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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 000-23361
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INTERVU INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-0680870
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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6815 FLANDERS DRIVE, SAN DIEGO CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 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 Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant on February 15, 2000 was $1,514,348,000 based
on a average of the high and low sales for the common stock on such date. For
purposes of this computation, all executive officers and directors have been
deemed to be affiliates. Such determination should not be deemed to be an
admission that such executive officers and directors are, in fact, affiliates of
the Registrant.
The number of shares outstanding of the Registrant's common stock on
February 15, 2000 was 15,615,702.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, the
Company's expectations for growth, estimates of future revenue, expenses,
profit, cash flow, balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. The Company's actual results
may differ materially from those anticipated in these forward-looking statements
as a result of the proposed merger of the Company with Akamai Technologies,
Inc., which is expected to close during the second quarter of 2000, and the
risks and uncertainties identified in this Form 10-K in Item 1 -- "Business --
Factors That May Affect Future Performance" and other risks identified from time
to time in the Company's filings with the Securities and Exchange Commission,
press releases and other communications. The Company assumes no obligation to
update forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
INTERVU provides Web site owners and content publishers with cost-effective
services and automated tools for the streaming of live and on-demand video and
audio content over the Internet. INTERVU also provides Internet conferencing
services and interactive Web broadcasting services. INTERVU's customers use its
video and audio distribution services to transmit entertainment, sports, news,
and business-to-business content. INTERVU's current customers include AOL
MovieFone, Bloomberg, CNET, CNN, Digital Entertainment Network, DVD Express,
Excite@Home, House of Blues, Microsoft, MSNBC, NBC, NetRadio.com, Playboy,
Pseudo, Quokka Sports, Saatchi & Saatchi, Tunes.com, Turner Broadcasting and
Viacom/VH-1.
INTERVU's streaming media services allow Internet users to:
- View news, sports and other events from around the world;
- Listen to live and pre-programmed radio broadcasts online;
- Watch and listen to specialized content not widely available on
television or radio;
- Hear a company's quarterly earnings report live, accompanied by an
interactive audio/video presentation;
- View a movie trailer before purchasing a movie ticket, videotape or DVD;
- Watch music videos or listen to songs on demand; and
- Participate in live interactive Webcasts or Internet conferences
featuring live audio and video with a synchronized slide presentation.
INTERVU has developed software solutions that automate the publishing,
distribution and programming of video and audio content. INTERVU is a
full-service provider, offering all of the services necessary for delivery of
live Webcasting, interactive Web presentation broadcasting, and video and audio
on-demand, including production, encoding, uplinking, Web site integration,
distribution, reporting and archiving. Web site owners and content publishers
use INTERVU's solutions to: (1) more quickly and efficiently add video and audio
content and live event interactivity to Web sites, (2) avoid purchasing or
developing costly software and hardware and hiring employees with video and
audio expertise and (3) benefit from the economies of scale INTERVU can generate
by buying Internet transmission capacity, known as bandwidth, in bulk. INTERVU
typically charges its customers monthly fees based on the particular bundle of
services to be provided and the amount of audio/video content to be stored and
delivered.
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INTERVU also offers Internet conference, or "conference casting," solutions
that enable telecommunications carriers and other service bureaus to incorporate
live audio and video streaming services and participant interactivity into their
traditional conference call offerings. The INTERVU Conference solutions leverage
the power of the Internet, the INTERVU Network and INTERVU's Netpodium(R)
technology (which offers synchronized slides, real-time audience polling, and
question-and-answer capability) to offer a combination of streaming media,
interactive text messaging, detailed reporting and other dynamic functions that
traditional conference calls cannot deliver.
The cornerstone of INTERVU's service strategy is a scalable, patented
distribution network. The INTERVU Network uses servers strategically located in
major Internet hosting centers. INTERVU's dispersed network architecture enables
it to deliver streaming content to larger numbers of simultaneous end-users than
other service providers can achieve from centrally located servers. The INTERVU
Network also allows customers to make large numbers of video and audio files
available for on-demand viewing and listening. INTERVU has a patented process
for managing video and audio content, and INTERVU believes its use of multiple
delivery centers significantly improves the quality, speed and reliability of
delivery.
MERGER AGREEMENT WITH AKAMAI TECHNOLOGIES, INC.
On February 6, 2000, INTERVU, Akamai Technologies, Inc. ("Akamai") and Alii
Merger Corporation ("Merger Sub"), a wholly-owned subsidiary of Akamai, entered
into an Agreement and Plan of Merger. Pursuant to the merger agreement and
subject to the terms and conditions set forth therein, Merger Sub will be merged
with and into INTERVU, with INTERVU surviving the merger and becoming a
wholly-owned subsidiary of Akamai. At the effective time of the merger, all
outstanding shares of INTERVU's capital stock will be exchanged for shares of
Akamai common stock, and options and warrants to purchase INTERVU common stock
will be exchanged for options or warrants to purchase shares of Akamai common
stock with the exercise price and number of shares of INTERVU capital stock
subject to each such INTERVU option or warrant appropriately adjusted to reflect
the exchange ratio. Each share of INTERVU common stock will be exchanged for
.5957 of a share of Akamai common stock.
The merger is subject to various conditions, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and approval by INTERVU's
stockholders. The transaction will qualify as a tax-free reorganization and will
be accounted for as a purchase. The Board of Directors of INTERVU unanimously
approved the merger agreement.
In connection with the execution of the merger agreement, INTERVU and
Akamai entered into a Stock Option Agreement, dated as of February 6, 2000,
pursuant to which INTERVU granted Akamai an option to purchase up to 19.9% of
the outstanding shares of INTERVU common stock, which option is exercisable upon
the occurrence of certain events specified in the Stock Option Agreement. In
addition, stockholders of the Company who beneficially own in the aggregate
approximately 26.5% of INTERVU's common stock entered into the Stockholder
Voting Agreement with Akamai dated as of February 6, 2000, pursuant to which
these stockholders have agreed to vote their shares in favor of the merger and
against a competing proposal.
INDUSTRY BACKGROUND
The Internet and many Internet software, hardware and service providers
have experienced dramatic growth in recent years. In January 2000, Computer
Industry Almanac estimated that the number of Global Web users will increase
119% between 2000 and 2005 and will reach a global population of 765 million
users. The use of broadband technologies on the Internet also has shown
significant growth. According to Jupiter Communications, high speed connectivity
in the form of cable modems, DSL and satellite technology will grow from 5.4% of
all Internet access in 1999 to over 23% by the year 2003. The development of
video and audio delivery solutions along with the development and proliferation
of broadband connectivity has fostered the Internet's transition from a static
environment of text-oriented Web pages to a more attractive and dynamic
multimedia environment.
INTERVU believes that as the Internet continues to evolve as a mass
communication medium, end-users will spend an increasing percentage of their
time online visiting sites that offer high-quality video and
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audio content. The rising popularity of the Internet also has spurred the
development of commercial applications, including online commerce and
advertising. International Data Corporation estimates that the total purchases
made over the Internet will grow from $32.4 billion in 1998 to $425.7 billion by
2002. INTERVU believes that growth in commercial applications on the Internet
will increase demand for streaming media services as companies seek to increase
the effectiveness of their Web sites by enhancing them with video and audio.
There has also been dramatic growth in the use of the Internet to
facilitate business communications. Web-based conferencing that incorporates
streaming media, presentation materials, on-line guided tours of Web sites
selected by the presenter and audience interaction is being rapidly adopted by
companies as a tool to enhance collaboration, reduce expenses and increase
audience reach. The opportunities for this technology are vast -- remote idea
sharing, distance education, corporate communications and sales and marketing.
ActivMedia estimates that the total retail purchases made over the Internet will
grow from $95 billion in 1999 to $1.3 trillion by 2003.
The delivery of streaming content over the Internet can present numerous
challenges. Web site owners that want to stream video and audio can either do so
from their own servers or through third-party service providers. Many Web site
owners encounter capacity and technological limitations as they seek to deliver
video to large numbers of end-users. Similarly, third-party service providers
that offer streaming media solutions from centrally located servers face
increased reliability problems because these servers are more likely to become
overloaded during peak usage periods than distributed servers.
