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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 (Date of earliest event reported) December 1, 1997
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INTERVU INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 0-23361 33-0680870
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization File No.) Identification No.)
201 Lomas Santa Fe Drive
Solana Beach, California 92075
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 350-1600
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(Former name or former address,
if changed since last report.)
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Item 5. Other Events
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
An investment in shares of the Common Stock, par value $.001 per share (the
"Common Stock"), of InterVu Inc. (the "Company") is speculative in nature and
involves a high degree of risk. The following factors should be considered
carefully in evaluating the Company and its business before purchasing shares of
Common Stock. The Company's actual results could differ materially from those
discussed in certain forward-looking statements made by the Company from time to
time as a result of certain factors, including, but not limited to, those
discussed below.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES
The Company was incorporated in August 1995 and launched the InterVU
Network in December 1996. The Company has a limited operating history on which
to base an evaluation of its business and prospects and currently is considered
a development stage company. Accordingly, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as the delivery of video over
the Internet. Such risks for the Company include, but are not limited to, an
evolving and unproven business model and the management of growth. To address
these risks, the Company must, among other things, maintain and significantly
increase its customer base, implement and successfully execute its business and
marketing strategy, continue to develop and upgrade its technology, provide
superior customer service, respond to competitive developments, and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing these risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Since inception, the Company has incurred significant losses and, as of
September 30, 1997, the Company had an accumulated deficit of approximately $5.7
million. To date, the Company has not generated any significant revenues and, as
a result of the significant expenditures that the Company plans to make in sales
and marketing, research and development and general and administrative
activities over the near term, the Company expects to continue to incur
significant operating losses and negative cash flows from operations on both a
quarterly and annual basis through at least the end of fiscal 1998 and for the
foreseeable future thereafter. For these and other reasons, there can be no
assurance that the Company will ever achieve or be able to sustain
profitability. The Company had federal and California tax net operating loss
carry forwards at December 31, 1996 of approximately $2.3 million. The federal
and California tax loss carry forwards will begin to expire in 2010 and 2003,
respectively, unless previously utilized. The Company also has federal and
California research tax credit carry forwards of approximately $47,000 and
$38,000, respectively, which will begin to expire in 2010 unless previously
utilized. The utilization of these losses is contingent upon the Company's
ability to generate taxable income in the future. Because of that uncertainty,
management has recorded a full valuation allowance with respect to these
deferred tax assets.
As consideration for the strategic alliance between the Company and NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly owned subsidiary of National
Broadcasting Company, Inc. ("NBC"), the Company issued 1,280,000 shares of
Series G Convertible Preferred Stock ("Series G Preferred") to NBC, and NBC
Multimedia granted the Company exclusive rights to deliver most NBC audio/video
content from NBC Web sites. NBC Multimedia may terminate the Strategic Alliance
Agreement between the Company and NBC Multimedia without cause by giving 90 days
prior written notice and is required to return (i) all shares of Series G
Preferred (or the shares of Common Stock into which such shares may in the
future be converted) if termination occurs prior to January 10, 1998 and NBC
Multimedia has not, at a minimum, displayed a button or link containing a copy
of the Company's logo on the NBC Web site or (ii) 600,000 shares of Series G
Preferred (or Common Stock, as the case may be) if the termination occurs at any
other time during the first two years of the exclusive term of the Strategic
Alliance Agreement. Notwithstanding the foregoing, NBC Multimedia is not
required to return any such shares until it has received from the Company the
$2.0 million of non-refundable payments described below under "Risks Associated
with Strategic Alliance with NBC Multimedia." The Company will determine the
fair value of the Series G Preferred issued to NBC on the dates the requirements
that NBC
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return some or all of the shares of Series G Preferred upon termination of the
Strategic Alliance Agreement lapse. Based on these provisions, the Company
currently expects to charge the then fair value of 680,000 shares of Series G
Preferred to expense in the quarter ending March 31, 1998 and the then fair
value of the remaining 600,000 shares of Series G Preferred to expense in the
quarter ending December 31, 1999. Should the Company renegotiate or waive these
provisions, removing NBC's obligation to return shares of Series G Preferred (or
Common Stock, as the case may be), the Company would expense the fair value of
the shares at that time. The Company believes that the fair value of each share
