<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File No. 000-23361
INTERVU INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0680870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6815 Flanders Drive, San Diego CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 623-8400
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
(Title of Class)
Indicate by check mark whether Registrant (1) has filed all reports
to be filed by section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock on
October 30, 1998 was 10,885,728
<PAGE> 2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Quarterly Report involve, without limitation, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items or any other guidance on future periods, these
statements are forward-looking statements. These risks and uncertainties include
those identified in the Company's Annual Report on Form 10-K in Item 1 -
"Business - Factors That May Affect Future Performance" and other risks
identified for time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications. Copies of the
Company's Form 10-K are available from the Company upon request. The Company
assumes no obligation to update forward-looking statements.
2
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INTERVU INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 FINANCIAL STATEMENTS PAGE
<S> <C> <C>
Balance Sheets.....................................................4
Statements of Operations...........................................5
Statements of Cash Flows...........................................6
Notes to the Financial Statements..................................7-8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................9-12
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .................................................12
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS .........................13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ..................................14
SIGNATURES ...................................................................15
</TABLE>
3
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PART I
ITEM 1. FINANCIAL STATEMENTS
INTERVU INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -----------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 21,379,845 $ 8,979,925
Short-term investments ....................................................... -- 21,851,985
Accounts receivable (net of $4,290 and $109,660 allowance.....................
for doubtful accounts at December 31, 1997 and September 30, 1998 .......... 88,685 433,483
Prepaid and other current assets ............................................. 69,608 88,127
------------ ------------
Total current assets ........................................................... 21,538,138 31,353,520
Property and equipment, net .................................................... 584,601 2,051,952
Other assets ................................................................... 7,269 71,908
------------ ------------
Total assets ........................................................... $ 22,130,008 $ 33,477,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 437,064 $ 2,268,928
Accrued liabilities .......................................................... 142,018 761,477
Current portion, lease commitments ........................................... 11,814 9,566
------------ ------------
Total current liabilities .............................................. 590,896 3,039,971
Lease commitments .............................................................. 7,608 1,318
Stockholders' equity:
Series G convertible preferred stock, Designated -- 1,280,000 shares; Issued
and outstanding -- 1,280,000 shares at December 31, 1997 and
September 30, 1998; Liquidation preference-- $10,240,000 ................. 1,280 1,280
Common stock, $0.001 par value Authorized-- 20,000,000 shares; Issued
and outstanding 9,377,404 shares and 10,885,728 shares at
December 31,1997 and September 30, 1998, respectively .................... 9,377 10,885
Additional paid-in capital ................................................... 29,821,121 51,035,313
Notes receivable from common stockholders .................................... (500) --
Deferred compensation ........................................................ (710,493) (574,635)
Deficit accumulated during the development stage ............................. (7,589,281) (20,036,752)
------------ ------------
Total stockholders' equity ............................................. 21,531,504 30,436,091
------------ ------------
Total liabilities and stockholders' equity ............................. $ 22,130,008 $ 33,477,380
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
disclosures required by generally accepted accounting principles.
See accompanying notes.
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INTERVU INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 2,1995
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................... $ 52,609 $ 453,079 $ 84,122 $ 849,428 $ 992,969
Operating expenses:
Research and development... 409,392 831,459 1,300,712 2,200,760 5,356,986
Selling, general and
administrative ........... 830,116 3,460,983 2,202,747 7,356,816 11,431,412
Charges associated with the
NBC Strategic Alliance
Agreement ................ -- 250,000 -- 4,622,580 5,372,580
------------ ------------ ------------ ------------ ------------
Total operating expenses ... 1,239,508 4,542,442 3,503,459 14,180,156 22,160,978
------------ ------------ ------------ ------------ ------------
Loss from operations ....... (1,186,899) (4,089,363) (3,419,337) (13,330,728) (21,168,009)
Interest income ............ 34,366 456,912 76,529 883,257 1,131,257
------------ ------------ ------------ ------------ ------------
Net loss ................... $ (1,152,533) $ (3,632,451) $ (3,342,808) $(12,447,471) $(20,036,752)
============ ============ ============ ============ ============
Basic and diluted net loss
per share ................. $ (0.51) $ (0.38) $ (1.48) $ (1.43)
============ ============ ============ ============
Shares used in calculating
basic and diluted net loss
per share ................ 2,272,949 9,646,574 2,256,800 8,718,586
============ ============ ============ ============
</TABLE>
See accompanying notes.