THE INTERVU SOLUTION
INTERVU's services allow Web site owners and content publishers to transmit
streaming content more quickly and cost-effectively. Specifically, INTERVU
provides its customers with the following service features:
Automated, Cost-Effective and Scalable Distribution
INTERVU's patented distributed network delivers video and audio more cost
effectively and with better quality than Web site owners can achieve from a
single location. The INTERVU Network manages bandwidth limitations and
automatically directs end-users' requests for video and audio to the media
delivery center that can provide the content most quickly and efficiently. The
INTERVU Network also allows Web site operators to deliver video and audio
without incurring start-up costs associated with purchasing the hardware and
software required to stream multimedia content, maintenance costs and fixed
bandwidth costs. INTERVU's proprietary software allows INTERVU to quickly expand
the capacity of its network by installing additional servers at Internet hosting
centers.
Advanced Data Management Services
INTERVU continues to add features to its data management services,
including data capture, which provides information about the technical
attributes of video and audio files and streams, and data reporting. Data
reporting enables INTERVU customers to better market their Web events and tailor
their content to meet end-user demand. INTERVU believes that its ability to
provide meaningful data will be an important factor in its ability to attract
and retain customers.
Automation of the Publishing Process
INTERVU has developed services that automate the process of publishing
video and audio to the Internet, making this process less expensive and less
labor-intensive. For example, INTERVU Publish, the technology used in NBC's
Videoseeker Web site, automates the process of generating Web pages with
dynamically changing content allowing for quicker, easier integration of content
onto a Web site.
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BUSINESS STRATEGY
INTERVU's objective is to establish itself as the leading service provider
for Internet video and audio distribution solutions. INTERVU's strategy for
achieving this goal includes the following key components:
Target Leading Web Sites and Content Publishers
INTERVU targets its sales and marketing efforts at Web site owners and
content publishers with significant video and audio volume and quality
requirements, primarily in the areas of entertainment, news, sports and business
services. INTERVU also targets leading Web sites in part to create awareness for
the INTERVU brand. INTERVU has established relationships with key customers that
provide INTERVU with the opportunity to promote its brand identity by placing
its logo on the customer's Web site next to the video being delivered. During
2000, INTERVU intends to expand both its sales force and the geographic areas in
which INTERVU maintains a sales presence.
Maximize Customers' Brand Awareness
Web site owners devote substantial resources to establishing online brand
recognition and increasing traffic. INTERVU does not compete with its customers
for Web site traffic or brand awareness because it does not maintain a Web site
that end-users must visit to access its customers' video and audio content.
End-users visiting an INTERVU customer's Web site receive video and audio
directly through that site without knowing that it is coming from the INTERVU
Network.
Further Develop Automated Delivery Solutions
INTERVU intends to further develop automated delivery solutions to attract
new customers and remain a technology leader. For example, INTERVU Conference
enables telecommunications providers and other service bureaus to provide
automated Internet conferencing services to their customers. INTERVU plans to
expand the features of its automated solutions while also developing new,
innovative solutions. INTERVU has developed several automated publishing
interfaces (APIs). These APIs allow INTERVU's customers to more quickly and
efficiently gain access to the INTERVU Network.
Provide Full-Service Solutions
INTERVU is a full-service provider, offering its customers encoding and
production services, software solutions, content distribution and storage.
INTERVU tailors its services to each customer's needs and provides 24-hour,
seven-days-a-week customer support. INTERVU believes that its customized
full-service approach increases customer satisfaction, facilitates the sale of
additional services to its existing customers and significantly enhances its
ability to increase its customer base.
Adapt Technologies to Access New Markets
INTERVU intends to continue to develop service offerings based on its core
technologies to gain access to new markets for transmission of content through
the Internet. For example, INTERVU leveraged its expertise in interactive Web
presentations to develop the INTERVU Conference family of conferencing
solutions, which has enabled INTERVU to enter the emerging Internet conferencing
market. INTERVU has also developed its Netpodium(R) Web-based interactive
presentation application, which incorporates streaming audio and video,
synchronized slides, real-time audience polling, and question-and-answer
capability, to meet the business communications needs of various markets,
including investor relations, corporate training, internal corporate
communications, product launches, online sales, conferences and tradeshows and
government.
Expand the INTERVU Network
INTERVU intends to expand the INTERVU Network by installing additional
delivery centers in Internet hosting centers and at Internet points of presence,
commonly known as POPs. INTERVU believes it
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can further improve the speed, quality and reliability of streaming video and
audio by reducing the number of Internet connections that content must traverse
before its reaches the end-user. INTERVU plans to locate network resources in
POPs with broadband technologies, such as digital subscriber line (DSL), cable
modem technology or satellite delivery, to facilitate faster transmission to
end-users. Expansion of the network also will allow INTERVU to store and deliver
larger numbers of video and audio files and to increase the number of
simultaneous streams it can deliver.
MARKETING AND SALES
INTERVU employs a variety of marketing methods, including television and
print advertising, direct marketing, trade show and conference participation,
the INTERVU Web site, sales literature, Internet promotions and placement of its
name and logo on customers' Web sites. A key element of INTERVU's marketing
strategy is to continue to heighten awareness for the INTERVU brand as it
expands its sales and marketing activities.
INTERVU classifies its target customers into two principal categories: (1)
entertainment and news and (2) business communications.
Entertainment and News
Entertainment and news customers are content creators that have a need to
deliver audio or video entertainment or news content over the Internet to an
end-user audience. INTERVU markets to this segment both directly and through
reseller partners. INTERVU services entertainment and news customers by
streaming either "live" or "on-demand" content.
- Entertainment. INTERVU's largest target market is entertainment
providers, especially providers of music, movies and sports. INTERVU
believes that entertainment content has the greatest end-user demand and
therefore targets providers of this content. INTERVU's entertainment
customers include AOL MovieFone, House of Blues, NBC, NetRadio.com,
Playboy, Quokka Sports, Tunes.com, Turner Broadcasting System (TBS),
Viacom/VH-1 and Warner Brothers. Companies such as Beatflow.com and DVD
Express use INTERVU's services to stream audio and video clips in support
of their e-commerce sales of music and DVDs.
- News. News and information providers increasingly are using the Internet
as a distribution channel to reach end-users quickly and conveniently.
INTERVU's current customers in the news market include Bloomberg, CNET,
CNN, MSNBC and a number of local NBC affiliates.
Business Communications
INTERVU believes there is a growing market for video and audio applications
in business communications on the Internet. The business communications market
includes investor relations, corporate communications, business training, online
sales, conferences and tradeshows. INTERVU facilitates these various forms of
business communications through the INTERVU Conferencing family of products. To
capitalize on the market potential of business communications offerings, INTERVU
has targeted the following segments with its sales and marketing efforts:
- Corporate Customers. INTERVU targets corporate customers both directly
and through channel sales. INTERVU offers these customers the ability to
use the Internet and their corporate intranets for remote idea sharing,
corporate training, online sales and conferences. Companies such as Texas
Instruments and Hand Technologies use INTERVU services for sales
training, and companies such as Great Plains, Peppers & Rogers and Visio
utilize INTERVU solutions for public relations and marketing purposes.
Other INTERVU corporate clients include BMG Music, Saatchi & Saatchi,
Onyx, Microsoft, and Intel.
- Financial Service Organization. INTERVU uses financial service
organizations as resellers of INTERVU's business-to-business products.
Companies such as CCBN, Investor Broadcast Network and Visual Data Corp.
resell INTERVU's service offerings for earnings announcements,
shareholder
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meetings and other investor relations events. Through these resellers,
INTERVU has facilitated Webcast financial events for companies such as
AOL, AT&T, eBay, Microsoft, and Yahoo!.
- Telecommunications Providers and Service Bureaus. INTERVU is establishing
relationships with telecommunications providers and service bureaus to
resell the INTERVU Conference family of Internet conferencing solutions.
Telecommunications and traditional teleconferencing companies market
INTERVU's services as enhancements to their standard offerings. To date,
INTERVU has established reseller relationships with three
telecommunications providers.
INTERVU employs a dedicated sales force of 64 sales professionals to sell
its audio and video distribution services. INTERVU plans to significantly expand
its sales force during 2000 both in its current geographic markets and new
markets. INTERVU divides its sales representatives into channel sales and direct
sales. INTERVU has a sales office or presence in San Diego, Seattle, Washington
D.C., San Francisco, New York, Chicago, Los Angeles, Atlanta and Detroit.
INTERVU also seeks to leverage its relationships with other Internet companies
that resell INTERVU's delivery services.