of Series G Preferred will roughly approximate the price per share at which the
Common Stock is then trading, multiplied by the .6298 conversion ratio
applicable to the Series G Preferred. These noncash charges are likely to be
substantial and are likely to have a material adverse impact on the Company's
results of operations in the periods such expenses are recognized.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNPREDICTABILITY OF
FUTURE REVENUES
The Company's quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include the future adoption rate of video content by Web site owners;
the Company's ability to retain existing customers (including, in particular,
NBC), attract new customers at a steady rate and maintain customer satisfaction;
the level of use of the Internet and the growth of the market for video
advertising on the Internet; the amount and timing of costs and expenditures
relating to the expansion of the Company's business; the introduction or
announcement of new Internet services by the Company and its competitors; price
competition or pricing changes in the Internet, cable and telecommunications
industries; technical difficulties or network downtime; general economic
conditions; and economic conditions specific to the Internet, Internet media,
corporate intranet and cable industries. As a result of the Company's limited
operating history and the emerging nature of the markets in which it competes,
the Company is unable to accurately forecast its revenues. In addition, the
Company plans to increase operating expenses to fund additional sales and
marketing, research and development and general and administrative activities.
To the extent that these expenses are not accompanied by an increase in
revenues, the Company would have to decrease or cease such expenditures or the
Company's operating results and financial condition could be materially
adversely affected. Due to all of the foregoing factors, it is possible that the
Company's operating results in one or more future quarters will fail to meet or
exceed the expectations of securities analysts or investors.
UNPROVEN ACCEPTANCE OF THE COMPANY'S FEE STRUCTURE
The Company's business plan calls for it to generate revenues primarily
from fees charged to customers for the volume of video content delivered. To
date, however, the Company has generated most of its revenues from flat rate
monthly fees charged to customers based upon video delivery and encoding
services. In addition, certain of the Company's Web site customers have traded
advertising space on their Web pages for video delivery services provided by the
Company. Although monthly fees charged by the Company typically are based on
estimates of the amounts such customers would pay under the pay-per-delivery
approach, flat rate billing exposes the Company to the risk that end-users will
download customers' video content at higher-than-anticipated rates, causing the
Company to incur bandwidth expenses in excess of revenues. Likewise, trading
video delivery services for advertising space exposes the Company to the risk
that it will not generate sufficient proceeds from sales of advertising to cover
its costs of supplying video delivery services. The Company does not currently
have the expertise or staffing necessary to liquidate significant amounts of
Internet advertising inventory through the direct sale of advertising to clients
or the sale of advertising space to a reseller of such space, and there can be
no assurance that the Company will develop such expertise and staffing or that
the Company will establish a strategic relationship with a company having such
capacities. There can be no assurance that the Company's pay-per-delivery fee
structure will become widely accepted by Web site owners and advertisers, and
the failure of the Company to successfully implement its pay-per-delivery fee
structure or a profitable monthly fee equivalent would have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
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UNCERTAIN MARKET FOR THE COMPANY'S SPECIALIZED SERVICES
Use of the Internet by consumers is at a very early stage of development,
and market acceptance of the Internet as a medium for information,
entertainment, commerce and advertising is subject to a high level of
uncertainty. The Company's success will depend in large part on the development
and acceptance of the Internet as an advertising medium and, specifically, the
use of advertising and Web sites which incorporate video. There can be no
assurance that a market for Internet video delivery services will develop or
that any such market, if developed, will offer significant revenue opportunities
for specialized video delivery service providers such as the Company. The
Company's customers have only limited experience, if any, with the Internet as a
marketing and advertising medium, and neither its customers nor their
advertising agencies have devoted a significant portion of their advertising
budgets to Internet-based marketing and advertising activities in the past. In
order for the Company to generate revenues from Web site owners and advertising
customers, Web site owners, advertisers and advertising agencies must direct a
portion of their budgets to Internet-based marketing and advertising activities
which incorporate video. There can be no assurance that Web site owners,
advertisers or advertising agencies will be persuaded to allocate or continue to
allocate portions of their budgets to Internet-based marketing and advertising
activities or, if so persuaded, that they will incorporate video in such
marketing and advertising activities. The Company's services are highly
specialized and designed solely to meet Web site owners' and advertisers'
Internet video delivery needs. Accordingly, if Internet-based marketing and
advertising activities incorporating video are not widely accepted by
advertisers and advertising agencies, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.