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INTERVU INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 2,
1995
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................. $ (3,342,808) $(12,447,471) $(20,036,752)
Adjustments to reconcile net loss to
net cash used in operating activities:
Recognition of lapse of NBC's obligation to return
680,000 shares of Series G convertible preferred
stock issued under the NBC Strategic Alliance
Agreement........................................... -- 3,372,580 3,372,580
Compensation related to stock options .............. -- 22,009 22,009
Amortization of deferred compensation ................ 139,506 135,858 409,457
Depreciation and amortization ........................ 117,771 314,260 552,787
Changes in operating assets and
liabilities:
Accounts receivable .............................. (50,582) (344,798) (433,483)
Prepaid and other current assets ................. (829) (18,519) (88,127)
Accounts payable .................................. 60,419 1,831,864 2,268,928
Accrued liabilities ............................... 52,712 619,459 761,477
------------ ------------ ------------
Net cash used in operating activities................. (3,023,811) (6,514,758) (13,171,124)
INVESTING ACTIVITIES
Purchases of short term investments................... -- (21,851,985) (21,851,985)
Purchases of property and equipment .................. (268,397) (1,789,142) (2,584,784)
Disposal of property and equipment (net) ............. -- 7,531 7,531
Other assets ......................................... 5 (64,639) (71,908)
------------ ------------ ------------
Net cash used in investing activities ................ (268,392) (23,698,235) (24,501,146)
FINANCING ACTIVITIES
Payments on capital leases ......................... (4,698) (8,538) (16,602)
Issuance of common stock (net) ..................... 1,250 17,821,111 36,403,851
Issuance of preferred stock ........................ 3,359,921 -- 5,920,352
Advances from stockholders ......................... 2,010,000 -- 4,341,612
Repurchase of common stock ......................... (1,200) -- (1,200)
Repayment of stockholder notes receivable .......... 1,065 500 4,182
Deferred offering costs ............................ (223,869)
------------ ------------ ------------
Net cash provided by financing activities .......... 5,142,469 17,813,073 46,652,195
Net increase (decrease) in cash and cash
equivalents ....................................... 1,850,266 (12,399,920) 8,979,925
Cash and cash equivalents at beginning of period ... 2,507,822 21,379,845 --
------------ ------------ ------------
Cash and cash equivalents at end of period ......... $ 4,358,088 $ 8,979,925 $ 8,979,925
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations entered into for
equipment ....................................... $ 27,486 $ -- $ 27,486
============ ============ ============
Conversion of advances from stockholders to
convertible preferred stock ...................... $ 2,036,500 $ -- $ 4,341,612
============ ============ ============
Issuance of common stock in
exchange for notes receivable ................... $ -- $ -- $ 5,570
============ ============ ============
Cancellation of stockholder notes receivable ..... $ 1,388 $ -- $ 1,388
============ ============ ============
Issuance of Series G convertible
preferred stock as consideration for
the formation of NBC Strategic Alliance
Agreement ...................................... $ -- $ -- $ 1,280
============ ============ ============
Recognition of lapse of NBC's obligation
to return 680,000 shares of series G
convertible preferred stock issued
under the NBC Strategic Alliance
Agreement ...................................... $ -- $ 3,372,580 $ 3,372,580
============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
INTERVU, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
InterVU Inc. (the "Company" or "InterVU") was incorporated in Delaware on
August 2, 1995 to develop and market proprietary technologies and systems for
delivering video on the Internet. The Company utilizes a proprietary operating
system for routing and distributing high quality video over the Internet at high
speeds. The Company has commenced planned principal operations; however, as
there has been no significant revenue therefrom, the Company is considered to be
in the development stage.
The interim unaudited condensed financial statements of the Company
contained herein have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. In management's
opinion, the unaudited information includes all adjustments (consisting only of
normal recurring adjustments) necessary for fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Interim results are not necessarily indicative of results to be expected for the
full year.
