1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: April 20, 2000
(Date of earliest event reported)
AKAMAI TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 0-27275 04-3432319
(State or other jurisdiction of (Commission File No.) (IRS Employer Identification No.)
incorporation or organization)
500 Technology Square, Cambridge, Massachusetts 02139
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(617) 250-3000
--------------
(Registrant's telephone number, including area code)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 20, 2000, the Registrant acquired INTERVU Inc., a Delaware
corporation ("INTERVU"). The stock-for-stock acquisition was completed pursuant
to an Agreement and Plan of Merger, dated February 6, 2000 (the "Merger
Agreement"), providing for the merger of Alii Merger Corporation, a Delaware
corporation and a wholly owned subsidiary of the Registrant with and into
INTERVU (the "Merger"). Upon completion of the Merger, the Registrant issued an
aggregate of 9,906,186 shares of its common stock to the stockholders of INTERVU
and assumed INTERVU's warrants and options resulting in warrants and options to
acquire 2,100,350 shares of the Registrant's common stock. Pursuant to the terms
of the Merger Agreement, each share of INTERVU common stock was exchanged for
0.5957 shares of the Registrant's common stock. All shares of INTERVU Series G
Preferred Stock were converted into INTERVU common stock prior to the closing of
the Merger and shares of INTERVU's Series H Preferred Stock were converted into
the right to receive shares of the Registrant's common stock pursuant to the
terms and conditions of such Series H Preferred Stock. The Registrant used a
per share price of $88.9375 (the last sale price of the Registrant's common
stock on April 19, 2000) to compute the amount due for each fractional share of
the Registrant's common stock issuable upon conversion of the INTERVU common
stock. The terms of the Merger were determined on the basis of arm's length
negotiations. Prior to the execution of the Merger Agreement, none of the
Registrant or any of its affiliates, any directors or officers of the Registrant
or any associate of such director or officer had any material relationship with
INTERVU or its stockholders. INTERVU is a service provider for Internet audio
and video delivery solutions.
The foregoing description of the Merger Agreement does not purport to
be complete and is qualified in its entirety by reference to the full text of
the Merger Agreement which is filed as Exhibit 2.1 to this Current Report on
Form 8-K and incorporated herein by reference.
ITEM 5. OTHER EVENTS.
On April 20, 2000, the Registrant issued a press release (which is
attached hereto as Exhibit 99.1) announcing the completion of the acquisition of
INTERVU.
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial Statements of Business Acquired.
Report of Ernst & Young LLP, Independent Auditors
INTERVU Inc.
Consolidated Balance Sheets as of December 31, 1999 and 1998
INTERVU Inc.
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
INTERVU Inc.
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
INTERVU Inc.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
INTERVU Inc.
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
The pro forma financial information that is required to be
filed pursuant to this item will be filed by amendment not
later than 60 days following the date hereof.
(c) Exhibits.
Exhibit
Number Description
------ -----------
2.1* Agreement and Plan of Merger, dated February 6, 2000, by and among Akamai Technologies, Inc.,
Alii Merger Corporation and INTERVU Inc.
4.1** Specimen stock certificate representing common stock, $.01 par value per share, of the
Registrant.
4.2* Stock Option Agreement, dated as of February 6, 2000, between the Registrant and
INTERVU Inc.
4
4.3* Form of Stockholder Voting Agreement, dated as of February 6, 2000, by and among the
Registrant and each of the Stockholders of INTERVU Inc. named thereon.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Press release dated April 20, 2000 announcing the completion of the acquisition of
INTERVU.
* Incorporated by reference to the Registrant's Form
S-4 (File No. 333-31712), as amended, filed with the
Securities and Exchange Commission on March 3, 2000.
** Incorporated by reference to the Registrant's Form
S-1 (File No. 333-85679), as amended, filed with the
Securities and Exchange Commission on August 21,
1999.
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 5, 2000 AKAMAI TECHNOLOGIES, INC.
/s/ Robert O. Ball III
Robert O. Ball III
Vice President, General Counsel and
Secretary
6
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
2.1* Agreement and Plan of Merger, dated February 6, 2000, by and
among Akamai Technologies, Inc., Alii Merger Corporation and
INTERVU Inc.
4.1** Specimen stock certificate representing common stock, $.01 par
value per share, of the Registrant.
4.2* Stock Option Agreement, dated as of February 6, 2000, between
the Registrant and INTERVU Inc.