The Company's ability to achieve and maintain a leadership position in the
Internet video delivery market will depend, among other things, on the Company's
success in providing high-speed, high-quality video over the Internet, the
Company's marketing efforts and the reliability of the Company's networks and
services, none of which can be assured. If Web site owners and advertisers do
not perceive the Company's services to be of high quality, or if the Company
introduces new services or enters into new business ventures that are not
favorably received, the Company's business, prospects, financial condition and
results of operations would be materially adversely affected. Moreover, even if
a significant market for video delivery services develops, there can be no
assurance that Web site owners and advertisers will retain the Company to
provide video delivery services. Because of the specialized nature of the
Company's services, the absence of a market for video delivery services, or the
Company's failure to obtain a significant share of such market if it develops,
would have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
In order to attract early customers and achieve penetration of the market
for Internet video delivery, the Company initially provided up to 90 days of
free trial service to certain customers. Of the 20 customers who received such
discounts, 19 customers have emerged from the free trial period, one customer
remains in the trial period, and four customers discontinued the Company's video
delivery service. There can be no assurance that the Company's customers will
continue to utilize the Company's services or that the Company will be able to
attract and retain new customers. The failure of the Company to retain customers
after the free trial period or the inability of the Company to attract and
retain new customers could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
COMPETITION
The market for Internet services is highly competitive, and the Company
expects competition to increase significantly. In addition, the Company expects
the market for the delivery of video over the Internet, to the extent it
develops, to be intensely competitive. The Company faces substantial competition
from companies that provide the hardware, digital video encoding software and
know-how necessary to allow Web site owners and advertisers to utilize video in
their Internet marketing and advertising activities. Several companies offer
services that compete with those offered by the Company, including, among
others, RealNetworks, Inc. (formerly Progressive Networks, Inc.) (RealVideo),
VDOnet Corp. (VDOLive), VXtreme, Inc. (Web Theater), AudioNet Inc. (AudioNet)
and At Home Corporation (@Home Experience). In August 1997, RealNetworks and MCI
Communications Corporation ("MCI") announced a strategic alliance involving the
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introduction of a service, called "RealNetwork," that will deliver audio and
video broadcasts over the Internet. The RealNetwork will reportedly permit
end-users to simultaneously receive video broadcasts by distributing copies of
digital video programs to multiple points on MCI's Internet backbone. The
strategic alliance between RealNetworks and MCI appears to be a service-based
marketing strategy similar to that being implemented by the Company. In
addition, Microsoft Corporation ("Microsoft") has made significant investments
in Internet video delivery technologies and has disclosed a multimedia strategy
of broadening the market for video compression solutions. In August 1997,
Microsoft announced (i) the release of its NetShow 2.0 multimedia server which
incorporates technology for video and audio delivery over the Internet and
corporate intranets, (ii) an agreement with leading video compression software
companies, including RealNetworks and VDOnet Corp., to cooperate in defining
future standards based on the Microsoft Active Streaming Format and (iii) the
acquisition of VXtreme, Inc. Microsoft also holds significant equity positions
in RealNetworks and VDOnet Corp. In addition, as was the case with VXtreme,
Inc., RealNetworks and VDOnet Corp., providers of Internet delivery video
services may be acquired by, receive investments from or enter into other
commercial relationships with, larger, well-established and well-financed
companies, such as Microsoft and MCI. Greater competition resulting from such
relationships could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. Because the operations
and strategic plans of existing and future competitors are undergoing rapid
change, it is extremely difficult for the Company to anticipate which companies
are likely to offer competitive services in the future.