INTERVU SERVICE SOLUTIONS
INTERVU provides live interactive Web event services, live Webcasting, and
video and audio on-demand. Live Webcasting includes both live online events and
24-hour per day streaming services such as continuous radio broadcasts.
On-demand services allow INTERVU customers to store video and audio clips on the
INTERVU Network and to make them available to end-users through their Web sites.
INTERVU is a full-service provider, offering all of the services necessary for
both live Webcasting and video and audio on-demand, including production,
encoding, uplinking, Web site integration, distribution, reporting and
archiving. INTERVU supports and enhances these services with the following
software solutions and other services:
INTERVU Netpodium
INTERVU Netpodium is a feature-rich application for Internet-based live
interactive Web broadcasting that enables organizations to augment traditional
one-way Webcast events with interactive polling, instantaneous messaging and Web
site touring capabilities. In addition, the interactive Netpodium technology
integrates an event participant database. This database captures the entire
interactive Web broadcast activity, including questions, responses and poll
results. INTERVU Netpodium was awarded the "Best Desktop Conferencing Product"
at the Telecon West '99 awards.
INTERVU Conference
The INTERVU Conference family of conference casting solutions enables
telecommunications carriers and other service bureaus to incorporate live audio
and video streaming services into their traditional conference call offerings.
The INTERVU Conference solutions leverage the power of the Internet, the INTERVU
Network and INTERVU's Netpodium technology to offer a combination of streaming
media, interactive text messaging and other dynamic functions that traditional
conference calls cannot deliver.
INTERVU Conference services are based on an automated solution that
captures the signal from a telephone or videoconference call and delivers it
over the INTERVU Network. The call is streamed to the participants through an
INTERVU-generated Web site branded in the service bureau's name. These solutions
are efficiently provided through a real-time, Web-based reservation system.
Users also have the ability to load content, set security, view reports and
monitor events from their own secure Web page in real time. In addition,
customer conferences can be automatically recorded and archived for on-demand
use and rebroadcast.
INTERVU Publish
INTERVU Publish allows customers with large amounts of content to publish
video and audio clips to their Web pages, dynamically generate new pages that
offer end-user access to the clips, and provide content
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searching functionality. INTERVU initially developed this technology to provide
services to NBC's VideoSeeker Web site. This technology is being expanded with
INTERVU Publish to provide mainstream functionality to a broader marketplace.
Production Services
INTERVU provides production services for Web site owners that deliver
content through INTERVU. These production services include filming and producing
live events that Web site owners broadcast over the Internet. INTERVU's
customers have used its production services to broadcast events such as the Dr.
Drew Show, Sammy Hagar's Birthday Bash, the Red Carpet for the Screen Actors'
Guild Awards, the L.A. Latino International Film Festival, and various trade
shows including E3, the Red Hat Software Linux Expo, NATPE '99 and the National
Cable Television Association's Cable '99.
Encoding Services
INTERVU offers encoding services to its customers through its internal
staff and through subcontracting relationships with INTERVU business partners.
INTERVU offers encoding in a number of digital formats, including MPEG,
Quicktime, AVI, Microsoft's Media Player and RealNetworks' RealServer 7.0.
INTERVU NETWORK
INTERVU uses the INTERVU Network as the foundation for providing video and
audio distribution solutions to INTERVU customers. The INTERVU Network uses
proprietary software, systems and processes to manage large amounts of content
stored on nearly 1,000 servers in Internet hosting centers.
In 1999 INTERVU received two patents -- one for the design and operation of
INTERVU's distributed network, the other for the method by which video and audio
files are indexed and retrieved. The INTERVU Network's disbersed network
architecture enables INTERVU to deliver streaming content to larger numbers of
simultaneous end-users than other service providers can achieve from centrally
located servers. In addition, the network architecture is designed to more
evenly distribute streaming media traffic across the Internet infrastructure.
Using the INTERVU Network, Web site owners provide video and audio content
to end-users more cost-effectively and conveniently than through traditional
Internet distribution mechanisms. INTERVU customers can place their streaming
video and audio content on the INTERVU Network instead of managing large video
and audio files themselves and maintaining their own expensive hardware. To an
end-user visiting an INTERVU customer's Web site, the content appears to come
directly from that site, rather than from INTERVU. INTERVU provides software for
the customer's Web site that links end-users to the INTERVU Network.
Reduces Transmission Time and Improves Quality
INTERVU's use of delivery centers, called Streaming Performance
Centers(SM), in multiple Internet hosting centers provides significant
advantages in multimedia delivery. The INTERVU Network's intelligent content
distribution system determines which of its servers is electronically closest to
the end-user and sends the video and audio content from that location. This
reduces transmission time, with a corresponding reduction in the chances for
stream degradation due to Internet congestion. The result is a higher-quality
stream.
Scalable Network
The INTERVU Network is capable of scaling (increasing its delivery
capacity) quickly according to demand. Scalability is achieved through the use
of an intelligent content distribution system that notices increased demand for
a piece of content, replicates that content, and immediately sends it to those
Streaming Performance Centers(SM) nearest the demand for delivery. This
efficient routing, combined with the distributed
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nature of the INTERVU Network, enables INTERVU to ramp up quickly to deliver
streaming content to thousands of Web users at the same time.
One of the best-publicized examples of the INTERVU Network's scalability
was INTERVU's September 21, 1998 live Webcast of President Clinton's grand jury
testimony for CNN Interactive. This breaking news event occurred on a workday,
sending office workers to the CNN Web site to watch the video. When demand for
the streaming video peaked in the 11 a.m. hour, the INTERVU Network successfully
met that demand, scaling up to deliver more than 18,000 simultaneous live
streams. For this event, INTERVU delivered more than 500,000 total streams
between 9 a.m. and 5 p.m.
KEY WORKING RELATIONSHIPS
INTERVU seeks to leverage its relationships with key customers and
technology leaders to support the development of its automated delivery
solutions and build INTERVU's brand identity. In October 1997, INTERVU entered
into a strategic alliance with NBC Multimedia and became the exclusive
distributor of most NBC entertainment multimedia content over NBC Internet
sites. The NBC strategic alliance agreement provides for revenue sharing from
the Videoseeker Web site, which offers end-users a single source for online
multimedia entertainment and information. INTERVU created the automated video
search engine and directory functions used on the VideoSeeker site and developed
the proprietary software underlying the site. A major benefit to INTERVU of the
strategic relationship with NBC is the opportunity VideoSeeker provides INTERVU
to develop and test new solutions for multimedia publishing, programming and
delivery.
In November 1999, INTERVU announced a strategic multi-tiered alliance with
the CNN News Group. As part of the agreement, INTERVU issued $20 million of
common stock to CNN. In return, CNN will provide INTERVU with three years of
on-air and online advertising and promotional opportunities across CNN's
properties, and INTERVU will sub-license CNN's domestic television networks to
its corporate clients for internal distribution on their LANs. INTERVU will
provide fee-based Internet video management and delivery services for three
years and will also deliver audio streaming services.
INTERVU also has worked with Microsoft to integrate its products into
INTERVU's delivery solutions. For example, INTERVU has incorporated the features
of Microsoft's PowerPoint presentation software into INTERVU Netpodium and
INTERVU Conference to allow Web site owners to integrate PowerPoint slides into
streaming video presentations. In addition, in December 1999 INTERVU announced a
strategic alliance with Microsoft to expand its broadband streaming media
network based on the Windows Media platform. INTERVU and Microsoft are seeking
to develop a cost-effective infrastructure for the development of Internet
broadband audio and video delivery. Under the strategic alliance, INTERVU will
provide content providers with forward-based pricing and will deploy media
delivery centers located at high-speed access points. In addition, Microsoft's
is seeking to establish its Windows Media solution as a platform for building
value-added applications such as targeted audio/video advertising insertion,
pay-per-view, and digital rights management, creating new business opportunities
for content providers.
In connection with the formation of the strategic alliance, Microsoft
invested $30 million in INTERVU preferred stock and warrants. With Microsoft's
investment, INTERVU will co-locate and interconnect its Streaming Performance
Centers(TM) on cable, wireless and digital subscriber line (DSL) networks and in
other "edge" locations in order to reduce, and eventually eliminate, egress
distribution costs for its content provider customers. Egress distribution costs
are costs that content providers incur when their content is streamed out of the
ISP. INTERVU believes this regional expansion of the INTERVU Network will offer
broadband subscribers a higher quality audio/video experience because content
will be delivered from their broadband service provider directly to them,
bypassing Internet congestion.