4.3* Form of Stockholder Voting Agreement, dated as of February 6,
2000, by and among the Registrant and each of the Stockholders
of INTERVU Inc. named thereon.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Press release dated April 20, 2000 announcing the completion
of the acquisition of INTERVU.
* Incorporated by reference to the Registrant's Form S-4 (File No.
333-31712), as amended, filed with the Securities and Exchange
Commission on March 3, 2000.
** Incorporated by reference to the Registrant's Form S-1 (File No.
333-85679), as amended, filed with the Securities and Exchange
Commission on August 21, 1999.
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INTERVU INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
8
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterVU Inc.
We have audited the accompanying consolidated balance sheets of InterVU
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InterVU Inc. at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 10, 2000
F-2
9
INTERVU INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 48,097 $ 13,086
Short-term investments.................................... 66,950 17,700
Accounts receivable, less allowance of $788,000 and
$122,000, at December 31, 1999 and 1998,
respectively........................................... 5,373 795
Prepaid and other current assets.......................... 925 81
-------- --------
Total current assets........................................ 121,345 31,662
Property and equipment, net................................. 13,858 2,654
Intangible assets, net...................................... 1,156 --
Other assets................................................ 6,360 45
-------- --------
Total assets...................................... $142,719 $ 34,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,916 $ 1,387
Accrued liabilities....................................... 774 198
Deferred revenue.......................................... 554 210
Payable to NBC Multimedia................................. -- 750
Accrued payroll and related benefits...................... 1,145 677
Current portion of long-term debt......................... 60 --
Current portion of capital lease obligations.............. 385 7
-------- --------
Total current liabilities......................... 5,834 3,229
Capital lease obligations, less current portion............. 515 --
Long term debt, less current portion........................ 55 --
Other long-term liabilities................................. 101 --
Commitments
Redeemable convertible preferred stock, $0.001 par value:
Series H 30,000 shares and 0 shares issued and outstanding
at December 31, 1999 and December 31, 1998,
respectively.............................................. 30,000 --
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Authorized -- 5,000,000 shares:
Series G convertible preferred stock,
Designated -- 1,280,000 shares; Issued and
outstanding -- 1,280,000 shares at December 31, 1999
and December 31, 1998, respectively.................... 1 1
Common stock, $0.001 par value: Authorized -- 45,000,000
shares; Issued and outstanding -- 15,525,821 shares and
11,865,097 shares at December 31, 1999 and 1998,
respectively.............................................. 15 12
Additional paid-in capital.................................. 203,823 57,057
CNN prepaid advertising..................................... (20,000) --
Deferred compensation....................................... (8,943) (746)
Accumulated other comprehensive (loss)...................... (99) --
Accumulated deficit......................................... (68,583) (25,192)
-------- --------
Total stockholders' equity........................ 106,214 31,132
-------- --------
Total liabilities and stockholders' equity........ $142,719 $ 34,361
======== ========
See accompanying notes.
F-3
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INTERVU INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
Revenues.............................................. $ 11,834 $ 1,761 $ 144
Cost of revenues...................................... 5,160 1,105 997
----------- ---------- ----------
Gross margin.......................................... 6,674 656 (853)
Operating expenses:
Research and development............................ 10,094 4,752 1,705
Sales and marketing................................. 15,638 6,021 1,920
General and administrative.......................... 11,107 4,143 231
Charges associated with the NBC Strategic Alliance
Agreement........................................ 17,194 4,622 750
----------- ---------- ----------
Total operating expenses.............................. 54,033 19,538 4,606
----------- ---------- ----------
Loss from operations.................................. (47,359) (18,882) (5,459)
Interest income....................................... 3,968 1,281 192
----------- ---------- ----------
Net loss.............................................. $ (43,391) $ (17,601) $ (5,267)
=========== ========== ==========
Basic and diluted net loss per share.................. $ (3.23) $ (1.83) $ (0.95)
=========== ========== ==========
Shares used in calculating basic and diluted net loss
per share........................................... 13,452,463 9,604,154 5,570,609
=========== ========== ==========
See accompanying notes.