The bases of competition in markets for video delivery include transmission
speed, reliability of service, ease of access, price/performance, ease-of-use,
content quality, quality of presentation, timeliness of content, customer
support, brand recognition and operating experience. The Company believes that
it compares favorably with its competitors with respect to each of these
factors, except brand recognition and operating experience, both of which have
been limited as a result of the Company's early stage of development. However,
many of the Company's competitors and potential competitors have substantially
greater financial, technical, managerial and marketing resources, longer
operating histories, greater name recognition and/or more established
relationships with advertisers and content and application providers than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services or online content than the Company.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect the Company's business, prospects,
financial condition and results of operations. Further, as a strategic response
to changes in the competitive environment, the Company may make certain pricing,
service or marketing decisions or enter into acquisitions or new ventures that
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCE WITH NBC MULTIMEDIA
As part of the Company's strategy to provide video delivery services to the
top tier of Internet multimedia content sites, in October 1997 the Company
entered into the Strategic Alliance Agreement with NBC Multimedia. The terms of
the Strategic Alliance Agreement subject the Company to a number of risks and
uncertainties, including the following:
Issuance of Stock. As consideration for the strategic alliance, the Company
issued 1,280,000 shares of Series G Preferred to NBC pursuant to the terms of a
Preferred Stock Purchase Agreement among the Company, NBC and NBC Multimedia
(the "Series G Purchase Agreement"). Such shares represented approximately 10%
of the Company's outstanding capital stock prior to the Company's initial public
offering (the "Offering"). No cash consideration was received by the Company for
the Series G Preferred. In addition, the Series G Purchase Agreement granted NBC
Multimedia the right to purchase $2.0 million of Common Stock at the initial
public offering price in a direct offering (the "Direct Offering"), and NBC
Multimedia exercised this right.
InterVU Payment Obligations. InterVU is fully obligated to pay to NBC
Multimedia a total of $2.0 million in a series of non-refundable payments (the
"Prepayments"), the first of which will be in the amount
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of $750,000 and is payable immediately upon the completion of the Direct
Offering. The Prepayments are designed to cover certain production, operational
and promotional costs. If the Strategic Alliance Agreement is terminated for any
reason, all unpaid Prepayments become immediately due and payable to NBC. There
can be no assurance that NBC Multimedia will not terminate the Strategic
Alliance Agreement, with or without cause. The termination of the Strategic
Alliance Agreement would have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. See "NBC
Multimedia's Termination Rights" below.
Broad Discretionary Powers of NBC Multimedia. The Strategic Alliance
Agreement provides NBC Multimedia with broad discretion in a number of areas,
including (i) the determination of what materials and content will be made
available for downloading through the InterVU Network, (ii) the promotional
obligations of NBC Multimedia and (iii) the obligation of NBC Multimedia to
introduce the Company to television stations associated with the NBC television
network. The failure of NBC Multimedia to make a significant amount of
compelling material available for downloading through the InterVU Network and to
promote the Company and its Internet video delivery services could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Limited Nature of Exclusive Rights. The Strategic Alliance Agreement
provides that, subject to certain exceptions, during the Exclusive Term (as
defined below), NBC Multimedia will not make available for transmission over the
Internet any entertainment (i.e., excluding sports, news and other
non-entertainment programming) audio/video content in any format to users via a
Web site operated or controlled by NBC ("NBC Internet Sites") other than
pursuant to the Strategic Alliance Agreement. The Strategic Alliance Agreement
expressly excludes from this provision audio/video content of less than five
seconds in length. In addition, NBC Multimedia is not restricted from making
such audio/video content available on any Internet site that is not an NBC
Internet Site. There can be no assurance that NBC Multimedia will not make its
audio/video content available on other Internet sites. A determination by NBC
Multimedia to make its audio/video content available on other Internet sites
could have a material adverse effect on the amount of revenues generated
pursuant to the Strategic Alliance Agreement and could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
The Exclusive Term is defined as the period commencing on October 10, 1997
and ending on October 10, 1999; provided that if certain mutually agreed cost
and revenue goals are established and met, then the Exclusive Term shall be