2. NEW ACCOUNTING STANDARDS
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supercedes APB opinion No. 15. SFAS No. 128
replaces the presentation of primary earnings per share (EPS) with basic
earnings per share ("Basic EPS"), which includes no dilution and is based on
weighted average common shares outstanding for the period. Companies with
complex capital structures, including InterVU, will also be required to present
"Diluted EPS" that reflects the potential dilution from securities such as
employee stock options and warrants to purchase common stock. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. On February 2, 1998, the SEC issued Staff Accounting Bulletin (SAB) No. 98
which revised the previous instructions for determining the dilutive effects of
earnings per share computations of common stock and common stock equivalents
issued at prices below the Initial Public Offering ("IPO") price prior to the
effectiveness of the IPO.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in computing
certain earnings per share data. The Company previously considered preferred
stock as outstanding in pre-IPO periods from the date of original issuance
"as converted" basis in computing earnings per share. To conform with the
recent interpretations, the Company has revised its calculation of earnings per
share for all pre-IPO periods to exclude the impact of preferred shares.
COMPREHENSIVE INCOME AND SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both
of these standards are effective for the fiscal years beginning after December
15, 1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during the period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income, including
foreign currency translation adjustments, and unrealized gains and losses on
investment shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company does not believe that comprehensive income or
loss will be materially different than net income or loss. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its 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 the 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 does not believe adoption of this standard
will have a material impact on the Company's financial statements.
7
<PAGE> 8
INTERVU, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In April 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). SOP 98-1 requires
that costs associated with developing computer software for internal use be
capitalized once capitalization criteria of the SOP have been met. Capitalized
costs of computer software developed or obtained for internal use should be
amortized on a straight-line basis or other systematic and rational basis that
is more representative of the software's use. Impairment should be recognized
and measured in accordance with the provisions of FASB Statement NO. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF.
3. STOCKHOLDERS' EQUITY
COMMON STOCK
In June 1998, the Company completed a secondary offering and sold
1,495,000 shares of common stock ($.001 par value) at a price of $13.25 per
share. Net proceeds from the offering were $17.8 million.
STOCK OPTIONS
In June 1998, the Company established the 1998 stock option plan to grant
options to purchase common stock to consultants, employees, officers and
directors of the Company. The Company has authorized for grant under the plan
stock options to purchase up to 2,000,000 shares of its common stock.
Under the terms of the plan, 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 the grant. Options generally vest
20% after the first year of employment and daily thereafter for four years. The
options expire ten yard from the date of the grant.
As of September 30, 1998 406,500 shares of common stock are subject to
outstanding options with an exercise price ranging from %5.25 to $17.75 per
share.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements regarding the
Company, its business prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, the risks detailed under the caption Item 1. - Business
"Factors that May Affect Future Performance" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
OVERVIEW
The Company was incorporated in August 1995 and launched the InterVU
Network in December 1996. The Company began recognizing revenue during 1997
through the delivery of video content over the InterVU Network and the provision
of related services to the Company's initial customers.
The Company offers its services to Web-site owners and advertisers for fees
based on the volume of video content delivered, for flat fees based on estimates
of video to be delivered or for a combination thereof. The Company also
generally charges its customers fees for encoding analog video into digital form
for transmission over the Internet.
The Company has incurred net losses in each fiscal period since its
inception and, as of September 30, 1998, had an accumulated deficit of $20.0
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 for the foreseeable future. The Company is in the
early stages of executing its business model, and the profit potential of the
Company's fee based model for the delivery of video content or advertising is
unproven in the Internet industry. Because its success is dependent on the
growth of the video market on the Internet, as well as the growth of the
Internet industry, the Company must, among other things, develop services that
are widely accepted by Web-site owners, advertisers and end-users at prices that
will yield a profit. There can be no assurance that the Company's services will
achieve broad commercial or consumer acceptance.
As consideration for the strategic alliance with NBC Multimedia, Inc. ("NBC
Multimedia"), a subsidiary of National Broadcasting Company, Inc. ("NBC") the
Company issued 1,280,000 shares of its Series G Convertible Preferred Stock
("Series G Preferred") to NBC, and NBC Multimedia granted the Company exclusive
rights to deliver most NBC audio/video entertainment 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 by returning 600,000 shares of Series G Preferred (or Common Stock into
which such shares of Series G Preferred are converted, as the case may be) if
the termination occurs prior to October 10, 1999. The Strategic Alliance
Agreement also provides that if NBC Multimedia had terminated the agreement
prior to January 10, 1998 and NBC had not, at a minimum, displayed a button or
link containing a copy of the Company's logo on the NBC Web site, it would have
been required to return all 1,280,000 shares of Series G Preferred. NBC
Multimedia is not required to return any shares upon termination until it has
received from the Company the $2.0 million of non-refundable payments described
below under "-- Liquidity and Capital Resources." The Company will determine the
fair value of the Series G Preferred issued to NBC on the dates the requirements
that NBC 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 charged to expense in January 1998 the fair value of 680,000 shares of
Series G Preferred (with respect to which NBC's obligation to return such shares
upon termination lapsed) in the amount of $3,372,580, and expects to charge 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
9
<PAGE> 10
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 non-cash 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.