F-4
11
INTERVU INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES DEFERRED
RECEIVABLE COMPENSATION
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM AND
------------------- ------------------- PAID-IN COMMON CNN PREPAID
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADVERTISING
---------- ------ ---------- ------ ---------- ------------ ------------
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
cost of $2,432.................... -- -- 2,210,526 2 18,566 -- --
Issuance of convertible preferred
stock............................. 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................... 1,280,000 1 -- -- (25) -- --
Repayments of note receivable from
common stockholders............... -- -- -- -- -- 4 --
Repurchase of restricted stock..... -- -- (108,685) -- (3) 2 --
Issuance of shares for exercise of
stock options..................... -- -- 31,490 -- 1 -- --
Issuance of stock upon formation of
Netpodium......................... -- -- 43,117 -- 30 -- --
Deferred compensation.............. -- -- -- -- 563 -- (563)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 256
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1997....... 1,280,000 1 9,420,521 9 29,851 -- (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 the subsequent
public offering net of issuance
costs of $1,973................... -- -- 1,495,000 2 17,834 -- --
Repurchase of restricted stock..... -- -- (28,334) -- (1) -- --
Issuance of shares for exercise of
stock options..................... -- -- 47,789 -- 80 -- --
Issuance of common stock........... -- -- 927,493 1 5,681 -- --
Compensation related to stock
options........................... -- -- 2,628 -- 22 -- --
Deferred compensation.............. -- -- -- -- 217 -- (217)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 181
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1998....... 1,280,000 1 11,865,097 12 57,057 -- (746)
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- -- -- 17,194 -- --
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 2,875,000 3 97,004 -- --
Issuance of stock to CNN for
prepaid advertising............... -- -- 349,612 -- 20,000 -- (20,000)
Repurchase of restricted stock..... -- -- (47,437) -- (2) -- --
Issuance of shares under ESPP
plan.............................. -- -- 13,396 -- 106 -- --
Issuance of shares for exercise of
warrants.......................... -- -- 165,837 -- -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 225,301 -- 1,162 -- --
Issuance of common stock........... -- -- 40,616 -- 111 -- --
Issuance of common stock related to
the acquisition of Videolinx...... 38,399 1,530
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- -- -- 9,661 -- (9,084)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 887
Comprehensive Income:
Net loss.......................... -- -- -- -- -- -- --
Unrealized loss on short-term
investments..................... -- -- -- -- -- -- --
Total comprehensive income
(loss)............................ -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1999....... 1,280,000 $ 1 15,525,821 $15 $203,823 $-- $(28,943)
========== === ========== === ======== === ========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
(LOSS) DEFICIT EQUITY
------------- ----------- -------------
Balance at December 31, 1996....... $ -- $ (2,324) $ 2,597
Issuance of common stock in initial
public offering net of issuance
cost of $2,432.................... -- -- 18,568
Issuance of convertible preferred
stock............................. -- -- 5,396
Conversion of preferred stock...... -- -- --
Issuance of Series G convertible
preferred stock................... -- -- (24)
Repayments of note receivable from
common stockholders............... -- -- 4
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 1
Issuance of stock upon formation of
Netpodium......................... -- -- 30
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 256
Net loss........................... -- (5,267) (5,267)
---- -------- --------
Balance at December 31, 1997....... -- (7,591) 21,560
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 the subsequent
public offering net of issuance
costs of $1,973................... -- -- 17,836
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 80
Issuance of common stock........... -- -- 5,682
Compensation related to stock
options........................... -- -- 22
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 181
Net loss........................... -- (17,601) (17,601)
---- -------- --------
Balance at December 31, 1998....... -- (25,192) 31,132
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- 17,194
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 97,007
Issuance of stock to CNN for
prepaid advertising............... -- -- --
Repurchase of restricted stock..... -- -- (2)
Issuance of shares under ESPP
plan.............................. -- -- 106
Issuance of shares for exercise of
warrants.......................... -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 1,162
Issuance of common stock........... -- -- 1,641
Issuance of common stock related to
the acquisition of Videolinx......
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- 577
Amortization of deferred
compensation...................... -- -- 887
Comprehensive Income:
Net loss.......................... -- (43,391) (43,391)
Unrealized loss on short-term
investments..................... (99) -- (99)
--------
Total comprehensive income
(loss)............................ -- -- 43,490
---- -------- --------
Balance at December 31, 1999....... $(99) $(68,583) $106,214
==== ======== ========
See accompanying notes.