automatically extended until October 10, 2001. Although the Strategic Alliance
Agreement provides that the parties shall meet and consult with one another in
good faith and shall make good faith efforts to determine such cost and revenue
goals on or before October 10, 1998, there can be no assurance that the Company
and NBC Multimedia will be able to establish such mutually agreeable cost and
revenue goals. The failure of the Company and NBC Multimedia to reach an
agreement on this issue could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
NBC Multimedia's Termination Rights. During the Exclusive Term, NBC
Multimedia may terminate the Strategic Alliance Agreement without cause by
giving 90 days prior written notice to the Company. NBC Multimedia also has the
right to terminate the Strategic Alliance Agreement if, among other things, the
services provided by the Company pursuant to such agreement materially decline
below industry standards or fail to conform to the specifications set forth in
the Strategic Alliance Agreement and the Company is unable to cure such failure
within ten days of its receipt of notice. The Strategic Alliance Agreement
requires the Company to maintain a successful user connection rate of at least
98%. The failure to maintain such a connection rate could be deemed to be a
material breach by the Company of the Strategic Alliance Agreement, giving NBC
Multimedia the right to terminate the Strategic Alliance Agreement for cause.
Although the Company expects to maintain the required connection rate, there can
be no assurance that the Company can do so. The Company has represented to NBC
Multimedia in the Strategic Alliance Agreement that it will not use the InterVU
Network in connection with the encoding or distribution of adult video content.
Any such activity would constitute a breach of that representation and warranty
and could result in a determination by NBC Multimedia to terminate the Strategic
Alliance Agreement for cause. The termination of the Strategic Alliance
Agreement, or the announcement of an intent to terminate, would have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. Among
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other things, any such termination or announcement of an intent to terminate
could cause other customers of the Company, especially NBC television affiliates
then using the Company's video delivery services, if any, to terminate their
relationship with the Company and would also have a negative impact on the
Company's reputation in the market for Internet video delivery services, which
would have a material adverse effect on the Company's ability to market its
services to Web site owners and advertisers.
If NBC Multimedia terminates the Strategic Alliance Agreement without cause
during the first two years of the Exclusive Term, then NBC or NBC Multimedia
would be required to return to the Company (i) all shares of Series G Preferred
(or the shares of Common Stock into which such shares may in the future be
converted) if termination occurs prior to January 10, 1998 and NBC Multimedia
has not, at a minimum, displayed a button or link containing a copy of the
Company's logo on the NBC Web site or (ii) 600,000 shares of the Company's
Series G Preferred (or Common Stock, as the case may be) if the termination
occurs at any other time during the first two years of the Exclusive Term;
provided that NBC or NBC Multimedia would not be required to return any shares
until the Company had made the $2.0 million of Prepayments. NBC Multimedia is
not obligated to return any shares to the Company if the Strategic Alliance
Agreement is terminated by NBC Multimedia for cause.
Limited Nature of Revenue Sharing Rights. The Strategic Alliance Agreement
provides for the establishment of a new "area" (the "Revenue Sharing Area") to
be created and placed by NBC Multimedia on its Web site to allow, among other
things, the distribution of NBC audio/video clips and the promotion of the
business relationship between the Company and NBC Multimedia. The Company is
entitled to receive 30% of the actual NBC cash receipts, if any, from
advertising, transactions and subscriptions directly attributable to any Revenue
Sharing Area less certain costs and expenses associated with the Revenue Sharing
Area. Since no Revenue Sharing Areas have yet been established, no revenues have
been generated. There can be no assurance that any revenues will be generated by
the Revenue Sharing Area. In addition, the Strategic Alliance Agreement permits
NBC Multimedia to opt out of its 30% revenue sharing obligation by paying for
the Company's video delivery services at rates at least as favorable as the most
favorable rates offered by the Company to third parties, other than special
promotional rates. NBC Multimedia would have an incentive to exercise its right
to opt out of the revenue sharing obligation if the costs to NBC Multimedia of
sharing revenue exceed the amount that NBC Multimedia would be required to pay
the Company based on its most favorable video delivery rates.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance and development will depend, in large
part, upon the efforts and abilities of certain members of senior management,
including Harry E. Gruber, its Chief Executive Officer and Chairman of the
Board, and Brian Kenner, its Vice President and Chief Technology Officer. Dr.