COMPETITION
The market for Internet content delivery services is rapidly expanding and
highly competitive. INTERVU expects that the competition will continue to
intensify. The streaming media distribution industry is characterized by rapidly
changing technology, evolving industry standards and frequent new product and
service introductions. INTERVU faces sustained competition from a number of
companies. These competi-
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tors include: (1) companies that utilize other streaming technologies, (2)
Internet service providers and (3) hardware and system vendors. INTERVU competes
with Web site owners and content publishers that employ in-house technical
personnel to develop streaming media technology and to manage their streaming
media. Competitive factors in the Internet streaming media distribution market
include the quality and reliability of service, price, customer support,
patented technology, brand recognition and traffic flow directed to Web sites.
The market for Web-based conferencing is also highly competitive. Many
competitive products and solutions were launched during 1999. The online
conferencing market is characterized by rapidly changing software applications
with frequent new product enhancements and features. INTERVU believes that
substantial competition exists within the marketplace. INTERVU's competitors
include (1) companies that develop and market conferencing software and (2)
companies that host online conferences using proprietary conferencing
applications. Competitive factors in the online conferencing market include
quality of service, price, customer support, product features, and brand
recognition.
SOFTWARE DEVELOPMENT; INTELLECTUAL PROPERTY
INTERVU develops most of its technologies itself and maintains a software
development staff of 62 people that designs and develops INTERVU's new services.
INTERVU had research and development expenses of approximately $1.7 million in
1997, $4.8 million in 1998 and $10.1 million in 1999. INTERVU believes that by
performing most of its software development itself it can more quickly and
cost-effectively develop new and innovative technologies and services. As a
result, INTERVU believes it is better equipped to incorporate customer
preferences identified by INTERVU's marketing and sales groups into development
plans.
INTERVU regards its technology as proprietary and attempts to protect it
with patents, copyrights, trade secret laws, restrictions on disclosure and
other methods. The U.S. Patent & Trademark Office (USPTO) has granted two
patents to INTERVU covering the management, distribution and delivery of
multimedia content over the Internet as well as the architecture of the INTERVU
Network. In addition, INTERVU currently has fifteen patent applications pending
before the USPTO and twenty three pending international patent applications.
Furthermore, INTERVU is in the process of filing several patent applications
directed to the distribution and delivery of content from a distributed computer
network over the Internet.
INTERVU pursues registration of its trademarks and service marks, although
it has not secured registration of all of its marks. As of February 2000,
INTERVU had three registered U.S. trademarks and had several applications
pending for additional U.S. trademarks.
EMPLOYEES
As of December 31, 1999, INTERVU had 291 full time employees, of which 62
were in software development, 103 in operations, 102 in sales and marketing and
24 in administration. None of INTERVU's employees is represented by a labor
union, and INTERVU considers its relations with its employees to be good.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
You should carefully consider the following risk factors in your evaluation
of INTERVU. If any of the following risks actually occur, it could materially
harm INTERVU's business and impair the price of INTERVU common stock.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN EVALUATION OF OUR
BUSINESS AND PROSPECTS. INTERVU was incorporated in August 1995 and launched the
INTERVU Network in December 1996. INTERVU did not emerge from the development
stage until 1998. Accordingly, we have a limited operating history on which to
base an evaluation of our business and prospects. You must consider our
prospects in light of the risks and uncertainties encountered by companies in
the early stages of development, particularly companies in new and rapidly
evolving markets such as the delivery of video and audio over the Internet.
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<PAGE> 11
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES. Since the
formation of our business, we have incurred substantial net losses. As of
December 31, 1999, we had an accumulated deficit of $68.6 million. As we
continue to implement our growth strategy, we intend to spend significant
amounts on sales and marketing, research and development and general and
administrative activities. We expect that we generally will incur these costs in
advance of anticipated related revenues, which may further increase operating
losses in some periods. As a result of our expansion, we expect to continue to
incur significant operating losses and negative cash flows from operations for
the next several years. It is possible that we may never achieve favorable
operating results or profitability.
POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAY IMPAIR THE TRADING
PRICE OF OUR COMMON STOCK. We expect our revenues and operating results to vary
significantly from quarter to quarter. As a result, quarter to quarter
comparisons of our revenues and operating results may not be meaningful and you
should not rely on them as indicators of future performance. In addition, due to
our limited operating history, we cannot predict our future revenues or results
of operations accurately. It is likely that in one or more future quarters our
financial results will fall below the expectations of analysts and investors. If
this happens, the trading price of our common stock would likely decrease. Many
of the factors that cause our quarter to quarter financial results to be
unpredictable are largely beyond our control. These factors include:
- our ability to retain existing customers and attract a significant number
of new ones;
- the growth of the market for streaming media content over the Internet;
- our ability to implement our growth strategy, especially our sales and
marketing efforts; and
- the introduction of new technologies and Internet services by us and our
competitors.
OUR SPECIALIZED SERVICES MAY NOT BE WIDELY ADOPTED BY CUSTOMERS. Our
services are highly specialized and are designed solely to meet the needs of Web
site owners who wish to deliver audio and video and the needs of companies that
wish to provide Internet conferencing and presentation services to end users. If
Internet-based content incorporating streaming media technology does not become
widely adopted by Web site owners, it would materially harm our business and
impair the price of our common stock. Similarly, if Internet conferencing and
presentations are not widely adopted by end-users, our business would be harmed.
The market for streaming media content on the Internet has only recently
developed, is rapidly evolving and historically has been limited. The market for
Internet conferencing and presentations also is in its infancy. Demand for
streaming media content on the Internet and Internet conferencing and
presentations must develop further in order to offer significant revenue
opportunities for video and audio distribution service providers such as
INTERVU.
Many of our customers may cease using our services either without notice or
upon short notice, including customers with which we have contracts. For
example, NBC may terminate its strategic alliance agreement with us for any
reason upon 90 days prior notice. If we were to lose customers that are well
known in their industry, it could impair our ability to retain customers and
attract new ones.
ANY FAILURE BY US TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR
BUSINESS. We have rapidly expanded our operations since INTERVU was founded in
August 1995. Continued expansion of our business may place increasing strains on
our ability to manage our growth, including our ability to monitor operations,
bill customers, control costs and maintain effective quality controls. In
connection with the expansion of our operations, we have grown from 34 employees
on October 15, 1997 to 295 employees on February 15, 2000. We plan to
significantly expand our sales and marketing and research and development
activities, hire a significant number of additional employees, expand our
internal information, accounting and billing systems and establish additional
sales offices. In addition, we plan to expand the infrastructure of the INTERVU
Network by investing in additional software and hardware consisting primarily of
additional servers. In order to successfully manage our growth we must identify,
attract, motivate, train and retain highly skilled managerial, financial,
engineering, business development, sales and marketing and other personnel.
Competition for this type of personnel is intense. If we fail to manage our
growth effectively, it could materially harm our business and impair the price
of our common stock.
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<PAGE> 12
WE MAY FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES. The Internet
industry is characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions. These factors will
require us to continually improve the performance, features and reliability of
our services and the INTERVU Network. We may not successfully respond quickly or
cost-effectively to these developments. We also may not achieve widespread
acceptance of our services before our competitors offer products and services
with speed, performance, features and quality similar to or better than ours or
that are more cost-effective than our services. In addition, the widespread
adoption of new technologies could require substantial expenditures by us to
modify or adapt our technology. Furthermore, new or emerging technologies such
as satellite transmission of content and improved functionality of servers may
reduce demand for our services.
WE FACE SIGNIFICANT COMPETITION. The market for Internet content delivery
services is rapidly expanding and highly competitive. INTERVU expects that the
competition will continue to intensify. The streaming media distribution
industry is characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions. INTERVU faces
sustained competition from a number of companies. These competitors include: (1)
companies that utilize other streaming technologies, (2) Internet service
providers and (3) hardware and system vendors. INTERVU competes with Web site
owners and content publishers that employ in-house technical personnel to
develop streaming media technology and to manage their streaming media.
Competitive factors in the Internet streaming media distribution market include
the quality and reliability of service, price, customer support, patented
technology, brand recognition and traffic flow directed to Web sites.