F-5
12
INTERVU INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- -------
OPERATING ACTIVITIES:
Net loss.................................................... $ (43,391) $(17,601) $(5,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Recognition of lapse of NBC's obligation to return shares
of Series G convertible preferred stock issued under the
NBC Strategic Alliance Agreement........................ 17,194 3,373 --
Loss on disposal of property and equipment................ -- 11 --
Issuance of common stock for services..................... 577 22 --
Amortization of deferred compensation..................... 887 181 256
Depreciation and amortization............................. 3,372 615 178
Changes in operating assets and liabilities net of effects
from the purchase of Videolinx:
Accounts receivable..................................... (4,239) (707) (89)
Prepaid and other assets................................ (1,034) (49) (60)
Accounts payable........................................ 1,065 949 350
Accrued liabilities..................................... 438 205 --
Deferred revenue........................................ 344 210 --
Payable to NBC Multimedia............................... (750) 750 --
Accrued payroll and related benefits.................... 468 529 76
--------- -------- -------
Net cash used in operating activities....................... (25,069) (11,512) (4,556)
INVESTING ACTIVITIES:
Acquisition of Videolinx net of cash acquired............... 41 -- --
Purchase of short-term investments.......................... (208,338) (42,232) --
Proceeds from sale of short-term investments................ 158,989 24,532 --
Purchases of property and equipment......................... (12,707) (2,675) (484)
Investments in other entities............................... (6,100) -- --
--------- -------- -------
Net cash used in investing activities....................... (68,115) (20,375) (484)
FINANCING ACTIVITIES:
Payments on capital leases.................................. (304) (12) (8)
Proceeds from note payable.................................. 165 -- --
Repayment on note payable................................... (50) -- --
Proceeds from issuance of redeemable convertible preferred
stock and warrants........................................ 30,000 -- --
Issuance of common stock.................................... 98,386 23,578 18,599
Issuance of preferred stock................................. -- -- 3,336
Advances from stockholders.................................. -- -- 2,010
Repurchase of common stock.................................. (2) (1) (1)
Repayment of stockholder notes receivable................... -- -- 4
--------- -------- -------
Net cash provided by financing activities................... 128,195 23,565 23,940
--------- -------- -------
Net increase in cash and cash equivalents................... 35,011 (8,322) 18,900
Cash and cash equivalents at beginning of year.............. 13,086 21,408 2,508
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 48,097 $ 13,086 $21,408
========= ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered into for equipment........ $ 1,155 $ -- $ 27
--------- -------- -------
Conversion of advances from stockholders to convertible
preferred stock........................................... $ -- $ -- $ 2,306
--------- -------- -------
Expense related to issuance of common stock for services.... $ 577 $ 22 $ --
--------- -------- -------
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 shares of
Series G convertible preferred stock issued under the NBC
Strategic Alliance Agreement.............................. $ 17,194 $ 3,373 $ --
--------- -------- -------
See accompanying notes.
F-6
13
INTERVU INC.
NOTES TO CONSOLIDATED 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.
BASIS OF PRESENTATION
The consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. On August 25, 1999 the
Company acquired Netpodium in a business combination accounted for as a
pooling-of-interests. Netpodium Inc., a Seattle based innovator of live,
interactive web-based communication software and event hosting services, became
a wholly owned subsidiary of the Company through the exchange of approximately
one million shares of common stock for all outstanding stock, stock options and
warrants of Netpodium. The accompanying financial statements have been prepared
as if the companies had been combined for all periods presented, as more fully
discussed in Note 9.
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.
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 benefits 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.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and patents.
The Company has recorded goodwill of $1.2 million for the excess purchase
price over the estimated fair value of tangible and intangible assets acquired
and liabilities assumed resulting from its acquisition of Videolinx. The
goodwill is amortized on a straight line basis over seven years from July 15,
1999, date of acquisition.
F-7
14
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of patent applications and costs incurred in filing for patents
are capitalized. Capitalized costs related to patent applications are expensed
when it becomes determinable that such applications will not be pursued.
Capitalized costs related to issued patents are amortized over a period not to
exceed seventeen years or the remaining useful life of the patents, whichever is
shorter, using the straight-line method. As of December 31, 1999, the Company
had $82,000 of capitalized patent costs.
Accumulated amortization of intangible assets at December 31, 1999 and 1998
was $89,000 and $0, respectively.
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
(three years.) As of December 31, 1999 the Company has capitalized $1,470,000 of
development costs related to internal use software compared with $1,044,000 as
of December 31, 1998. Accumulated amortization of developed computer software at
December 31,1999 and 1998 was $385,000 and $95,000, respectively.
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 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.