Gruber is also serving as the Company's Chief Financial Officer until the
Company determines to retain an individual for that position. The loss of
service of one or more members of senior management could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. The Company does not have employment agreements with any
of its officers or employees. The Company, however, has obtained a key man life
insurance policy on the life of Mr. Kenner in the amount of $1.0 million, of
which the Company is the sole beneficiary. The Company does not have key man
life insurance on Dr. Gruber. In addition, the Company believes that its future
success will depend upon its continuing ability to identify, attract, motivate,
train and retain other highly skilled managerial, financial, engineering, sales
and marketing and other personnel. Competition for such personnel is intense.
There can be no assurance that the Company will be successful in identifying,
attracting, motivating, training and retaining the necessary personnel, and the
failure to do so could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET
The future of the Internet as a center for information exchange,
advertising, entertainment and commerce will depend in significant part on
continued rapid growth in the number of households and commercial, educational
and government institutions with access to the Internet, in the level of usage
by individuals and
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businesses, and in the number and quality of products and services designed for
use on the Internet. Because usage of the Internet as a medium for on-line
exchange of information, advertising, entertainment and commerce is a recent
phenomenon, it is difficult to predict whether the number of users drawn to the
Internet will continue to increase. There can be no assurance that Internet
usage patterns will not decline as the novelty of the medium recedes or that the
quality of products and services offered on-line will improve sufficiently to
continue to support user interest.
Moreover, critical issues regarding the stability of the Internet's
infrastructure remain unresolved. The rapid rise in the number of Internet users
and increased transmission of audio, video, graphical and other multimedia
content over the Web has placed increasing strains on the Internet's
communications and transmission infrastructures. Continuation of such trends
could lead to significant deterioration in transmission speeds and reliability
of the Internet and could reduce the usage of the Internet by businesses and
individuals. Any failure of the Internet to support the ever-increasing number
of users due to inadequate infrastructure, or otherwise, could materially and
adversely affect the acceptance of the Company's products and services which
would, in turn, materially and adversely affect the Company's business,
prospects, financial condition and results of operations.
RISKS OF TECHNOLOGICAL CHANGE
The markets for Internet services are characterized by rapid technological
developments, frequent new product introductions and evolving industry
standards. The emerging nature of Internet products and services and their rapid
evolution will require that the Company continually improve the performance,
features and reliability of the InterVU Network and the Company's customer
service, particularly in response to competitive offerings. There can be no
assurance that the Company will be successful in responding quickly, cost
effectively and sufficiently to these developments. There can be no assurance
that the Company will be successful in achieving widespread acceptance of its
services before competitors offer products and services with speed and
performance similar to the Company's current offerings. In addition, the
widespread adoption of new Internet or telecommunications technologies or
standards could require substantial expenditures by the Company to modify or
adapt its video delivery service and could fundamentally affect the character,
viability and frequency of Internet-based advertising, either of which could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, new services or enhancements
offered by the Company may contain design flaws or other defects that could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
SECURITY RISKS
Despite the implementation of security measures, the Company's networks may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet Service Providers ("ISPs") and On-line Service Providers
("OSPs") have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. Although the Company
intends to continue to implement industry-standard security measures,
industry-standard security measures have been circumvented in the past, and
there can be no assurance that measures implemented by the Company will not be
circumvented in the future. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
the Company's customers and end-users, which could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
RISKS OF ENCODING AND DISTRIBUTING ADULT VIDEO CONTENT
While the Company does not currently provide its services to Web sites that
host adult videos, the Company may in the future provide services to such sites.
