111,000 $0.25
$1.98 to $5.25....................... 183,000 3.40 7.92 57,000 2.58
$6.50 to $9.13....................... 550,000 7.98 9.16 52,000 9.10
$9.81 to $14.13...................... 315,000 13.10 9.61 14,000 14.13
$14.88 to $19.25..................... 486,000 17.03 9.49 -- --
--------- -------
$0.04 to $19.25...................... 1,822,000 9.60 8.32 234,000 3.60
========= =======
Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123, and has been determined as if the
Company has accounted for its employee stock options under the fair value method
prescribed in that Statement. For options granted in the year ended December 31,
1996 and through November 18, 1997, the fair value for the options was estimated
at the date of grant using the "minimum value" method for option pricing with
the following weighted-average assumptions: risk-free interest rate of 6%,
dividend yield of 0%, and weighted-average expected life of the option of seven
years. For options granted from November 18, 1997, to December 31, 1997, the
fair value of the options was estimated at the date of grant using the
"Black-Scholes" method for option pricing with the following weighted-average
assumptions: risk free interest rate of 6%, dividend yield of 0%, expected
volatility of 75% and weighted-average expected life of the option of seven
years. For options granted in 1998, the fair value of the options was estimated
at the date of the grant using the following assumptions: risk free interest
rate of 6%, dividend yield of 0%, expected volatility of 108% and
weighted-average expected life of seven years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly speculative assumptions.
33
34
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of related options. The
Company's net loss would have been affected by the pro forma amounts as follows:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNT)
-------------------------------
1998 1997 1996
--------- -------- --------
Net loss
As reported.......................................... $(15,710) $(5,265) $(2,278)
Pro forma............................................ $(17,141) $(5,100) $(2,278)
Basic and diluted loss per share
As reported.......................................... $ (1.73) $ (0.95) $ (0.66)
Pro forma............................................ $ (1.89) $ (0.92) $ (0.66)
Weighted-average fair value of options granted......... $ 10.63 $ 1.11 $ 1.08
Qualified Stock Purchase Plan
The Qualified Stock Purchase Plan was adopted by the Board of Directors and
stockholders on June 22, 1998 and became effective September 1, 1998. A total of
500,000 shares of Common Stock have been authorized for issuance under the
Qualified Stock Purchase Plan. The Qualified Stock Purchase Plan permits
eligible employees of the Company to purchase shares of Common Stock through
periodic payroll deductions. Payroll deductions may not exceed 15% of the
participant's base salary, and the purchase price will not be less than 85% of
the lower of the fair market value of the stock at either the beginning or the
end of the offering period.
Deferred Compensation
Through December 31, 1998, the Company recorded deferred compensation for
the difference between the price per share of restricted stock issued or the
exercise price of stock options granted and the deemed fair value for financial
statement presentation purposes of the Company's common stock at the date of
issuance or grant. The deferred compensation is amortized over the vesting
period of the related restricted stock or options, which is generally five
years. Through December 31, 1998, the Company recorded gross deferred
compensation totaling $1,201,000 and related amortization expense totaled
$181,000, $256,000, and $18,000 for the years ended 1998, 1997 and 1996,
respectively.
Warrants
In connection with the Company's initial public offering in November 1997,
the Company issued 200,000 warrants to purchase common stock to its
underwriters. Such warrants are exercisable at $11.40 per share of common stock
through November 2002. In connection with the Company's public offering in June
1998, the Company issued 130,000 warrants to purchase common stock to its
underwriters. These warrants are exercisable at $15.90 commencing June 1999 and
expire in June 2003.
34
35
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Shares Reserved for Future Issuance
At December 31, 1998, the Company had reserved approximately 4.2 million
common shares for the conversion of preferred stock, the exercise of outstanding
stock options, the exercise of outstanding warrants and for stock options
available for future grant.
6. COMMITMENTS
The Company leases its principal facilities under a sublease that commenced
on May 1, 1998 and expires in 2003. Additionally, the Company maintains a
regional office in New York City under a sublease which expires in 1999. In
October 1998, the Company opened a regional office in San Francisco under a
lease which expires in 2003. Total rent expense was $267,000, $129,000 and
$48,000 for years ended December 31, 1998, 1997 and 1996, respectively.
Future annual minimum payments under noncancelable capital and operating
leases (with initial lease terms in excess of one year) consisted of the
following at December 31, 1998:
OPERATING CAPITAL
LEASES LEASES
--------- -------
1999........................................................ $ 404 $ 7
2000........................................................ 418 1
2001........................................................ 434 --
2002........................................................ 449 --
2003........................................................ 229 --
------ ---
Total minimum lease payments................................ $1,934 8
------ ---
Less amounts representing interest.......................... (1)
---
Present value of future minimum lease payments.............. 7
Less current portion........................................ (7)
---
Capital lease obligation, net of current portion............ $--
---
In March 1999, the Company financed $1.1 million of equipment under a three
year non-cancelable lease with an interest rate of 7.75%.
7. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are shown below. A valuation allowance of $9,305,000 has been
recorded at December 31, 1998 to offset the net deferred tax assets because
realization is uncertain.
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 8,397 $ 2,883
Research tax credit carryforwards......................... 517 233
Other..................................................... 391 94
------- -------
Total deferred tax assets......................... 9,305 3,210
Valuation allowance......................................... (9,305) (3,210)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
35
36
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company had federal and California tax net operating loss carryforwards
at December 31, 1998 of approximately $21.6 million and $14.5 million,
respectively. The difference between the federal and California tax loss
carryforwards is attributable to the 50% limitation on California loss
carryforwards for 1998. The federal and California tax loss carryforwards will
begin to expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $380,000 and $211,000, respectively, which will begin to expire in
2011 and 2010, respectively, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards may be limited because of
a cumulative change in ownership of more than 50% which occurred during 1996.