The Company's economic model is predicated upon achieving significant
economies of scale relative to variable and, to a lesser extent, fixed
telecommunications costs. The Company has developed a series of software tools
and a software system to analyze Internet performance, specifically related to
congestion points on the Internet. The Company's operating strategy is to reduce
the number of congestion points experienced by end-users through the redirection
of an individual's request for video content to the optimal server location. To
date, the Company has contracted for telecommunications capacity and services
primarily from major Internet Service Providers ("ISPs"). It is the Company's
intention to continue to contract with selected ISPs in the future for Internet
services as well as to procure and install selected servers over a variety of
Internet backbones and regional POPs. In addition, the Company may incur
significant capital equipment expenditures and lease commitments for additional
servers to expand the InterVU Network, although these expenditures would be less
significant than those required of ISPs. The amount and timing of such
expenditures will depend upon the level of demand for the Company's services.
The Company believes that as customer adoption rates for the Company's service
increases, the corresponding levels of video delivery volumes will allow the
Company to generate economies of scale relative to the expenses it incurs with
ISPs as well as the expenses emanating from the maintenance and amortization of
its servers. To the extent that such economies of scale are not realized, the
Company's business, prospects, financial condition and results of operations
will be materially adversely affected.
RESULTS OF OPERATIONS
The financial results for the period from August 2, 1995 (Inception) to
September 30, 1998 reflect the Company's initial organizational efforts,
research and development activities, capital raising activities and initial
deployment of the Company's video delivery service. The Company believes that
its limited operating history makes prediction of future results of operations
difficult and, accordingly, that its operating results should not be relied upon
as an indication of future performance. The Company began to recognize revenue
during 1997 and, as such, the Company believes that any comparison of the
results of operations for the three and nine months ended September 30, 1998 and
1997 is not meaningful.
Total revenues consist of fees for delivery of video content over the
InterVU Network and related customer services. Revenues from fees from video
delivery are recognized at the time of delivery. Revenues from encoding and
other customer services are recognized during the period in which services are
provided. In order to attract early customers and achieve penetration of the
market for the Internet video delivery, the Company initially provided up to 90
days of free trial service to certain customers. The Company terminated its free
trial service program in August 1997. The Company may elect to resume the free
trial service program or other sales practices in the future if it determines
they are warranted.
Research and development expenses consist primarily of salaries and related
expenses for personnel, fees to outside contractors and consultants, the
allocated costs of facilities, and the depreciation and amortization of capital
equipment. Research and development expenses to date have focused in three
areas: the development of software tools and enabling platforms for the
load-balanced distribution of video content; the development of tools to analyze
Internet performance to subsequently redirect individual end-users to optimal
servers; the development of tools that allow Web-site producers to post video
web pages onto the InterVU Network; and the development of end-user tools for
displaying multimedia content including installation of new media player
software. Research and development expenses have been expensed as incurred.
Selling, general and administrative expenses consist primarily of
salaries, commissions, promotional expenses, professional services and general
operating costs. Also included are costs the Company incurs for the Internet
access and telecommunications transport costs ("bandwidth"). These costs have
both fixed and variable components. The Company believes that it will be able to
negotiate lower bandwidth charges as the InterVU Network expands. The expansion
of the InterVU Network will in some cases require capital equipment
expenditures, the cost of which will be depreciated over the useful life of the
asset.
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Charges associated with the NBC Strategic Alliance Agreement are comprised
of a non-cash charge related to the lapse of NBC's obligations to return 680,000
shares of Series G Preferred and non-refundable cash payments due to NBC under
the NBC Strategic Alliance Agreement.
Total revenues for the three months ended September 30, 1998 were $453,100
compared with $52,600 for the comparable period in 1997. Total revenue for the
nine months ended September 30, 1998 increased to $849,400 from $84,100 for the
comparable period in the prior year. The increase in revenues reflect the
expansion of the InterVU Network, which provides enhanced delivery of video and
other media content over the Internet, live audio and video broadcasts, and
other media ads which bring the branding capabilities of major advertising
campaigns to the Web. Additional revenue was generated from InterVU's
participation in VideoSeeker.com, NBC's Internet video search engine and a
series of "Rich Media Day" seminars co-hosted by InterVU and Matchlogic.