The market for Web-based conferencing is also highly competitive. Many
competitive products and solutions were launched during 1999. The online
conferencing market is characterized by rapidly changing software applications
with frequent new product enhancements and features. INTERVU believes that
substantial competition exists within the marketplace. INTERVU's competitors
include (1) companies that develop and market conferencing software and (2)
companies that host online conferences using proprietary conferencing
applications. Competitive factors in the online conferencing market include
quality of service, price, customer support, product features, and brand
recognition.
WE RUN THE RISK OF SYSTEM FAILURES THAT COULD IMPAIR OUR ABILITY TO PROVIDE
SERVICE. Our success in marketing our services requires us to provide reliable
service. Our operations depend on our ability to protect our networks from
physical damage, power loss, capacity limitations, software defects and other
disruptive problems, many of which are beyond our control. Our ability to
provide reliable services also depends on the reliability of Internet service
providers and online service providers, which have in the past had operational
problems and experienced outages. We expect these problems and outages to
continue to occur periodically. Any failure to provide reliable service could
impair our customer satisfaction, lead to a loss of customers or increase our
costs, which could materially harm our business and impair the price of our
common stock.
OUR NETWORK MAY BE VULNERABLE TO COMPUTER VIRUSES AND SECURITY
BREACHES. Security breaches or problems caused by computer viruses could
adversely affect our ability to provide services and could materially impair
customer acceptance of our services. The INTERVU Network may be vulnerable to
unauthorized access, computer viruses and other disruptive problems despite our
implementation of security measures. Computer viruses or problems caused by
third parties, such as hackers, could lead to interruptions, delays or
termination of service to our customers. To alleviate problems caused by
computer viruses or security breaches, we may have to interrupt, delay or cease
service to our customers, which could materially harm our business.
THE INTERNET MAY FAIL TO SUPPORT AN INCREASING NUMBER OF USERS. The
wide-spread commercial use of the Internet is a relatively new development.
Critical issues regarding the stability of the Internet's infrastructure remain
unresolved. For example, the rapid rise in the number of Internet users and
increased transmission of multimedia content over the Web continues to place
increasing strains on the Internet's communications and transmission
infrastructures. If these trends continue it could lead to significant declines
in transmission speeds and reliability of the Internet, reducing the usage of
the Internet by businesses and individuals. The failure of
12
<PAGE> 13
the Internet to support an increasing numbers of users could materially harm our
business and impair the price of our common stock.
WE MAY EXPERIENCE DIFFICULTIES IN INTEGRATING BUSINESSES, PRODUCTS AND
TECHNOLOGIES WE MAY ACQUIRE INTO OUR BUSINESS. As part of our growth strategy,
we may acquire businesses, products and technologies and enter into joint
ventures and strategic relationships with other companies. Any of these
transactions would expose us to additional risks, including:
- the difficulty of assimilating and integrating the operations of the
combined companies and retaining key personnel;
- the potential disruption of our ongoing business; and
- the potential additional expenses associated with amortization of
acquired intangible assets, integration costs and unanticipated
liabilities or contingencies.
We do not have significant experience in the identification and management
of acquisitions. If we are unable to successfully address any of the foregoing
risks, it could materially harm our business and impair the price of our common
stock.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS. Given the early stage of
development of our business, we depend on the performance and efforts of our
senior management team and other key employees. If we lost the service of any
members of our senior management or other key employees it could materially harm
our business and impair the price of our common stock. Our senior management
includes Harry E. Gruber, our Chief Executive Officer and Chairman of the Board,
Brian Kenner, our Vice President and Chief Technology Officer, Kenneth L.
Ruggiero, our Vice President and Chief Financial Officer, and Edward L. Huguez,
our Vice President and Chief Operating Officer. We do not have employment
agreements with any of our officers or employees.
THE ENACTMENT OF NEW LAWS OR CHANGES IN GOVERNMENT REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS. We are not currently required to comply with
direct regulation by any domestic or foreign governmental agency, other than
regulations applicable to businesses generally and laws or regulations directly
applicable to the Internet. However, due to the increasing popularity of the
Internet, it is possible that additional laws may be adopted regarding the
Internet, any of which could materially harm our business. The adoption of any
additional laws may decrease the growth of Internet use, which could lead to a
decrease in the demand for our services or increase the cost of doing business.
Although we do not actively program or edit the content on our network, we
could be held liable if customers use our network to distribute content deemed
to be indecent or obscene. While we do not actively market our services to sites
that host adult video content, one or more of our customers may in the future
use our services to transmit this type of content. The law relating to liability
for transmitting obscene or indecent material over the Internet remains
unsettled. The imposition of potential liability for materials distributed
through the Internet could require us to implement measures to reduce our
exposure to this liability. These measures may require the expenditure of
substantial resources or the discontinuation of some services, which could
materially harm our business and impair the price of our common stock.
OUR INABILITY TO OBTAIN PATENT PROTECTION FOR OUR TECHNOLOGY OR
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD IMPAIR OUR COMPETITIVE
POSITION. Our success depends on our internally developed technologies and other
intellectual property. We regard our technology as proprietary and attempt to
protect it with patents, copyrights, trade secret laws and confidentiality and
nondisclosure agreements. Despite these precautions, it may be possible for a
third party to obtain and use our services or technology without authorization.
Third parties also may develop similar technology independently.
We have applied for 38 United States and foreign patents. Two of these
applications have issued in the United States, and we have received a notice of
allowance on another one of these applications. Some of these patents may not be
issued and, even if they are issued, they may not sufficiently protect our
technology. If any patents are not issued or if they fail to provide protection
to our technology, it may make it easier for our competitors to offer technology
equivalent or superior to ours. Moreover, we have applied for registration of a
13
<PAGE> 14
number of key trademarks and service marks and intend to introduce new
trademarks and service marks. We may not be successful in obtaining registration
for one or more of these trademarks.
We may need to resort to litigation in the future to enforce or to protect
our intellectual property rights, including our patent and trademark rights. In
addition, our technologies and trademarks may be claimed to conflict with or
infringe upon the patent, trademark or other proprietary rights of third
parties. If this occurred, we would have to defend ourselves against the
challenge, which could result in substantial costs and the diversion of
resources. We also may have to obtain a license to use those proprietary rights
or possibly cease using those rights altogether. Any of these events could
materially harm our business and impair the price of our common stock.
YEAR 2000 PROBLEMS COULD DISRUPT OUR BUSINESS. Many software programs may
not recognize calendar dates beginning in the Year 2000. This problem could
cause computers or machined that utilize date dependent software to either shut
down or provide incorrect information. As of the date of this annual report,
INTERVU has not experienced any material Year 2000 problems. However, if INTERVU
or any other company that it conducts business with fails to mitigate internal
and external Year 2000 risks, INTERVU may temporarily be unable to engage in
business activities, which could materially harm its business and impair the
value of INTERVU common stock.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE. The market price of
our common stock has fluctuated in the past and is likely to continue to
fluctuate in the future. In addition, the market prices of securities of other
technology companies, particularly Internet-related companies, currently are
highly volatile. Factors that may have a significant effect on the market price
of our common stock, many of which are beyond our control, include:
- fluctuations in our operating results;
- analysts' reports and projections;
- changes in the market valuations of other Internet companies; and
- announcements by us or our competitors relating to technological
innovations, new products or services, significant acquisitions,
strategic relationships or customer relationships.
Fluctuations in the market price of our common stock may in turn adversely
affect (1) our ability to complete any targeted acquisitions, (2) our access to
capital and financing and (3) our ability to attract and retain qualified
personnel. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation against that
company often results. We may become involved in this type of litigation in the
future. Litigation is often expensive and diverts management's attention and
resources, which could materially harm our business and impair the value of
INTERVU common stock.
OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL CONTROL OVER OUR
VOTING STOCK AND CAN MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK
PRICE. As of February 15, 2000, our present executive officers and directors and
their affiliates beneficially owned approximately 23.3% of our outstanding
common stock. As a result, these stockholders will continue to significantly
influence our management and affairs and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, such as a merger, consolidation or sale of substantially
all of our assets.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT AN
ACQUISITION OF OUR BUSINESS AT A PREMIUM PRICE. Some of the provisions of our
certificate of incorporation and bylaws could discourage, delay or prevent an
acquisition of our business at a premium price. These provisions:
- permit the board of directors to increase its own size and fill the
resulting vacancies;
- provide for a board comprised of three classes of directors with each
class serving staggered three year terms;
- authorize the issuance of preferred stock in one or more series; and
- prohibit stockholder action by written consent.