However, the Company does not believe such limitation will have a material
impact on the Company's ability to use these carryforwards.
8. EMPLOYEE BENEFITS
In 1996, the Company established a cafeteria benefits plan whereby it
contributes for each employee an amount equal to $3,000 plus a percentage of
each employee's base salary, as approved by the Board of Directors, up to a
maximum contribution of $9,000. The employer contribution goes towards the
purchase of various benefit packages selected by the employee. The employee may
contribute additional amounts as desired. Benefit packages include health care
reimbursement, dependent care assistance, various insurance premium payments and
a 401(k) plan. Company contributions to the cafeteria benefits plan were
$418,000, $182,000 and $102,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
9. STRATEGIC ALLIANCES
On October 10, 1997, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly-owned subsidiary of the National
Broadcasting Corporation, Inc. ("NBC") whereby the Company became the exclusive
provider of technology and services for the distribution of most NBC
entertainment audio/visual content by means of the Internet. As consideration
for the formation of the strategic alliance, the Company issued to NBC 1,280,000
shares of Series G convertible preferred stock. The Company is entitled to
receive 30% of certain advertising revenues generated under this alliance from
NBC Web sites or, at a minimum, payments from NBC Multimedia for the video
delivery services at rates at least as favorable as the most favorable rates
offered by the Company to third parties. The Company was obligated to make
$2,000,000 in non-refundable payments to NBC Multimedia for certain production,
operating and advertising costs associated with certain NBC Web sites including
payments of (i) $750,000 paid on the completion of the initial public offering
completed in November 1997, (ii) $500,000 due in February 1998, (iii) $500,000
due in May 1998, and (iv) $250,000 due in August 1998. Through December 31,
1998, the Company has made a total of $1,250,000 in payments to NBC Multimedia
under the agreement.
NBC Multimedia may terminate the agreement without cause by giving 90 days
written notice. NBC Multimedia was required to return all shares of Series G
convertible preferred stock if termination occurred prior to January 10, 1998
and NBC Multimedia had not promoted, at a minimum, the Company's logo on the NBC
Web site and is required to return 600,000 shares of Series G convertible
preferred stock if the termination occurs at any other time during the first two
years of the exclusive term. The Company determines the fair value of the Series
G convertible preferred stock issued to NBC on the dates the requirements that
NBC return some or all of the shares of Series G convertible preferred stock
lapse. Based on these provisions, the Company has charged $3,373,000 as the fair
value of 680,000 shares of Series G convertible preferred stock to expense in
1998 and expects to charge the then fair value of the remaining 600,000 shares
of Series G convertible preferred stock to expense in the quarter ending
December 31, 1999. Should the Company breach, renegotiate or waive these
provisions, removing NBC's obligation to return shares of Series G convertible
preferred stock, the Company would expense the fair value of each share at that
time. The Company believes
36
37
INTERVU INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
that the fair value of the remaining 600,000 shares of Series G convertible
preferred stock will roughly approximate the price at which the Company's common
stock is then trading, multiplied by the number of shares into which such
outstanding shares of Series G convertible preferred stock would convert at the
0.6298 conversion rate. The noncash charge is likely to be substantial and is
likely to have a material adverse impact on the Company's results of operations
in the period such expense is recognized.
10. CONTINGENCIES
The Company is party to certain claims and legal actions arising in the
normal course of business. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of all such
pending matters will not have a material adverse affect on the Company's
financial position or liquidity; however, there can be no assurance that the
ultimate resolution of these matters will not have a material impact on the
Company's results of operations in any period.
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38
ITEM 9. CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the age and position of each of INTERVU's
executive officers, directors and key employees:
NAME AGE POSITION
---- --- --------
Harry E. Gruber........................ 46 Chairman and Chief Executive Officer
Brian Kenner........................... 39 Vice President and Chief Technology Officer
Kenneth L. Ruggiero.................... 32 Vice President and Chief Financial Officer
Edward L. Huguez....................... 41 Vice President and Chief Operating Officer
Stephen H. Klein....................... 35 Vice President of Business Development, Networks
Larry Behmer........................... 51 Vice President, Engineering
Charles Bragg.......................... 47 Vice President and General Manager, Sales
Stephen Condon......................... 35 Vice President, Marketing
Scott Crowder.......................... 36 Vice President, Operations
J. William Grimes...................... 58 Vice Chairman
Edward E. David, Jr.................... 74 Director
Mark Dowley............................ 34 Director
Alan Z. Senter......................... 57 Director
Isaac Willis........................... 58 Director
EXECUTIVE OFFICERS AND DIRECTORS
Harry E. Gruber is a founder of INTERVU and has served as Chairman and
Chief Executive Officer of INTERVU since July 1996. From July 1996 to July 1997,
Dr. Gruber served as INTERVU's President, and from July 1997 to February 1998,
Dr. Gruber served as INTERVU's Chief Financial Officer. Prior to founding
INTERVU, Dr. Gruber founded two start-up biotech ventures, Gensia Inc. and
Viagene Inc., which completed initial public offerings in 1990 and 1993,
respectively. From July 1995 to July 1996, Dr. Gruber served as Chief Scientific
Officer of Gensia, and from 1988 to July 1995, he served as Vice President,
Research of Gensia. Dr. Gruber serves as a director of Vascular Genomics, Inc.,
a privately held company, and as a director of the UCSD Foundation and a member
of the Board of Overseers for the University of Pennsylvania College of Arts and
Sciences. Dr. Gruber obtained his M.D. and B.A. degrees from the University of
Pennsylvania.