The Company's wholly owned subsidiary Netpodium generates revenue from
licensing the rights to use its software products directly to end-users and also
generates revenue from broadcast hosting services and the sale of customer
support services. Netpodium recognizes revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition." Revenues from software
license agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. The software revenue represents less
than 10% of total revenues in each of the years presented.
CONCENTRATION OF CREDIT RISK
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
F-8
15
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $1.3
million and $1.0 million in advertising costs for the years ended December 31,
1999 and 1998, respectively.
STOCK OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, and EITF 96-18,
Accounting for Equity Instruments, That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, 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. Deferred
compensation for options granted to non-employees has been determined in
accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest. 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 account for its stock-based compensation (Note
5).
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. Common
equivalent shares result from Series G Preferred Stock, Series H Preferred
Stock, stock options, warrants and unvested restricted stock of which 5,311,265,
4,065,391 and 3,365,614 shares were excluded from the computation of diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997,
respectively, as their effect would be anti-dilutive.
RECENT 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
F-9
16
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of SFAS 133 by one year. The Company will be required
to adopt SFAS 133 for fiscal year 2001. This statement establishes a new model
for accounting for derivatives and hedging activities. Under SFAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company has not completed its determination of the impact of the
adoption of this new accounting standard on its financial position or results of
operations.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to current
year presentation.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------- ----------
At December 31, 1999:
US Treasury securities and obligations of US
government agencies....................... $ 61 $-- $-- $ 61
Municipal Bonds.............................. 38,300 -- -- 38,300
U.S. corporate debt securities............... 28,688 -- 99 28,589
------- -- --- -------
$67,049 $-- $99 $66,950
======= == === =======
At December 31, 1998:
Municipal Bonds........................... $17,700 $-- $-- $17,700
======= == === =======
Available-for-sale securities by contractual maturity are as follows (in
thousands):
DECEMBER 31,
1999
------------
Due in one year or less......................... $51,614
Due after one year through two years............ 15,275
-------
$66,950
=======
F-10
17
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
Equipment......................................... $ 904 $ 81
Computers......................................... 11,267 2,041
Furniture and fixtures............................ 205 125
Equipment under capital lease..................... 1,175 27
Leasehold improvements............................ 320 21
Internally developed software..................... 1,470 1,044
Purchased software................................ 2,839 152
------- ------
18,180 3,491
Less accumulated depreciation..................... (4,322) (837)
------- ------
$13,858 $2,654
======= ======
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At December 31, 1999 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 and 30,000 shares were designated as Series H 6.5%
Convertible Redeemable Preferred Stock due 2009. The Board of Directors is
authorized, without further stockholder approval, to issue the remaining
3,690,000 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 to
NBC. 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.
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic partnership. Microsoft purchased 30,000 shares of the
Company's Series H 6.5% Convertible Redeemable Preferred Stock due 2009 (the
"Series H Preferred Stock"), a new series of preferred stock. The shares of
Series H Preferred Stock are convertible at the option of the holder into an
aggregate of 333,333 shares of the Company's common stock, subject to customary
anti-dilution adjustments. The terms of the Series H Preferred Stock specify an
annual dividend rate of 6.5%, payable quarterly in Series H Preferred Stock,
common stock or cash at the Company's option. Holders of Series H Preferred
Stock have a liquidation preference of $1,000 per share plus all accumulated
dividends. On December 19, 2000 if the Series H Preferred Stock has not been
converted to common, the Company will be required to redeem all outstanding
shares of Series H Preferred Stock at a price equal to the liquidation
preference, plus accumulated and unpaid dividends to the date of redemption.
F-11
18
INTERVU INC.
NOTES TO CONSOLIDATED 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 472,448 and 1,107,247 at December 31, 1999 and 1998,
respectively. In 1999 and 1998, the Company repurchased a total of 47,437 shares
for $2,000 and 28,334 shares for $1,000, respectively, pursuant to the
agreements.
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 preferred stock, automatically converted into 3,328,717 shares of
common stock.
On June 18, 1999, the Company increased the number of authorized shares of
the Company's common stock from 20,000,000 to 45,000,000 shares.
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 5,081,676 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.