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<PAGE> 15
In addition, Section 203 of the Delaware General Corporation Law also
imposes restrictions on mergers and other business combinations between us and
any holder of 15% or more of our common stock.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE. The
market price of INTERVU common stock could drop due to sales of a large number
of shares of INTERVU common stock or the perception that these sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of INTERVU common stock.
As February 15, 2000, 15,615,702 shares of common stock were outstanding.
All shares of INTERVU common stock outstanding at February 15, 2000 are eligible
for sale in the public market, which includes shares of restricted stock that
have not yet vested but will be eligible for sale upon vesting. INTERVU has
reserved 1,139,477 shares of its common stock for issuance upon conversion of
outstanding shares of INTERVU preferred stock. Of these shares, 806,144 are
currently eligible for sale. An additional 3,502,544 shares of INTERVU common
stock are issuable upon the exercise of options and warrants, although a
substantial number of INTERVU options currently are not exercisable.
ITEM 2. PROPERTIES
INTERVU is headquartered in facilities consisting of approximately 36,333
square feet in San Diego, California, under a sublease expiring in 2003.
Additionally, INTERVU maintains offices in New York, San Francisco, Chicago,
Seattle, and Fairfax, Virginia. INTERVU anticipates opening additional regional
sales offices in 2000 and beyond as it increases the size of its sales force and
expands its sales and marketing initiatives.
ITEM 3. LEGAL PROCEEDINGS
From time to time, INTERVU may be involved in litigation arising in the
ordinary course of its business. INTERVU is not presently a party to any
material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTER TO A VOTE OF THE SECURITY HOLDERS
On October 20, 1999, INTERVU held a Special Meeting of Stockholders at
which the following proposal was voted on by the holders of its common stock and
Series G preferred stock:
1. To consider and vote upon a proposal to amend the 1998 Stock Option
Plan to increase the number of shares of the Company's common stock
reserved for issuance thereunder from 2,000,000 to 3,000,000 shares.
<TABLE>
<CAPTION>
VOTES
---------
<S> <C>
For............................... 7,396,070
Against........................... 3,154,275
Abstained......................... 11,065
Broker non-votes.................. 0
</TABLE>
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol ITVU. Trading of the Company's stock commenced on November 20, 1997. The
following table represents the quarterly high and low sales prices of shares of
common stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
First Quarter 1998................................... 14 1/2 7 5/8
Second Quarter 1998.................................. 32 3/8 12 5/8
Third Quarter 1998................................... 21 1/2 5 1/8
Fourth Quarter 1998.................................. 19 1/2 6
First Quarter 1999................................... 47 13
Second Quarter 1999.................................. 71 29 1/4
Third Quarter 1999................................... 53 1/8 26 13/16
Fourth Quarter 1999.................................. 115 1/2 37 13/16
</TABLE>
As of February 15, 2000, there were 276 holders of record of the Company's
common stock.
The Company has never declared dividends or paid any cash dividends on its
capital stock. The Company currently intends to retain all future earnings, if
any, for use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on its common stock in the
foreseeable future. The terms of the Series H Preferred Stock specify an annual
dividend rate of 6.5% payable quarterly in Series H Preferred Stock, common
stock or cash at the Company's option.
Recent Sales of Unregistered Securities
On July 14, 1999, INTERVU acquired Videolinx Communications, Inc., a
Virginia-based visual communications services company, through a merger of an
INTERVU subsidiary with and into Videolinx. Under the terms of the acquisition
agreement, INTERVU issued 38,399 shares of INTERVU common stock to Videolinx's
former stockholders.
On August 25, 1999, INTERVU acquired Netpodium Inc., a Seattle-based
innovator of live, interactive, Web-based communication software and event
hosting services. Under the terms of the acquisition, INTERVU issued 996,882
shares of common stock to Netpodium's former shareholders, assumed options to
purchase 192,275 shares of INTERVU common stock (on an as converted basis), at a
weighted average price of $1.66 per share, and assumed warrants to purchase
14,354 shares of INTERVU common stock (on an as converted basis) at an exercise
price of $8.71.
On November 11, 1999, INTERVU announced a strategic multi-tiered alliance
with the CNN News Group. As part of the agreement, INTERVU issued $20 million of
common stock to CNN. In return, CNN has agreed to provide INTERVU with three
years of on-air and online advertising and promotional opportunities across
CNN's properties, and INTERVU will sublicense CNN's domestic television networks
to its corporate clients for internal distribution on their local area networks.
INTERVU will provide fee based Internet video management and delivery services
for three years and will also deliver audio streaming services immediately.
Following the first anniversary of the agreement, if the fair market value of
the shares prior to the end of any fiscal quarter falls below $20.00 per share,
INTERVU has agreed to issue a letter of credit in the amount of $10.0 million to
CNN prorated by the number of INTERVU shares remaining held by CNN and by the
days into the agreement. INTERVU may become obligated to pay to CNN up to $10
million in cash or common stock, at INTERVU's option, if CNN holds the shares
issued to it for three years and the price per share of INTERVU's common stock
does not increase to 1.5 times the initial price of $57.20 at the effective date
of the agreement. Either party may terminate the contract at any time for
material breach by the other party that remains uncured or the other party's
bankruptcy or similar adverse condition. In the event the agreement is
terminated by CNN, CNN is required to pay INTERVU as of the date of the
termination
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<PAGE> 17
notice, the value of the undelivered services purchased under this agreement in
stock (the INTERVU stock to be valued at approximately $57 per share). In the
event the agreement is terminated by INTERVU because CNN engages another party
to provide Internet video management and delivery services, CNN is required to
pay INTERVU as of the date of termination in INTERVU stock (the INTERVU stock to
be valued at the issuance price of approximately $57 per share) (i) the value of
the undelivered services purchased under the agreement and (ii) a breakup fee of
$3,000,000 initially that declines to zero over the term of the agreement.
On December 20, 1999, INTERVU and Microsoft Corporation ("Microsoft")
announced a strategic partnership to expand INTERVU's broadband streaming media
network based on Microsoft's Windows Media platform and announced that Microsoft
will make an investment of $30 million in INTERVU. On December 23, 1999,
Microsoft purchased 30,000 shares of the Company's Series H 6.5% Convertible
Redeemable Preferred Stock due 2009 (the "Series H Preferred Stock"), a new
series of preferred stock. The shares of Series H Preferred Stock are
convertible at the option of the holder into an aggregate of 333,333 shares of
INTERVU's common stock, subject to customary anti-dilution adjustments. The
terms of the Series H Preferred Stock specify an annual dividend rate of 6.5%,
payable quarterly in Series H Preferred Stock, common stock or cash at INTERVU's
option. Microsoft also received a warrant to purchase 60,000 shares of INTERVU's
common stock at an exercise price of $90.00 per share, the conversion price of
the Series H Preferred Stock. Holders of Series H Preferred Stock have a
liquidation preference of $1,000 per share plus all accumulated dividends. On
December 19, 2009, if the Series H Preferred Stock has not been converted to
common, INTERVU will be required to redeem all outstanding shares of Series H
Preferred Stock at a price equal to the liquidation preference, plus accumulated
and unpaid dividends to the date of redemption.
The sales of the securities listed above were made in reliance upon Section
4(2) and Rule 506 of the Securities Act, which provide exemptions for
transactions not involving a public offering. The purchasers of securities
described above represented that they acquired them for their own account and
not with a view to any distribution thereof to the public. INTERVU made
inquiries of purchasers of securities in these transactions and obtained
representations from such purchasers to establish that such issuances qualified
for an exemption from the registration requirements. The certificates evidencing
the securities bear legends stating that the shares are not to be offered, sold
or transferred other than pursuant to an effective registration statement under
Securities Act, or an exemption from such registration requirements. INTERVU did
not retain underwriters in connection with the issuance of any of the securities
described above.
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ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with summary historical financial data
of INTERVU. We have prepared this information using the financial statements of
INTERVU for the period from August 2, 1995 (inception) to December 31, 1995 and
for each of the four years in the period ended December 31, 1999. The financial
statements for the period from August 2, 1995 (inception) to December 31, 1995
and for each of the four years in the period ended December 31, 1999 have been
audited by Ernst & Young LLP, independent auditors.