Brian Kenner is a founder of INTERVU and has served as Vice President and
Chief Technology Officer of INTERVU since February 1996. From 1989 to January
1996, Mr. Kenner was a Project Engineer at Science Applications International
Corporation, an advanced-technology development and research organization. As
Project Engineer, Mr. Kenner had responsibility for products ranging from
advanced hand-held instrumentation to devices which digitize, compress, and
transmit both moving and still images over public and proprietary communications
networks. Mr. Kenner obtained a B.S. in electrical engineering from the
University of California, San Diego.
Kenneth L. Ruggiero joined INTERVU in February 1998 and serves as Vice
President and Chief Financial Officer. From April 1996 to February 1998, Mr.
Ruggiero was employed by NBC. From December 1996 to February 1998, he was the
Chief Financial Officer of NBC Interactive Media, NBC's Internet division. In
this capacity he performed and managed financial reporting, implemented various
policies and procedures and structured and negotiated business development
activities. From April 1996 to December 1996, Mr. Ruggiero was a Manager in
NBC's Business Development and International Finance division. From
38
39
September 1989 to April 1996, he was employed by Arthur Andersen, an independent
public accounting firm, where he held a number of positions, including most
recently Manager of Corporate Consulting. Mr. Ruggiero is a Certified Public
Accountant. He received an M.B.A. from Columbia University Graduate School of
Business and a B.A. in accounting from the University of Massachusetts, Amherst.
Edward L. Huguez joined INTERVU in May 1998 and serves as Vice President
and Chief Operating Officer. From October 1992 to May 1998, Mr. Huguez was
employed by DIRECTV, a direct broadcast satellite entertainment company. Mr.
Huguez held a number of different positions at DIRECTV, most recently Vice
President, New Media and Interactive Programming and Platforms. In this
capacity, Mr. Huguez was responsible for the business unit that managed
DIRECTV's new media and interactive business. From March 1987 to September 1992,
Mr. Huguez was employed by ESPN, Inc., most recently as Director, Affiliate
Sales and Marketing, Western Division. He received an M.B.A. from the John E.
Anderson Graduate School of Management at UCLA and a B.A. in political science
from Arizona State University.
Stephen H. Klein joined INTERVU in May 1996 as Director of Business
Development and Sales and has served as Vice President of Business Development,
Networks since March 1997. From 1994 to 1996, he served as New Business
Development Manager for General Instrument Corporation where he was one of the
originating founders of the SURFboard Program, General Instrument's Internet
cable modem technology and product line. From 1988 to 1992, Mr. Klein held
various product management and technical management positions at General
Instrument's VideoCipher Division. Mr. Klein obtained an M.B.A. from San Diego
State University and a B.S. in engineering from Ohio State University.
Larry Behmer joined INTERVU in November 1998 as Vice President of
Engineering. Prior to joining INTERVU, Mr. Behmer was employed with U.S. West
from July 1987 to November 1998, including most recently as Executive Director
of Engineering. From May 1970 to July 1987, Mr. Behmer held various positions at
Bell Labs and Northern Telecom. Mr. Behmer earned a M.S. in computer science
from Northwestern University and a B.S. in computer science from University of
Dayton.
Charles Bragg joined INTERVU in September 1998 and serves as Vice President
and General Sales Manager. From June 1996 to September 1998, Mr. Bragg held a
number of management positions at Cybergold, an online marketing and incentives
company, including most recently Vice President of Sales. While at Cybergold,
Mr. Bragg was responsible for managing new business development and advertising
sales. Mr. Bragg's previous management experience includes developing
advertising sales operations for both cable television and Internet Web site
marketing venues. From 1985 to 1996, Mr. Bragg held various senior management
positions at Bigbook, Katz Media Corporation and Cable Adnet. He received a B.A.
in psychology from the University of North Carolina.
Stephen Condon joined INTERVU in September 1998 as Vice President of
Marketing from DIRECTV, where he most recently held the position of Senior
Marketing Director. While at DIRECTV, from January 1996 to August 1998, he was
responsible for such activities as national promotions, launching subscriber
marketing programs, developing partnership programs and customer communications.
From February 1993 to January 1996, Mr. Condon also held various positions with
Campbell-Ewald Advertising, Chiat/Day, and J. Walter Thompson Pty. Ltd. Mr.
Condon earned an undergraduate degree from Kuring-gai College of Advanced
Education, Sydney, Australia.
Scott Crowder joined INTERVU in June 1998 as Vice President of Operations.
From July 1985 through May 1998, Mr. Crowder held a number of positions at
Sprint Long Distance, including most recently Director-Advanced Product Support.
Mr. Crowder has more than 16 years of industry and experience and held various
management roles at Sprint in the areas of switch data services, ISDN, video
conferencing, and drums multimedia collaboration solutions.
J. William Grimes joined INTERVU as a director in September 1997 and has
served as Vice Chairman of the Board since October 1997. Since July 1995, Mr.
Grimes has worked as a consultant with JWG Communications, Inc., a
communications consulting company he founded in July 1995. He also is a partner
of BG Media Investors and serves as a faculty member in the Media Studies
Program at the New School for Social Research, a position he has held since
September 1996. From September 1994 to August 1996,
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40
Mr. Grimes held the position of President and Chief Executive Officer with
Zenith Media, a media buying service company. From October 1991 to December
1993, Mr. Grimes served as President and Chief Executive Officer of Multimedia,
Inc. From November 1988 to September 1991, Mr. Grimes served as President and
Chief Executive Officer of Univision Holdings, Inc. Mr. Grimes served as
President and Chief Executive Officer of ESPN, Inc. from June 1982 to October
1988. Prior to June 1982, Mr. Grimes held various positions with CBS, Inc.,
including his final position as Executive Vice President of the CBS Radio
division. He obtained a B.A. in English from West Virginia Wesleyan College.