F-12
19
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option activity under the plans:
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
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................................... 1,537,000 11.19
Exercised................................. (50,000) 1.77
Canceled.................................. (363,000) 9.72
--------- ------
Balance at December 31, 1998................ 1,868,000 9.39
Granted................................... 2,406,000 35.24
Exercised................................. (225,000) 5.15
Canceled.................................. (484,000) 23.94
--------- ------
Balance at December 31, 1999................ 3,565,000 $25.12
========= ======
Options exercisable as of December 31, 1999 and 1998 were 491,000 and
209,000, respectively and approximately 1.2 million shares are available for
future grant under the Company's stock option plans as of December 31, 1999.
Additional information regarding stock options outstanding at December 31, 1999
is as follows:
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ---------------------------
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES PRICE LIFE (IN YEARS) SHARES PRICE
------------------------ --------- --------- --------------- ------- ----------------
$0.04 to $8.38.............. 736,000 $ 3.86 6.85 250,000 $ 3.23
$8.63 to $17.00............. 611,000 12.97 8.51 157,000 12.49
$17.50 to $30.63............ 621,000 21.96 8.86 84,000 18.60
$31.00 to $36.75............ 694,000 33.12 9.63 -- --
$37.13 to $44.50............ 596,000 40.89 9.52 -- --
$45.25 to $97.75............ 307,000 58.07 9.71 -- --
--------- ------ ---- ------- ------
$0.04 to $97.75............. 3,565,000 $25.12 8.72 491,000 $ 8.83
========= ====== ==== ======= ======
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 had accounted for its employee stock options under the fair value method
prescribed in that Statement. For options granted from January 1, 1996 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. For options granted in 1999, the fair value of the options was estimated
at the date of the grant using the
F-13
20
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
following assumptions: risk free interest rate of 6%, dividend yield of 0%,
expected volatility of 150% 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 subjective assumptions.
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,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Net loss
As reported........................................ $(43,391) $(17,601) $(5,267)
Pro forma.......................................... $(52,810) $(19,165) $(5,102)
Basic and diluted net loss per share
As reported........................................ $ (3.23) $ (1.83) $ (0.95)
Pro forma.......................................... $ (3.93) $ (2.00) $ (0.92)
Weighted-average fair value of options granted..... $ 35.24 $ 10.33 $ 1.11
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
The Employee Qualified Stock Purchase Plan ("Qualified Stock Purchase
Plan") was adopted by the Board of Directors on February 25, 1998, and by the
Company's 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. As of December 31, 1999, 13,396 shares had been
issued under the plan.
DEFERRED COMPENSATION
Through December 31, 1999, 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, 1999, the Company recorded gross deferred
compensation totaling $10.3 million and related amortization expense totaling
$887,000, $181,000, and $256,000 for the fiscal years 1999, 1998 and 1997,
respectively.
F-14
21
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In connection with the Company's initial public offering in November 1997,
the Company issued warrants to purchase 200,000 shares of 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 warrants to purchase 130,000 shares of common stock to
its underwriters.
These warrants are exercisable at $15.90 per share commencing June 1999 and
expire in June 2003. In December 1999, the Company issued a warrant to purchase
60,000 shares of common stock to Microsoft in conjunction with its purchase of
Series H Preferred Stock. This warrant is exercisable at $90.00 per share
commencing December 1999 and expires in December 2004. At December 31, 1999
warrants to purchase 134,000 shares remain unexercised with a weighted average
exercise price of $48.66 per share.
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at December 31:
1999 1998
--------- ---------
Conversion of redeemable preferred stock...... 333,000 --
Conversion of preferred stock................. 806,000 806,000
Stock options issued and outstanding.......... 3,565,000 1,868,000
Warrants issued and outstanding............... 134,000 330,000
Authorized for future option grants and share
purchases................................... 1,697,000 1,280,000
--------- ---------
6,535,000 4,284,000
========= =========
5. COMMITMENTS
The Company leases certain of its operating facilities and equipment under
operating and capital leases with terms ranging up to five years. 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,
1999:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2000.............................................. $1,248 $ 442
2001.............................................. 1,237 435
2002.............................................. 1,267 108
2003.............................................. 720 --
2004.............................................. 316 --
------ -----
Total minimum lease payments...................... $4,788 985
======
Less amounts representing interest................ (85)
-----
Present value of future minimum lease payments.... 900
Less current portion.............................. (385)
-----
Capital lease obligation, net of current
portion......................................... $ 515
=====
Rental expense under operating leases for the years ended December 31,
1999, 1998, and 1997 was $1,167,000, $327,000, and $129,000, respectively.