When you read this summary historical financial data, it is important that
you read along with it the historical financial statements and related notes in
our annual and quarterly reports filed with the SEC, as well as the section of
our annual and quarterly reports titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 2, 1995
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------------
1995 1996 1997 1998 1999
-------------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ -- $ -- $ 144 $ 1,761 $ 11,834
Cost of revenues................. -- -- 997 1,105 5,160
---- ---------- ---------- ---------- -----------
Gross margin..................... -- -- (853) 656 6,674
Operating expenses:
Research and development...... 33 1,420 1,705 4,752 10,094
Sales and marketing........... 16 516 1,920 6,021 15,638
General and administrative.... -- 394 231 4,143 11,107
Charges associated with the
NBC Strategic Alliance
Agreement(1)................ -- -- 750 4,622 17,194
---- ---------- ---------- ---------- -----------
Total operating expenses......... 49 2,330 4,606 19,538 54,033
---- ---------- ---------- ---------- -----------
Loss from operations............. (49) (2,330) (5,459) (18,882) (47,359)
Interest income.................. 3 52 192 1,281 3,968
---- ---------- ---------- ---------- -----------
Net loss......................... $(46) $ (2,278) $ (5,267) $ (17,601) $ (43,391)
==== ========== ========== ========== ===========
Basic and diluted net loss per
share(2)...................... $ (.66) $ (0.95) $ (1.83) $ (3.23)
========== ========== ========== ===========
Shares used in computing basic
and diluted net loss per
share(2)...................... 3,440,931 5,570,609 9,604,154 13,452,463
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997 1998 1999
------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short term investments....... $2,508 $21,408 $30,786 $115,047
Working capital......................................... 2,365 20,975 28,433 115,511
Total assets............................................ 2,776 22,158 34,361 142,719
Long-term liabilities................................... 27 7 -- 671
Redeemable preferred stock.............................. -- -- -- 30,000
Total stockholders' equity.............................. 2,597 21,559 31,132 106,214
</TABLE>
- ---------------
(1) In October 1999 INTERVU expensed the then-fair value of 600,000 of shares of
Series G preferred stock issued to NBC in connection with the formation of a
strategic alliance in October 1997 in the amount of $17.2 million. In
January 1998, INTERVU expensed the then-fair value of 680,000 shares of
Series G preferred stock issued to NBC in connection with the formation of
the same strategic alliance in the amount of $3.4 million. The charges
associated with the NBC Strategic Alliance also include $750,000 and $1.3
million in non-refundable cash payments due to NBC under the strategic
alliance agreement which were expensed during 1997 and 1998, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used in computing basic and diluted net loss per
share.
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<PAGE> 19
ITEM 7.MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements regarding
INTERVU, its business, prospects and results of operations that are subject to
change as a result of the proposed merger of INTERVU with Akamai Technologies,
Inc., which is expected to close during the second quarter of 2000, and are
subject to certain risks and uncertainties posed by many factors and events that
could cause INTERVU's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, the risks detailed under the caption "Item 1.
Business -- Factors that May Affect Future Performance."
OVERVIEW
INTERVU provides Web site owners and content publishers with cost-effective
services and automated tools for the streaming of live and on-demand video and
audio content over the Internet. INTERVU also provides Internet conferencing
services and interactive Web broadcasting services. INTERVU's customers use its
video and audio distribution services to transmit entertainment, sports, news,
and business-to-business content. INTERVU's current customers include AOL
MovieFone, Bloomberg, CNET, CNN, Digital Entertainment Network, DVD Express,
Excite@Home, House of Blues, Microsoft, MSNBC, NBC, NetRadio.com, Playboy,
Pseudo, Quokka Sports, Saatchi & Saatchi, Tunes.com, Turner Broadcasting and
Viacom/VH-1.
Revenues
INTERVU derives revenues from delivering live and on-demand video and audio
content over the Internet and providing related services, including production,
encoding, uplinking, Web site integration, distribution, reporting and
archiving. INTERVU typically charges its customers fees with fixed and variable
components. The fixed component consists of a monthly fee based on the
particular bundle of services provided and an agreed upon amount of content to
be stored and streams to be delivered. To the extent that a customer exceeds
agreed upon storage and delivery amounts, INTERVU typically charges variable
fees based on the amount by which content delivered exceeds the agreed upon
amount. For customers for which INTERVU performs specific projects, it charges a
combination of fixed and variable fees depending on the project. INTERVU also
derives revenues from consulting services relating to streaming media
technologies, although this is not expected to constitute a material portion of
INTERVU's revenues in the future.
Cost of Revenues
Cost of revenues consists of production expense which is comprised of
salaries and costs associated with producing an event, bandwidth and monthly
fees paid to Internet service providers and depreciation of servers added to the
Company's network.
Expenses
INTERVU's operating expenses consist of research and development, sales and
marketing, and general and administrative. Research and development expenses
consist primarily of salaries and related expenses for personnel, fees to
outside contractors and consultants, allocated costs of facilities and
depreciation and amortization of capital equipment. Research and development
expenses to date have been focused in three areas: (1) research and development
of software to improve the INTERVU Network's ability to deliver video and audio
content, (2) research and development of software to analyze Internet
performance and redirect individual end-users to optimal servers and (3)
research and development of software to help Web sites and businesses publish
their sites and communicate with end users.
Sales and marketing and general and administrative expenses consist
primarily of salaries, commissions, promotional expenses, professional services
and general operating costs. INTERVU expects that as it adds additional
customers, the corresponding increase in video delivery volumes will allow
INTERVU to generate economies of scale relative to its bandwidth costs because
it will be able to obtain larger volume discounts. To
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<PAGE> 20
the extent that INTERVU does not realize such economies of scale, INTERVU's
business will be adversely affected.
As INTERVU expands its business in 2000 and beyond, it expects that its
research and development, and sales and marketing, general and administrative
expenses will increase substantially. Research and development expenses are
expected to increase as INTERVU adds engineers to its in-house software
development team. INTERVU's sales and marketing and general and administrative
expenses will increase as INTERVU, among other things, hires additional
personnel, increases its advertising expenditures and establishes additional
sales offices.
INTERVU also expects to expand the INTERVU Network by adding servers in
additional Internet hosting centers. INTERVU depreciates equipment added to the
INTERVU Network over the useful lives of the asset and includes this expense in
cost of revenues.
NBC Strategic Alliance
In connection with entering into a strategic alliance with NBC Multimedia,
Inc., INTERVU issued 1,280,000 shares of its Series G Convertible Preferred
Stock to NBC in October 1997. INTERVU charged $3.4 million to expense in January
1998, representing the fair value of 680,000 shares of Series G preferred stock
at the time NBC's obligation to return those shares lapsed. INTERVU charged
$17.2 million to expense in October 1999, representing the fair value of the
remaining 600,000 shares of Series G preferred stock at the time NBC's
obligation, pursuant to the strategic alliance, to return those shares lapsed.
CNN Strategic Alliance
On November 11, 1999, INTERVU announced a strategic multi-tiered alliance
with the CNN News Group. As part of the agreement, INTERVU issued 349,612 shares
of common stock to CNN. In return, CNN will provide INTERVU with three years of
on-air and online advertising and promotional opportunities across CNN's
properties, and INTERVU will sub-license CNN's domestic television networks to
its corporate clients for internal distribution on their LANs. INTERVU will be
CNN's provider of fee-based Internet video management and delivery services for
three years and will also deliver audio streaming services immediately.
Following the first anniversary of the agreement, if the market value of the
shares prior to the end of any fiscal quarter falls below $20.00 per share,
INTERVU has agreed to issue a letter of credit in the amount of $10.0 million to
CNN prorated by the number of INTERVU shares remaining held by CNN and by the
number of days into the agreement. In addition, INTERVU may become obligated to
pay to CNN up to $10 million in cash or common stock, at INTERVU's option, if
CNN holds the shares issued to it for three years and the price per share of
INTERVU's common stock does not increase to 1.5 times the initial price at the
effective date of the agreement. Either party may terminate the contract at any
time for material breach by the other party that remains uncured or the other
party's bankruptcy or similar adverse condition. In the event the agreement is
terminated by CNN, CNN is required to pay INTERVU as of the date of the
termination notice, the value of the undelivered services purchased under this
agreement in stock (the INTERVU stock to be valued at approximately $57 per
share). In the event the agreement is terminated by INTERVU because CNN engages
another party to provide Internet video management and delivery services, CNN is
required to pay INTERVU as of the date of termination in INTERVU stock (the
INTERVU stock to be valued at the issuance price of approximately $57 per share)
(i) the value of the undelivered services purchased under the agreement and (ii)
a breakup fee of $3,000,000 initially that declines to zero over the term of the
agreement.