Edward E. David, Jr. has served as a director of INTERVU since its
inception in August 1995, and has served as President of Edward E. David, Inc.,
a telecommunications consulting firm since 1992. In addition, since April 1996,
Dr. David has served as Vice President and Principal of Washington Advisory
Group, LLC. He has been Science Advisor to the President of the United States
and Director of the White House Office of Science and Technology. Dr. David was
also President of Exxon Research and Engineering Company and Executive Director
of Bell Telephone Laboratories. Mr. David serves as a director for
Intermagnetics General Corporation, Spacehab, Inc. and Protein Polymar
Technologies, all of which are publicly traded companies. Until recently, he
served as the U.S. Representative to the NATO Science Committee.
Mark Dowley joined INTERVU as a director in January 1997 and is the Chief
Executive Officer of Momentum IMC, an advertising agency division of
McCann-Erickson, a national advertising firm. Mr. Dowley has over ten years
experience in major event management, promotion and sponsorship. Mr. Dowley's
past and current clients include the NBA, the PGA Tour, NCAA, The Walt Disney
Company and Universal Studios. Mr. Dowley received a B.A. in economics from the
College of Wooster.
Alan Z. Senter joined INTERVU as a director in September 1997. From
September 1994 to May 1996, Mr. Senter served as Executive Vice President, Chief
Financial Officer and as a member of the Policy Council of Nynex Corporation.
From November 1993 to August 1994 and since June 1996, Mr. Senter has served as
Chairman of Senter Associates, a consulting firm founded by Mr. Senter in
November 1993. From August 1992 to November 1993, Mr. Senter served as Executive
Vice President, Chief Financial Officer and a director of GAF/ISP Corporation.
From January 1990 to July 1992, Mr. Senter served as Vice President of Finance
for Xerox Corporation. Mr. Senter serves on the Boards of Directors of Exel,
Ltd. and Advanced Radio Telecom, both publicly traded companies. Mr. Senter
obtained a B.S. in economics and political science from the University of Rhode
Island and an M.B.A. from the University of Chicago.
Isaac Willis has served as a director of INTERVU since November 1995. Dr.
Willis is a private investor with experience in venture financing and banking,
including the founding of Heritage Bank, Commercial Bank of Georgia and
Commercial Bank of Gwinnett. Dr. Willis has been a Professor and Director of
Dermatology Research at Morehouse School of Medicine since 1983 and was a Past
Commander of the 3297th U.S. Army Hospital. Dr. Willis obtained a M.D. from
Howard University and a B.S. in chemistry and mathematics from Morehouse
College.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for the fiscal years ended December 31, 1997 and 1998 received by the Chief
Executive Officer and the four most highly compensated individuals who served as
executive officers of the Company during fiscal 1998 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------- -------------------------
OTHER NUMBER OF
ANNUAL RESTRICTED SECURITIES
NAME AND FISCAL COMPEN- STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($)(1) AWARDS($)(2) OPTIONS(#)
------------------ ------ --------- -------- ------------ ------------ ----------
Harry E. Gruber.................... 1998 $180,003 $10,000 $ -- $-- 40,000
Chairman and 1997 179,632 -- -- -- --
Chief Executive Officer
Kenneth L. Ruggiero(3)............. 1998 120,182 10,000 33,156 -- 100,000
Chief Financial Officer
Douglas A. Augustine(4)............ 1998 121,411 5,000 -- -- 5,000
Former Vice President, 1997 112,052 -- -- -- 31,490
Sales and Marketing
Edward L. Huguez(5)................ 1998 128,062 -- 65,711 -- 200,000
Chief Operating Officer
Stephen H. Klein................... 1998 100,970 10,000 -- -- 10,000
Vice President, 1997 89,875 -- -- -- 2,519
Business Development
- ---------------
(1) Consists of moving expenses and relocation allowances.
(2) Dollar values of restricted stock awards are based on the market price at
the time of grant. With respect to each Named Executive Officer's restricted
stock holdings, the number of shares of Common Stock and the dollar value
thereof at December 31, 1998 are as follows: 1,007,680 and $12,847,033 for
Dr. Gruber; 62,980 and $800,476 for Mr. Augustine; and 62,980 and $801,080
for Mr. Klein. The value of restricted stock holdings is based on the fair
market value of the Common Stock on December 31, 1998 ($12.75) less the
purchase price paid by the executive for such shares. Restricted stock
awards vest daily over a five-year period (with the first 20% of the award
vesting on the first anniversary of the date of grant).
(3) Mr. Ruggiero has been the Company's Chief Financial Officer since February
1998. Mr. Ruggiero's annualized salary for 1998 was $140,000.
(4) Mr. Augustine resigned from the Company on November 20, 1998. Mr.
Augustine's annualized salary for 1998 was $136,800.
(5) Mr. Huguez has been Chief Operating Officer of the Company since May 1998.
Mr. Huguez's annualized salary for 1998 was $200,000.