Research and development expenses for the third quarter ended September 30,
1998 increased to $831,500 compared to $409,400 for the same period. Research
and development expenses for the nine months ended September 30, 1998 increased
to $2.2 million from $1.3 million in 1997. The increase in research and
development expenses reflects additions to the Company's research and
development staff, an increase in facilities costs and an increase in outside
consulting.
Selling, general and administrative expenses for the three months ended
September 30, 1998 and 1997 were $3.5 million and $830,100, respectively.
Selling, general and administrative expenses for the nine months ended September
30, 1998 increased to $7.4 million from $2.2 million for the comparable period
in the prior year. The increase in 1998 is primarily due to costs associated
with bandwidth, expenses relating to trade shows, advertising campaigns, and
other sales and marketing efforts, and the expansion of the administrative
staff. Increased costs associated with being a publicly traded company also
contributed to the increase in these expenses.
Charges associated with the NBC Strategic Alliance Agreement for the three
and nine months ended September 30, 1998 were $250,000 and $4.6 million. No such
charges were recorded in the three months and nine months ended September 30,
1997. The charges in the 1998 period reflected (i) a non-cash charge of $3.4
million relating to the lapse of NBC's obligation to return 680,000 shares of
Series G Preferred and (ii) a charge of $1.3 million for a portion of the
remaining nonrefundable cash payments due to NBC under the NBC Strategic
Alliance Agreement.
Interest income was $456,900 and $883,300 for the three month and nine
months ended September 30, 1998 compared to $34,400 and $76,500 for the
comparable period in the prior year. Interest income represents interest earned
by the Company on its cash, cash equivalents and short-term investments. The
increase in interest income over the comparable period in 1997 was the result of
higher cash, cash equivalents and short-term investments balances resulting from
sales of equity securities.
The Company's net loss was $3.6 million and $12.4 million for the three and
nine months ended September 30, 1998 compared to $1.2 million and $3.3 million
for the comparable period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
sales of equity securities. Through September 30, 1998, the Company had raised
$46.7 million from the sale and issuance of preferred stock and common stock. At
September 30, 1998, the principal source of liquidity for the Company was $30.1
million of cash and cash equivalents and short-term investments.
The Company has had significant negative cash flows from operating
activities since inception. Cash used in operating activities for the nine
months ended September 30, 1998 and 1997 was $6.5 million and $3.0 million
respectively. Cash used in operating activities in each of these periods was
primarily the result of increased business activity and related operating
expenses.
Cash used in investing activities for the nine months ended September 30,
1998 and 1997 was $23.7 million and $268,400, respectively, primarily
representing purchases of short-term investments, capital expenditures for
equipment, software development, and furniture and fixtures. Although the
Company has no material commitments for capital expenditures, the Company
expects to expend significant amounts for equipment, software and fixtures to
expand the InterVU Network, much of which it may elect to finance through
capital leases.
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<PAGE> 12
Cash provided by financing activities was $17.8 million and $5.1 million
for the nine months ended September 30, 1998 and 1997 respectively. This
increase is primarily due to $18.6 million in net proceeds from the sale of
1,495,000 shares of common stock at $13.25 per share in a public offering
completed on June 17, 1998.
In connection with the Strategic Alliance Agreement with NBC entered into
in October 1997, the Company became obligated to make $2,000,000 in
non-refundable payments to NBC Multimedia for certain production, operating and
advertising costs associated with certain NBC websites including payments of (i)
$750,000 paid on the completion of the initial public offering in November 1997,
(ii) $500,000 paid in April 1998, (iii) $500,000 due in May 1998, and (iv)
$250,000 due in August 1998; provided that all such payments will become
immediately due and payable to NBC Multimedia if the Strategic Alliance
Agreement is terminated for any reason. Through September 30, 1998 a total of
$1.3 million in payments have been made to NBC Multimedia.
In June 1998, the Company relocated headquarters to an improved and
equipped office space subleased in San Diego, CA. The sublease commenced in May
1998 and will expire in June 2003. Over the term of the lease the Company will
pay total rents of approximately $1.9 million.
The Company believes that existing cash and cash equivalents will be
sufficient to meet its working capital and capital expenditure requirements
through at least the end of 1999. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
need to sell additional equity or debt securities or obtain credit facilities.