F-15
22
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1999, the Company financed $1.1 million of equipment under a
three-year non-cancelable lease with an annual interest rate of 7.75%.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance of $26,584,000 has been
recorded at December 31, 1999 to offset the net deferred tax assets because
realization is uncertain.
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.............. $ 24,682 $ 8,999
Research tax credit carryforwards............. 932 517
Other......................................... 970 429
-------- -------
Total deferred tax assets............. 26,584 9,945
Valuation allowance............................. (26,584) (9,945)
-------- -------
Net deferred tax assets......................... $ -- $ --
======== =======
The Company had federal and California tax net operating loss carryforwards
at December 31, 1999 of approximately $65.0 million and $33.6 million,
respectively. The difference between the federal and California tax loss
carryforwards is attributable to the 50% limitation on California loss
carryforwards for 1999. 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 $686,000 and $379,000, 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.
7. 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 $1.1
million, $418,000 and $182,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
8. STRATEGIC ALLIANCES
NATIONAL BROADCASTING CORPORATION
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
F-16
23
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999, (iii) $500,000 due in May 1998, and
(iv) $250,000 due in August 1998. Through December 31, 1999, the Company has
paid a total of $2.0 million in payments to NBC Multimedia.
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 was required to return 600,000 shares of Series G convertible
preferred stock if the termination occurred at any other time during the first
two years of the exclusive term. The Company determined 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 lapsed. Based on these provisions, the Company has charged $3.4 million as
the fair value of 680,000 shares of Series G convertible preferred stock to
expense in 1998 and $17.2 million as the fair value of the remaining 600,000
shares of Series G convertible preferred stock to expense in 1999.
CNN NEWS GROUP
On November 11, 1999, the Company entered a strategic multi-tiered alliance
with the CNN News Group. As part of the agreement, the Company issued 349,612
shares of common stock to CNN. In return, CNN will provide the Company with
three years of on-air and online advertising and promotional opportunities
across CNN's properties, and the Company will sub-license CNN's domestic
television networks to its corporate clients for internal distribution on their
LANs. Through December 31, 1999, the Company has not received any services from
CNN under this agreement. The Company will, for a fee, be CNN's provider of
Internet video management and delivery services for three years beginning
November 1999 and will also deliver audio streaming services immediately.
Following the first anniversary of the agreement, if the market value of the
Company's common stock prior to the end of any fiscal quarter falls below $20.00
per share, the Company has agreed to issue a letter of credit in the amount of
$10.0 million to CNN prorated by the number of the Company's shares CNN
continues to hold and by the number of days into the agreement. In addition, the
Company may become obligated to pay CNN up to $10 million in cash or common
stock, at the Company's option, if CNN holds the shares for three years and the
price per share of common stock does not increase 1.5 times the initial price at
the effective date of the agreement. Either party may terminate the contract at
any time for material breach by the other party that remains uncured or the
other party's bankruptcy or similar adverse condition. In the event the
agreement is terminated by CNN, CNN is required to pay the Company as of the
date of the termination notice, the value of the undelivered services purchased
under this agreement in stock (the Company's stock to be valued at approximately
$57 per share). In the event the agreement is terminated by the Company because
CNN engages another party to provide internet video management and delivery
services, CNN is required to pay the Company as of the date of termination in
the Company's stock (the Company's stock to be valued at the issuance price of
approximately $57 per share) (i) the value of the undelivered services purchased
under the agreement and (ii) a breakup fee of $3,000,000 initially that declines
to zero over the term of the agreement.
F-17
24
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MICROSOFT CORPORATION
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic alliance to expand the Company's broadband streaming
media network based on Microsoft's Windows Media platform. Microsoft purchased
30,000 shares of the Company's Series H 6.5% Convertible Redeemable Preferred
Stock due 2009 (the "Series H Preferred Stock"), a new series of preferred
stock. The shares of Series H Preferred Stock are convertible at the option of
the holder into an aggregate of 333,333 shares of the Company's common stock,
subject to customary anti-dilution adjustments. The terms of the Series H
Preferred Stock specify an annual dividend rate of 6.5%, payable quarterly in
Series H Preferred Stock, common stock or cash at the Company's option.
Microsoft also received a warrant to purchase 60,000 shares of the Company's
common stock at an exercise price of $90.00 per share, the conversion price of
the Series H Preferred Stock. Holders of Series H Preferred Stock have a
liquidation preference of $1,000 per share plus all accumulated dividends. On
December 19, 2009, if the Series H Preferred Stock has not been converted to
common, the Company will be required to redeem all outstanding shares of Series
H Preferred Stock at a price equal to the liquidation preference, plus
accumulated and unpaid dividends to the date of redemption.