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42
OPTION GRANTS DURING FISCAL YEAR 1998
The following table sets forth certain information with respect to options
to purchase Common Stock granted during the year ended December 31, 1998 to each
of the Named Executive Officers. The Company does not have any outstanding stock
appreciation rights.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(%) SHARE($/SH) DATE 5% 10%
---- ---------- -------------- -------------- ---------- ---------- ----------
Harry Gruber......... 40,000 2.94 $ 15.31 6/22/08 $ 385,210 $ 976,199
Kenneth Ruggiero..... 100,000 7.36 $ 8.38 2/17/08 $ 526,699 $1,334,759
Douglas Augustine.... 5,000 0.3678 $14.125 4/14/08 $ 44,415 $ 112,558
Edward Huguez........ 200,000 14.71 $ 18.56 5/13/08 $2,334,671 $5,916,668
Stephen Klein........ 10,000 0.7356 $14.125 4/14/08 $ 88,831 $ 225,116
- ---------------
(1) The potential realizable values are based on an assumption that the stock
price of the Company's Common Stock will appreciate at the annual rate shown
(compounded annually) from the date of grant until the end of the option
term. These values do not take into account amounts required to be paid as
income taxes under the Internal Revenue Code and any applicable state laws
or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting. These amounts are
calculated based on the requirements promulgated by the Commission and do
not reflect the Company's estimate of future stock price growth of the
shares of the Company's Common Stock.
OPTIONS EXERCISED DURING FISCAL YEAR 1998
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock during the year ended December 31,
1998, and the unexercised options held and the value thereof at that date, for
each of the Named Executive Officers.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR FISCAL YEAR END
SHARES END(#) ($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ---------------
Harry Gruber......................... -- -- 0/40,000 $0/$0
Kenneth Ruggiero..................... -- -- 0/100,000 $0/$437,500
Douglas Augustine.................... 10,847 $146,843 0/5,000 $0/$0
Edward Huguez........................ -- -- 0/200,000 $0/$0
Stephen Klein........................ -- -- 756/11,763 $6,038/$14,081
- ---------------
(1) Based on the closing sale price of the Common Stock on December 31, 1998
($12.75), as reported by the Nasdaq National Market, less the option
exercise price
1996 AND 1998 STOCK PLAN
1996 STOCK PLAN
The Company adopted the 1996 Stock Plan in December 1996 to enable
directors, officers, key employees and consultants of the Company to acquire an
equity stake in the Company, and thus to create in such persons an increased
interest in and a greater concern for the welfare of the Company. The 1996 Stock
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Plan initially provided for aggregate option grants of up to 1,889,400 shares.
As of March 15, 1999, options to purchase an aggregate of 992,664 shares of
Common Stock at prices ranging from $.04 to $19.25 were outstanding under the
1996 Stock Plan. When the Company's stockholders approved the 1998 Stock Option
Plan in June 1998, the Company ceased to reserve the balance of the shares
initially reserved for issuance under the 1996 Stock Plan. No further shares are
available for issuance under the 1996 Stock Plan.
1998 STOCK OPTION PLAN
The 1998 Stock Option Plan provides additional incentives to selected key
employees, independent directors and consultants of the Company. The Board of
Directors adopted the 1998 Stock Option Plan in February 1998 and the Company's
stockholders approved the adoption of the 1998 Stock Option Plan in June 1998.
Approximately 120 directors, officers, key employees and consultants are
currently eligible to participate in the 1998 Stock Option Plan. The Company
initially reserved 2,000,000 shares of Common Stock for issuance upon exercise
of options granted under the 1998 Stock Option Plan. As of March 15, 1999,
options to purchase an aggregate of 1,021,125 shares of Common Stock at prices
ranging from $5.25 to $25.25 were outstanding under the 1998 Stock Option Plan.
Nonqualified stock options and incentive stock options may be granted under the
1998 Stock Option Plan.
The 1998 Stock Option Plan is administered by the Compensation Committee.
However, the Board of Directors will make most decisions regarding independent
directors under the 1998 Stock Option Plan. The Compensation Committee (or the
Board of Directors in the case of independent directors) is authorized to select
from among the eligible employees, directors and consultants the individuals to
whom options are to be granted and to determine the number of shares to be
subject thereto and the terms and conditions thereof, consistent with the 1998
Stock Option Plan. The Compensation Committee also is authorized to adopt, amend
and rescind rules relating to the administration of the 1998 Stock Option Plan.
The 1998 Stock Option Plan provides for formula grants of nonqualified stock
options to independent directors. Each independent director serving as a member
of the Board of Directors and who has been reelected to serve for an additional
term, if applicable, will be granted an option to purchase 5,000 shares of
Common Stock on the date of each annual meeting of stockholders (other than the
1998 Annual Meeting of Stockholders). In addition, each person initially elected
to the Board of Directors after the adoption of the 1998 Stock Option Plan will
be granted an option to purchase 20,000 shares of Common Stock on the date of
such election.
Nonqualified stock options granted under the 1998 Stock Option Plan will
provide for the right to purchase Common Stock at a specified price, which may
not be less than 85% of the fair market value of the Common Stock on the date of
grant and usually will become exercisable (in the discretion of the Compensation
Committee or the Board in the case of independent directors) in one or more
installments after the date of grant. Incentive stock options, if granted, will
be designed to comply with, and will be subject to restrictions contained in,
the Code, including exercise prices equal to at least 100% of fair market value
of Common Stock on the date of grant, but may be subsequently modified to
disqualify them from treatment as incentive stock options. Incentive stock
options may be granted only to employees. No option granted under the 1998 Stock
Option Plan may have a term of greater than ten years from the date of grant.
The period during which the right to exercise an option vests in the
optionee shall be set by the Compensation Committee. However, unless the
Compensation Committee states otherwise no option will be exercisable by an
optionee subject to Section 16 of the Securities Exchange Act of 1934, as
amended, within the period ending six months and one day after the date the
option is granted. In addition, options granted to independent directors will
become exercisable in annual installments of 25% on each of the first, second,
third, and fourth anniversaries of the date of grant.