In determining whether to encode and/or deliver adult video content through the
InterVU Network, the Company intends to take into account the overall costs of
providing such services, including the potential adverse impact on its strategic
alliance with NBC Multimedia and other possible negative reaction from its
existing and potential Web site and advertising
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customers. The Company has represented to NBC Multimedia in its Strategic
Alliance Agreement that it will not use the InterVU Network in connection with
the encoding or distribution of adult video content. Any such activity would
constitute a breach of that representation and warranty and could result in a
determination by NBC Multimedia to terminate the Strategic Alliance Agreement.
The Company could also be exposed to liability for encoding and hosting adult
content deemed to be indecent or obscene. Although 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 loss of customers as a result of the Company's becoming associated with
adult Web sites could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. Such association could
result even if the Company does not use the InterVU Network in connection with
the encoding or distribution of adult video content. For example, if an end-user
utilizing an Internet browser attempts to view an adult video and such end-user
does not have the necessary software, or "plug-in," he or she will automatically
be directed to the browser's plug-in finder page which lists the particular
plug-ins, including the InterVU Player, that can display the video. If the
InterVU Player is selected by the end-user, or if the end-user has already
installed the InterVU Player, the adult video will be presented within the
InterVU Player and with the InterVU name displayed.
INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws, restrictions on disclosure
and other methods. In addition, the Company has filed seven United States patent
applications and one international patent application and is in the process of
preparing additional patent applications with respect to its technology. There
can be no assurance that any patent will issue from these applications or that,
if issued, any claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any patents
that may be issued will not be challenged, invalidated or circumvented, or that
any rights granted thereunder would provide proprietary protection to the
Company. Failure of any patents to provide protection to the Company's
technology may make it easier for the Company's competitors to offer technology
equivalent or superior to the Company's technology. The Company also generally
enters into confidentiality and non-disclosure agreements with its employees and
consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's services or technology without authorization, or to develop similar
technology independently. There can be no assurance that the steps taken by the
Company will prevent misappropriation or infringement of its technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. The Company believes
that, due to the rapid pace of technological innovation for Internet products
and services, the Company's ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of its
development personnel than upon the legal protections afforded its existing
technology.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws could discourage potential
acquisition proposals, could delay or prevent a change in control of the Company
and could make removal of management more difficult. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers that are priced above the then current market value of
the Common Stock. The provisions also may inhibit increases in the market price
of the Common Stock that could result from takeover attempts. These provisions
include a Board of Directors consisting of three classes; a limitation which
permits only the Board of Directors, the
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Chairman or the President of the Company to call a special meeting of
stockholders; a prohibition against the stockholders acting by written consent;
and certain advance notice procedures for nominating candidates for election to
the Board of Directors and for proposing business before a meeting of
stockholders. Additionally, the Board of Directors of the Company, without
further stockholder approval, may issue up to 3,720,000 shares of Preferred
Stock, in one or more series, with such terms as the Board of Directors may
determine, including rights such as voting, dividend and conversion rights which
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock may be issued quickly with terms which delay or
prevent the change in control of the Company or make removal of management more
difficult. Also, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering could materially adversely affect the prevailing
market price of the Company's Common Stock. Upon completion of the Offering and
the Direct Offering, the Company will have 9,378,835 shares of Common Stock
outstanding (including 210,526 shares purchased in the Direct Offering). The
2,000,000 shares offered in the Offering (plus any shares issued upon exercise
of the over-allotment option granted to the Company's underwriters (the
"Underwriters")) and the shares offered in the Direct Offering will be freely
tradeable under the Securities Act of 1933, as amended (the "Securities Act"),
unless held by "affiliates" of the Company as defined in Rule 144 under the
Securities Act. Of the remaining 7,168,309 shares of Common Stock, all will be
eligible for sale under Rule 144 under the Securities Act, subject to certain
volume and other limitations, following expiration of the nine-month lockup
agreements with Josephthal, Lyon & Ross Incorporated ("Josephthal"). Josephthal
may, in its sole discretion, and at any time without notice, release all or any
portion of the shares subject to such lock-up agreements. In addition, the
shares of Common Stock issuable upon conversion of the Series G Preferred will
become eligible for public sale under Rule 144 in October 1998. The Company also
intends to register on Form S-8 following the effective date of the Offering, a
total of 1,889,400 shares of Common Stock reserved for issuance or subject to
outstanding options granted under the Company's 1996 Stock Plan. The Company
also sold to the Underwriters, for nominal consideration, Advisors'
Warrants to purchase from the Company 200,000 shares of Common Stock. The
Advisors' Warrants are initially exercisable at a price per share equal to 120%
of the initial public offering price for a period of four years commencing one
year after the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of twelve months from the date hereof,
except to officers of the Representatives. The Advisors' Warrants also provide
for adjustment in the number of shares of Common Stock issuable upon the
exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Advisors' Warrants grant to the holders thereof certain rights
of registration for the securities issuable upon exercise of the Advisors'
Warrants.