9. ACQUISITIONS
On July 14, 1999, the Company acquired Videolinx Communications, Inc.
("Videolinx"), a Virginia-based visual communications services company, through
a merger of the Company's subsidiary with and into Videolinx. The acquisition
was accounted for as a purchase in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 16. Under the purchase method of
accounting, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Under the terms of the acquisition agreement, the Company issued
38,399 shares of the Company's common stock to Videolinx's former stockholders
and repaid approximately $145,000 of Videolinx's indebtedness upon the closing.
The Company has integrated the product line and services acquired from
Videolinx. The Company's consolidated financial statements include the results
of Videolinx from July 15, 1999.
Assuming that the acquisition of Videolinx had occurred on the first day of
the Company's fiscal year ended December 31, 1998, pro forma condensed
consolidated financial information would be as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
(UNAUDITED)
Revenues..................................... $ 13,158 $ 4,131
Net loss..................................... (43,486) (17,416)
Net loss per share........................... $ (3.23) $ (1.81)
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had Videolinx been acquired the first day
of the Company's fiscal year ended December 31, 1998, nor is it necessarily
indicative of future results.
On August 25, 1999, the Company acquired Netpodium Inc. ("Netpodium"), a
Seattle-based innovator of live, interactive, Web-based communication software
and event hosting services. The acquisition will expand the Company's audio and
video Internet broadcasting offerings in the business services market. Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company issued 996,882 shares of its common stock to Netpodium's shareholders
and assumed all outstanding Netpodium options, which now represent the right to
purchase 192,275 shares of the Company's common stock at a weighted average
price of $1.66 per share. In December 1998, Netpodium
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25
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issued two warrants to Intel. INTERVU assumed the warrants in connection with
the acquisition of Netpodium on August 1999. Each warrant represents the right
to purchase 7,177 shares of the Company's common stock at the purchase price of
$8.71 per share. One of the warrants, however, did not become exercisable
because Intel did not satisfy a condition that it purchase an aggregate $75,000
of a product or products from Netpodium on or before September 30, 1999. The
remaining warrant expires in December 2003.
Revenues and net loss for the periods preceding the merger with Netpodium
are as follows:
INTERVU NETPODIUM COMBINED
------- --------- --------
(IN THOUSANDS)
Year ended December 31, 1997
Revenues.......................................... $ 144 $ -- $ 144
Net loss.......................................... $5,265 $ 2 $ 5,267
Year ended December 31, 1998
Revenues.......................................... $1,712 $ 49 $ 1,761
Net loss.......................................... $15,710 $ 1,891 $17,601
Six months ended June 30, 1999
Revenues (unaudited).............................. $2,966 $ 404 $ 3,370
Net loss (unaudited).............................. $(7,076) $(2,015) $(9,091)
10. SUBSEQUENT EVENTS
On February 7, 2000, Akamai Technologies, Inc. ("Akamai") signed a
definitive agreement to acquire the Company in a stock-for-stock transaction.
Each share of the Company's common stock will be exchanged for 0.5957 shares of
Akamai's common stock.
Under terms of the agreement, Akamai will acquire the Company by issuing
approximately 9.3 million shares of Akamai common stock in exchange for all
outstanding shares of the Company's stock. Additionally, Akamai will convert the
Company's outstanding stock options and warrants into options and warrants to
purchase approximately 2.8 million shares of Akamai's common stock. It is
planned that the merger will be effected on a tax-free basis to the Company's
stockholders and will be accounted for as a purchase. The acquisition is subject
to certain closing conditions, including regulatory approvals and the approval
of the Company's stockholders, and is expected to close during the second
quarter of 2000.
In connection with the execution of the merger agreement, the Company and
Akamai entered into a Stock Option Agreement, dated as of February 6, 2000,
pursuant to which the Company granted Akamai an option to purchase up to 19.9%
of the outstanding shares of the Company's common stock, which option is
exercisable upon the occurrence of certain events specified in the Stock Option
Agreement. In addition, stockholders of the Company who beneficially own in the
aggregate approximately 26.5% of INTERVU's common stock entered into Stockholder
Voting Agreements with Akamai dated as of February 6, 2000, pursuant to which
these stockholders have agreed to vote their shares in favor of the merger and
against a competing proposal.
11. 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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