QUALIFIED STOCK PURCHASE PLAN
On February 25, 1998, the Board of Directors adopted the Qualified Stock
Purchase Plan. The Company's stockholders approved the adoption of the Qualified
Stock Purchase Plan in June 1998. The Qualified Stock Purchase Plan, and the
rights of participants to make purchases thereunder, is intended to qualify
under the provisions of Sections 421 and 423 of the Code. The purpose of the
Qualified Stock
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Purchase Plan is to provide an incentive for employees of the Company to acquire
an interest in the Company through the purchase of Common Stock, thereby more
closely aligning the interests of the employees and the stockholders. The
Qualified Stock Purchase Plan provides that an aggregate of 500,000 shares of
the Common Stock may be issued thereunder. As of March 15, 1999, an aggregate of
5,156 shares of Common Stock had been issued under the Qualified Stock Purchase
Plan. The Compensation Committee administers the Qualified Stock Purchase Plan.
The Qualified Stock Purchase Plan is implemented through a series of
24-month offering periods, with a new offering period commencing on each
February 1 and August 1 during the term of the Qualified Stock Purchase Plan.
The first offering period (a 23-month period) commenced on September 1, 1998.
The purchase price of the shares under the Qualified Stock Purchase Plan is
funded through payroll deductions during an offering period. Currently, the
payroll deductions may be any whole percentage amount between 1% and 15% of a
participant's base salary, wages and commissions, but excluding bonuses and
overtime pay, on each payroll date during the offering period. A participant may
discontinue his or her participation in the Qualified Stock Purchase Plan at any
time during the offering period. In addition, a participant may, no more than
once during each offering period, reduce or increase the rate of payroll
deductions.
Subject to certain limitations contained in the Qualified Stock Purchase
Plan, on the first day of each offering period, each participant is granted an
option to purchase, on each exercise date during the offering period, a number
of shares of Common Stock determined by dividing the participant's contributions
to the Qualified Stock Purchase Plan by the applicable exercise price. Unless a
participant withdraws from the Qualified Stock Purchase Plan, such participant's
option to purchase shares will be exercised automatically on each exercise date
of the offering period to purchase the maximum number of full shares that may be
purchased at the exercise price with the accumulated payroll deductions in the
participant's account. The last day of each six-month period during each
offering period under the Qualified Stock Purchase Plan (i.e., each July 31, and
January 31) will be an exercise date under the Qualified Stock Purchase Plan.
Initially, the exercise price per share at which shares will be sold under
the Qualified Stock Purchase Plan will be equal to the lower of 85% of the fair
market value of the Common Stock on the date of commencement of an offering
period or 85% of the fair market value of the Common Stock on each exercise date
of the option. The Compensation Committee may change the percentage rate from
85%; however, it may never be less than 85%. The fair market value of a share of
Common Stock on a given date will be the closing price of the Common Stock on
the Nasdaq Stock Market on such date.
As of March 15, 1999, 10,940,529 shares of the Company's common stock,
$.001 par value per share ("Common Stock"), were outstanding.
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ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 15, 1999 by (i) each of the Company's
directors, (ii) each of the Company's Named Executive Officers (as defined
herein), (iii) each person who is known by the Company to own beneficially more
than 5% of the Common Stock and (iv) all directors and executive officers as a
group.
NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK COMMON STOCK
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED
------------------- --------------------- ------------------
Harry E. Gruber(3)............................... 1,037,852 9.5%
Brian Kenner(4).................................. 1,041,752 9.5
Isaac Willis(5).................................. 1,259,249 11.5
Stephen H. Klein(6).............................. 67,260 *
Edward E. David, Jr.(7).......................... 35,781 *
Kenneth L. Ruggiero(8)........................... 24,899 *
Edward L. Huguez(9).............................. 40,109 *
J. William Grimes(10)............................ 17,930 *
Mark Dowley(11).................................. 16,474 *
Alan Z. Senter(12)............................... 11,937 *
All directors and executive officers as a group
(10 persons)(13)............................... 3,553,243 32.5
Douglas A. Augustine(14)......................... 28,812 *
National Broadcasting Company, Inc.(15).......... 1,016,670 9.3
Westchester Group LLC(16)........................ 800,000 7.3
- ---------------
* Less than 1%.
(1) Except as indicated, the address of each person named in the table is c/o
INTERVU Inc., 6815 Flanders Drive, San Diego, California 92121.
(2) Beneficial ownership of directors, officers and 5% or more stockholders
includes shares of outstanding common stock and shares of common stock any
person has the right to acquire within 60 days after the date of this
table. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
(3) Includes 368,725 shares subject to INTERVU's repurchase right under an
amended and restated vesting agreement and 1,037,852 shares held in a
family trust.
(4) Includes 368,725 shares subject to INTERVU's repurchase right under an
amended and restated vesting agreement.
(5) Includes 1,036,938 shares owned by the Willis Family Trust, of which Dr.
Willis is settlor. Includes 3,904 shares subject to INTERVU's repurchase
right under a restricted stock agreement and 21,231 shares issuable upon
exercise of options that are currently exercisable or that will become
exercisable within 60 days after the date of this table. Includes 17,994
shares held in an Individual Retirement Account.
(6) Includes 21,699 shares subject to INTERVU's repurchase right under a
restricted stock agreement and 3,104 shares issuable upon exercise of
options that are currently exercisable or that will become exercisable
within 60 days after the date of this table.
(7) Includes 3,817 shares subject to INTERVU's repurchase right under a
restricted stock agreement and 10,859 shares issuable upon exercise of
options that are currently exercisable or that will become exercisable
within 60 days after the date of this table.
(8) Includes 24,709 shares issuable upon exercise of options that are currently
exercisable or that will become exercisable within 60 days after the date
of this table.
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(9) Consists of 40,109 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(10) Consists of 17,930 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(11) Consists of 16,474 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(12) Consists of 11,937 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(13) See Notes (3) - (12).