The Company currently does not have any lines of credit. The sale of additional
equity or convertible debt securities may result in additional dilution to the
Company's stockholders. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
IMPACT OF YEAR 2000
Some older computer programs were written using two digits rather that
four to define the applicable year. As a result, those computer programs have
time-sensitive software that recognizes a date using "00" as the year 1900
rather than 2000. This could cause a system failure or miscalculations causing
disruption of operations, including a temporary inability to process
transactions or engage in similar normal business activities.
The Company is completing an assessment of whether it will have to modify
or replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project cost is not expected to be material. The Year 2000 project is
expected to be completed not later than March 31, 1999, which is prior to any
anticipated impact on its operating systems. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems.
The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. There is no assurance that the systems of those other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing resources and other factors. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
12
<PAGE> 13
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1997, the Company filed a registration statement under the
Securities Act of 1993 to sell up to 2.3 million shares of Common Stock in its
IPO. The effective date of registration of the IPO was November 19, 1997, under
Commission file No. 333-33521. The offering was managed by Josephthal Lyon &
Ross and Cruttenden Roth and closed on November 23, 1997 after the Company sold
an aggregate of 2,210,526 shares of Common Stock in the IPO and Direct Offering.
Expenses related to the IPO and Direct Offering incurred through December
31,1997 were as follows:
<TABLE>
<S> <C> <C>
Proceeds from IPO......................................... $19,000,000
Proceeds from Direct Offering............................. 2,000,000
-----------
TOTAL PROCEEDS............................................ 21,000,000
Underwriters' Discount.................................... $1,330,000
Underwriter's advisor fee................................. 140,000
Securities and Exchange Commission registration fee....... 8,557
NASD filing fee........................................... 2,625
Nasdaq National Market listing fee........................ 39,917
Non-accountable expense allowance......................... 190,000
Legal fees and expenses................................... 199,054
Accounting fees and expenses.............................. 190,800
Printing and engraving expenses........................... 168,843
Blue Sky fees and expenses................................ 12,665
Transfer agent and registrar fees......................... 3,131
Miscellaneous............................................. 146,385
----------
TOTAL OFFERING COSTS.................................... 2,431,977
-----------
NET PROCEEDS.............................................. $18,568,023
===========
</TABLE>
Since completion of the IPO and Direct Offering in November 1997, the
Company has used $10,155,867 of the proceeds in the following manner:
<TABLE>
<S> <C>
Prepayment to NBC Multimedia, an affiliate of the
Company, for production, operating and advertising
costs associated with certain NBC
websites......................................... $ 1,250,000
Purchase of property and equipment............... 1,938,907
General and administrative and working capital... 1,740,346
Research and Development expenditures............ 1,714,412
Sales & Marketing expenditures .................. 3,512,202
Total proceeds used through September 30,1998 ... $ 10,155,867
</TABLE>
Except where noted, no proceeds were paid directly or indirectly to
directors, officers, general partners of the Company or to persons holding ten
percent or more of any class of equity security issued by the Company, or to any
other affiliate of the Company.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed for the three months ended
September 30, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant duly causes this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
InterVU Inc.
Date: November 13, 1998 By: /s/ Harry Gruber
----------------- -------------------------------
Harry Gruber
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board and Chief Executive Officer
/s/ Harry Gruber (Principal Executive Officer) November 13, 1998
- --------------------------------- -----------------
Harry Gruber
Vice President and Chief Financial Officer
/s/ Kenneth L. Ruggiero (Principal Financial and Accounting Officer) November 13, 1998
- --------------------------------- -----------------
Kenneth L. Ruggiero
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,979,925
<SECURITIES> 21,851,985
<RECEIVABLES> 543,143
<ALLOWANCES> (109,660)
<INVENTORY> 0
<CURRENT-ASSETS> 31,353,520
<PP&E> 2,588,098
<DEPRECIATION> (536,146)
<TOTAL-ASSETS> 33,477,380
<CURRENT-LIABILITIES> 3,039,971
<BONDS> 0
0
1,280
<COMMON> 10,885
<OTHER-SE> 30,423,926
<TOTAL-LIABILITY-AND-EQUITY> 33,477,380
<SALES> 0
<TOTAL-REVENUES> 849,428
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,068,786
<LOSS-PROVISION> 111,370
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,447,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,447,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,447,471)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> 0
</TABLE>