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of the Offering, members of the Board of Directors
and the executive officers of the Company, together with members of their
families and entities that may be deemed affiliates of or related to such
persons or entities, will beneficially own approximately 42.1% of the
outstanding shares of Common Stock of the Company. Accordingly, these
stockholders may be able to elect all of the Company's Board of Directors and
determine the outcome of corporate actions requiring stockholder approval, such
as mergers and acquisitions. This level of ownership may have a significant
effect in delaying, deferring or preventing a change in control of the Company
and may adversely affect the voting and other rights of other holders of the
Common Stock.
MANAGEMENT'S DISCRETION OVER USE OF PROCEEDS OF THE OFFERING
The Company expects to use the net proceeds of the Offering for expansion
of sales and marketing efforts, additional research and development expenditures
and general corporate purposes, including working
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capital and capital expenditures. In addition, the Company intends to use a
portion of the net proceeds to fund obligations under its strategic alliance
agreement with NBC Multimedia. The Company may, if an opportunity arises, use an
unspecified portion of the net proceeds to acquire or invest in complementary
businesses, products and technologies. From time to time, in the ordinary course
of business, the Company expects to evaluate potential acquisitions of such
businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition or investment. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offering. The failure of
management to apply such funds effectively could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to 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 and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet or
other online services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Furthermore, the growth and development of Internet markets may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on companies conducting business online. The adoption of any additional
laws or regulations may decrease the growth of Internet use, which could, in
turn, decrease the demand for the Company's services or increase the cost of
doing business, or otherwise have an adverse effect on the Company's business,
prospects, financial condition and results of operations. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
REQUIREMENTS FOR ADDITIONAL CAPITAL
The Company believes that the net proceeds from the Offering, together with
existing cash, cash equivalents, short-term cash investments and capital lease
financing, will be sufficient to meet its working capital and capital
expenditure requirements through at least the end of 1998. However, the Company
may need to raise substantial additional funds if its estimates of working
capital and/or capital expenditures change or prove inaccurate or in order for
the Company to respond to unforeseen technological or marketing hurdles or to
take advantage of unanticipated opportunities. Over the longer term, it is
likely that the Company will require substantial additional funds to finance
significant capital equipment expenditures and lease commitments for additional
servers to expand the InterVU Network, as well as for product development,
marketing, sales and customer support needs. There can be no assurance that any
such funds will be available at the time or times needed, or available on terms
acceptable to the Company. If adequate funds are not available, or are not
available on acceptable terms, the Company may not be able to continue to
develop new technologies and services or otherwise respond to competitive
pressures. Such inability could have a material adverse effect on the Company's
business, prospects, financial condition and result of operations.
NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in Internet markets, changes in the market
valuations of other Internet companies, announcements by the Company or its
competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments, additions
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or departures of key personnel, sales of Common Stock and other events or
factors, many of which are beyond the Company's control. In addition, the stock
market in general, and the market for Internet-related and technology companies
in particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and price
earnings ratios will be sustained. These broad market and industry factors may
materially and adversely affect the market price of the Common Stock, regardless
of the Company's operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
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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.
INTERVU INC.
DATE: December 1, 1997 By: /s/ HARRY E. GRUBER
------------------------------------
Harry E. Gruber
Chairman and Chief Executive Officer
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