(14) Mr. Augustine resigned as INTERVU's Vice President, Marketing and Sales on
November 20, 1998.
(15) Includes shares of Series G Preferred Stock owned by NBC that are
convertible into common stock at the option of the holder and 210,526
shares of common stock owned by NBC Multimedia. The holder of each share of
Series G Preferred Stock has the right to vote on an as-converted basis
with the common stock. As the ultimate parent of NBC, General Electric
Company may be deemed to be the beneficial owner of all these shares. The
address for NBC is 30 Rockefeller Plaza, New York, New York 10112.
(16) The membership interests of Westchester Group LLC are owned by Marcia
Berman individually, with respect to 99.4% of the interests, and as
custodian for her minor children under the New York Uniform Gifts to Minors
Act, with respect to 0.6% of the interests. The address for Westchester
Group LLC is c/o Duckor Spradling & Metzger, 401 West A Street, Suite 2400,
San Diego, CA 92101.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon incorporation of the Company in August 1995, the Company sold an
aggregate of 2,398,278 shares of Common Stock to various individuals for an
aggregate of $952, including 705,387 shares to Harry E. Gruber, 705,387 shares
to Brian Kenner, 599,555 shares to a predecessor of the Westchester Group LLC,
211,609 shares to Ruth Hargis and 176,340 shares to the A.B. Gruber Living Trust
(the "Initial Stockholders"). Allen B. Gruber, the settlor and trustee of the
A.B. Gruber Living Trust, is the brother of Harry E. Gruber.
In March 1996, the Company entered into Vesting Agreements with each of the
Initial Stockholders. Each Vesting Agreement initially granted the Company the
right to repurchase at the original issue price all of an Initial Stockholder's
unvested shares upon such person's death or disability or his or her
unwillingness to provide the services requested by the Company in such Vesting
Agreement. The Vesting Agreements provided for daily vesting of restricted
shares of Common Stock over a five-year period (with no shares vesting until
March 4, 1997). The Vesting Agreements also granted the Company rights of first
refusal to purchase vested shares before such shares may be sold to third
parties. In October 1997, the Company amended the Vesting Agreements for the
Initial Stockholders other than Dr. Gruber and Mr. Kenner to provide for the
termination of such Vesting Agreements (and the vesting of all shares covered
thereby) upon the completion of an initial public offering by the Company
resulting in gross proceeds of at least $7,500,000 (a "Qualifying IPO"). The
Vesting Agreements for Dr. Gruber and Mr. Kenner survived completion of the
Offering but were amended and restated as of October 1997 to provide for the
termination, upon completion of a Qualifying IPO, of the Company's rights of
first refusal to purchase vested shares and the Company's right to repurchase
unvested shares upon the death or disability of Dr. Gruber or Mr. Kenner, as
applicable. The Company's rights to repurchase unvested shares also would
terminate upon a change of control, with respect to Mr. Gruber, and upon a
change of control followed by termination without cause or reduction of annual
cash compensation, with respect to Mr. Kenner.
On August 30, 1995, the Company sold 172,500 shares of Series A Convertible
Preferred Stock at $1 per share to various accredited investors for total
consideration of $172,500. The Company sold 80,000 of such shares to the A.B.
Gruber Living Trust. Each share of Series A Convertible Preferred Stock was
converted into 2.5192 shares of Common Stock upon the closing of the Company's
IPO.
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On February 4, 1996, the Company sold an aggregate of 339,562 shares of
Series B Convertible Preferred Stock at $1.27 per share to various accredited
investors for a total consideration of $431,244. The Company sold 50,000 of such
shares to the A.B. Gruber Living Trust, 25,000 of such shares to L. Burton
Gruber, the father of Harry Gruber, 3,000 of such shares to Hope Gruber, the
sister of Harry Gruber, and 200,000 of such shares to Isaac Willis, who has
served as a director of the Company from November 1995 to the present. Each
share of Series B Convertible Preferred Stock was converted into 2.5192 shares
of Common Stock upon the closing of the IPO.
On March 5, 1996, the Company issued 302,296 shares of Common Stock to each
of Harry Gruber and Mr. Kenner and 282,166 shares to a predecessor of
Westchester Group LLC for aggregate proceeds of $1,760.
On March 7, 1996, the Company sold 296,147 shares of Series C Convertible
Preferred Stock at $2.75 per share to various accredited investors for a total
consideration of $814,404. The Company sold 3,500 of such shares to the A.B.
Gruber Living Trust, 3,000 of such shares to L. Burton Gruber and 136,364 of
such shares to Dr. Willis. Each share of Series C Convertible Preferred Stock
was converted into 2.5192 shares of Common Stock upon the closing of the IPO.
On April 17, 1996, the Company sold 96,429 shares of Series D Convertible
Preferred Stock at $7 per share to various accredited investors for a total
consideration of $675,003. The Company sold 7,143 of such shares to Dr. Willis.
Each share of Series D Convertible Preferred Stock was converted into 2.5192
shares of Common Stock upon the closing of the IPO.
On August 9, 1996, the Company sold 154,500 shares of Series E Convertible
Preferred Stock at $10 per share to various accredited investors for a total
consideration of $1,545,000. The Company sold 10,000 of such shares to Dr.
Willis. From November 1996 through February 1997, the Company sold 245,500
additional shares of Series E Convertible Preferred Stock at $10 per share to
various accredited investors for a total consideration of $2,455,000. The
Company sold 54,550 of such shares to Dr. Willis. Each share of Series E
Convertible Preferred Stock was converted into 1.2596 shares of Common Stock
upon the closing of the IPO.
On July 16, 1997, the Company sold 677,498 shares of Series F Convertible
Preferred Stock at $6 per share to various accredited investors for a total
consideration of $4,064,988. The Company sold 290,000 of such shares to Dr.
Willis. The Company received payments for certain of the shares of Series F
Preferred Stock issued on July 16, 1997 prior to such date and accounted for
such payments as advances from stockholders. Each share of Series F Convertible
Preferred Stock was converted into .6318 of one share of Common Stock upon the
closing of the IPO.
As consideration for the establishment of a strategic alliance in October
1997, the Company issued to NBC 1,280,000 shares of Series G Preferred, and NBC
Multimedia made the Company the exclusive provider of technology and services
for the distribution of NBC's entertainment audio/visual content by means of the
Internet. There are no agreements between management and NBC with respect to
voting their respective shares of Common Stock. The Company has granted NBC
rights to include shares of Common Stock issuable upon conversion of the Series
G Preferred in certain future registrations of the Company's Common Stock, as
well as the right to demand on one occasion only that the Company register such
shares of Common Stock after the Company becomes eligible to use Form S-3 under
the Act. NBC has agreed that neither it, nor its affiliates, will acquire or
seek to acquire any of the Company's securities for a period of one year from
October 10, 1997, the date of the Purchase Agreement.
NBC Multimedia purchased 210,526 shares of Common Stock in the Direct
Offering at the price per share to the public in the IPO. NBC Multimedia and NBC
together currently own approximately 10% of the outstanding shares of capital
stock of the Company. Upon consummation of the Direct Offering, the Company will
be obligated to pay NBC Multimedia $2,000,000 in installments over three
calendar quarters for the costs of producing and operating the Revenue Sharing
Area and the costs of advertising and promotions to be placed by the Company on
web sites controlled by NBC.
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ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules:
The following financial statements of InterVU Inc. are included in Item
8
PAGE
----
(1) (A) Report of Ernst & Young LLP, Independent Auditors.................. 23
(B) Financial Statements...............................................
(i) Balance Sheets as of December 31, 1998 and 1997............. 24
(ii) Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996......................................... 25
(iii) Statement of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996............................ 26
(iv) Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996......................................... 27
(v) Notes to Financial Statements............................... 28
(2) Financial Statement Schedules:
The following financial statement schedule of InterVU Inc. is
included in Item 14(d)
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) For a list of exhibits filed with this annual report, refer to the
exhibit index beginning on page 49.
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(c) Exhibits.
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10K.
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Form of Common Stock Certificate.(2)
4.2 Form of Advisors' Warrant Agreement including form of
Advisors' Warrants.(6)
10.1 1996 Stock Plan of INTERVU Inc.(3)
10.2 Form of Indemnification Agreement.(4)
10.3 Form of Restricted Stock Purchase Agreement.(4)
10.4 Amended and Restated Vesting Agreement between INTERVU and
Harry Gruber.(1)
10.5 Amended and Restated Vesting Agreement between INTERVU and
Brian Kenner.(1)
10.6 Strategic Alliance Agreement dated as of October 10, 1997
between INTERVU and NBC Multimedia, Inc.(3)
10.7 Preferred Stock Purchase Agreement dated as of October 10,
1997 among INTERVU, National Broadcasting Company, Inc. and
NBC Multimedia, Inc.(3)
10.8 Strategic Alliance Agreement dated January 15, 1998 between
INTERVU and MatchLogic Inc.(1)
10.9 Consulting Agreement dated January 28, 1998 between INTERVU
and J. William Grimes.(5)
10.10 Sublease Agreement dated as of April 20, 1998 between
INTERVU and Computervision Corporation.(5)
10.11 1998 Stock Option Plan of INTERVU Inc.(5)
10.12 Employee Qualified Stock Purchase Plan of INTERVU Inc.(5)
23.1* Consent of Ernst & Young LLP, Independent Auditors.
27.1* Financial Data Schedule.
- ---------------
* Filed herewith.
(1) Incorporated by reference to INTERVU's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
(2) Incorporated by reference to Exhibit 4.1 to INTERVU's Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on November
12, 1997.
(3) Incorporated by reference to Amendment No. 1 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
October 24, 1997.
(4) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
November 12, 1997.
(5) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
May 20, 1998.
(6) Incorporated by reference to Amendment No. 4 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 15, 1998.
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(d) FINANCIAL STATEMENT SCHEDULE.
SCHEDULE II
INTERVU INC.
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR EXPENSES DEDUCTIONS YEAR
------------------------------- ----------- ---------- ---------- ----------
Year ended December 31, 1997........................ $ -- $ 4,000 $ -- $ 4,000
Year ended December 31, 1998........................ 4,000 118,000 -- 122,000
NOTE: The Company had no activity in the allowance for doubtful accounts prior
to 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant duly causes this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
InterVU Inc.
Date: March 29, 1999 By: /s/ HARRY GRUBER
------------------------------------
Harry Gruber
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HARRY GRUBER Chairman of the Board and Chief March 29, 1999
- ------------------------------------------------ Executive Officer (Principal
Harry Gruber Executive Officer)
/s/ KENNETH RUGGIERO Vice President and Chief March 29, 1999
- ------------------------------------------------ Financial Officer (Principal
Kenneth Ruggiero Financial and Accounting
Officer)
/s/ J. WILLIAM GRIMES Vice Chairman of the Board March 29, 1999
- ------------------------------------------------
J. William Grimes
/s/ EDWARD DAVID Director March 29, 1999
- ------------------------------------------------
Edward David
Director March 29, 1999
- ------------------------------------------------
Mark Dowley
/s/ ALAN Z. SENTER Director March 29, 1999
- ------------------------------------------------
Alan Z. Senter
/s/ ISAAC WILLIS Director March 29, 1999
- ------------------------------------------------
Isaac Willis, M.D.
51