Microsoft Strategic Alliance
On December 20, 1999, INTERVU and Microsoft Corporation announced a
strategic alliance to expand INTERVU's broadband streaming media network based
on Microsoft's Window Media platform and announced that Microsoft will make an
investment of $30 million in INTERVU. On December 23, 1999, Microsoft purchased
30,000 shares of INTERVU's Series H 6.5% Convertible Redeemable Preferred Stock
due 2009 (the "Series H Preferred Stock"), a new series of preferred stock. The
shares of Series H Preferred Stock are convertible at the option of the holder
into an aggregate of 333,333 shares of INTERVU's common
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<PAGE> 21
stock, subject to customary anti-dilution adjustments. The terms of the Series H
Preferred Stock specify an annual dividend rate of 6.5%, payable quarterly in
Series H Preferred Stock, common stock or cash at INTERVU's option. Microsoft
also received a warrant to purchase 60,000 shares of the INTERVU's common stock
at an exercise price of $90.00 per share, the conversion price of the Series H
Preferred Stock. Holders of Series H Preferred Stock have a liquidation
preference of $1,000 per share plus all accumulated dividends. On December 19,
2009, if the Series H Preferred Stock has not been converted to common, INTERVU
will be required to redeem all outstanding shares of Series H Preferred Stock at
a price equal to the liquidation preference thereof, plus accumulated and unpaid
dividends to the date of redemption.
Acquisitions
On July 14, 1999, INTERVU acquired Videolinx Communications, Inc.
("Videolinx"), a Virginia-based visual communications services company, through
a merger of an INTERVU subsidiary with and into Videolinx. INTERVU acquired
Videolinx to strengthen INTERVU's focus on providing high-quality service to the
Internet audio and video conferencing space. The acquisition also provided
INTERVU with the ability to provide streaming customers with redundant call
centers located in San Diego, CA and Fairfax, VA. The new center in Virginia
provides additional back up to enhance staffing for various time zones,
reliability and peak load management. The acquisition was accounted for as a
purchase in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 16. Under the purchase method of accounting, the purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. Under the terms of the
acquisition agreement, INTERVU issued 38,399 shares of INTERVU common stock to
Videolinx's former stockholders and repaid approximately $145,000 of Videolinx's
indebtedness upon the closing.
On August 25, 1999, INTERVU acquired Netpodium Inc., a Seattle-based
innovator of live, interactive, Web-based communication software and event
hosting services. The acquisition has expanded INTERVU's audio and video
Internet broadcasting offerings in the business services market. Under the terms
of the acquisition, which was accounted for as a pooling of interests, INTERVU
issued 996,882 shares of common stock to Netpodium's former shareholders and
assumed options to purchase 192,275 shares of INTERVU common stock (on an as
converted basis), at a weighted average price of $1.66 per share, and assumed
warrants to purchase 14,354 shares of common stock (on an as converted basis) at
an exercise price of $8.71.
RESULTS OF OPERATIONS
INTERVU has incurred net losses in each fiscal period since its inception
and, as of December 31, 1999, had an accumulated deficit of $68.6 million. To
date, INTERVU has not generated sufficient revenues to absorb its operating
expenses, and, as a result of the significant expenditures INTERVU plans to make
as described above, INTERVU expects to continue to incur significant operating
losses and negative cash flows from operations for the foreseeable future.
1999 Compared to 1998
Total revenue for 1999 increased to $11.8 million from $1.8 million in the
prior year. The increase in revenues reflects the expansion of INTERVU's
streaming media services and its customer base, and the incremental revenues
associated with the acquisitions of Videolinx Communications, Inc. and Netpodium
Inc. in 1999.
Total cost of revenue for 1999 increased to $5.2 million from $1.1 million
in the prior year. The increase in the cost of revenues was primarily
attributable to an increase in the cost of bandwidth of $1.6 million and an
increase of $2.0 million in production expense which is comprised of salaries
and the costs associated with producing an event.
Research and development expenses for 1999 increased to $10.1 million from
$4.8 million in the prior year. The increase was due primarily to an increase of
$1.8 million in personnel and associated costs, an increase of $1.3 million in
depreciation, an increase of $1.4 million for consulting and a $115,000 increase
for travel and entertainment.
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<PAGE> 22
Sales and marketing expenses for 1999 increased to $15.6 million from $6.0
million in the prior year. The increase was attributable primarily to an
increase of $5.6 million in personnel and associated costs, an increase of
$672,000 in expenditures for trade shows and other marketing efforts, an
increase of $429,000 in consulting fees and an increase of $693,000 for travel
and entertainment.
General and administrative expenses for 1999 increased to $11.1 million
from $4.1 million in the prior year. The increase was attributable primarily to
an increase of $2.0 million in personnel and associated costs, an increase of
$954,000 in consulting fees, an increase of $930,000 for legal fees and
accounting fees and an increase of $310,000 for travel and entertainment.
Charges associated with the NBC strategic alliance agreement for the year
ended December 31, 1999 increased to $17.2 million from $4.6 million in the
prior year. The charges in the 1999 period reflected a non-cash charge of $17.2
million relating to the lapse of NBC's obligation to return 600,000 shares of
Series G preferred stock to INTERVU upon a termination by NBC of the strategic
alliance agreement. The charges in 1998 reflect (1) a non-cash charge of $3.4
million relating to the lapse of NBC's obligation to return 680,000 shares of
Series G preferred stock to INTERVU upon a termination by NBC of the strategic
alliance agreement and (2) a charge of $1.3 million relating to nonrefundable
cash payments paid to NBC Multimedia under the strategic alliance agreement for
the costs of producing and operating NBC's VideoSeeker Web site and the costs of
advertising and promotions placed by INTERVU on NBC Internet sites.
Interest income for 1999 increased to $4.0 million from $1.3 million in the
prior year. Interest income represents interest earned by INTERVU on its cash,
cash equivalents and short-term investments. The increase in interest income
over the comparable period in 1998 was the result of higher cash, cash
equivalents and short-term investments balances INTERVU obtained from sales of
equity securities.
INTERVU's net loss for 1999 increased to $43.4 million from $17.6 million
for the prior year.
INTERVU has not recorded any income tax benefit for net losses and credits
incurred for any period from inception to December 31, 1999. The utilization of
these losses and credits is contingent upon INTERVU's ability to generate
taxable income in the future. Because of that uncertainty, INTERVU has recorded
a full valuation allowance with respect to these deferred tax assets. See Note 6
of Notes to Consolidated Financial Statements for further discussion of these
deferred tax assets.
1998 Compared to 1997
Total revenue for 1998 increased to $1.8 million from $144,000 in the prior
year. The increase in revenues reflects the expansion of INTERVU's streaming
media services. INTERVU also generated additional revenue from its services to
NBC's VideoSeeker Web site and from consulting and seminar management services.
Total cost of revenue for 1998 increased to $1.1 million from $997,000 in
the prior year. The increase in the cost of revenue was primarily attributable
to an increase in the cost of bandwidth of $553,000.
Research and development expenses for 1998 increased to $4.8 million from
$1.7 million in the prior year. The increase in research and development
expenses was primarily attributable to a $1.5 million increase for personnel and
associated costs, an increase of $362,000 for consulting expense and an increase
of $60,000 for travel and entertainment.
Sales and marketing expenses for 1998 increased to $6.0 million from $1.9
million in the prior year. The increase was attributable primarily to an
increase of $1.6 million in personnel and associated costs, an increase of $1.8
million in expenditures for trade shows and other marketing efforts, an increase
of $128,000 in consulting fees and an increase of $274,000 for travel and
entertainment.
General and administrative expenses for 1998 increased to $4.1 million from
$231,000 in the prior year. The increase was attributable primarily to an
increase of $2.9 million in personnel and associated costs, and increase of
$108,000 in consulting fees, an increase of $276,000 for legal fees and
accounting fees and an increase of $54,000 for travel and entertainment.
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Charges associated with the NBC strategic alliance agreement for the year
ended December 31, 1998 increased to $4.6 million from $750,000 in the prior
year. The charges in the 1998 period reflected (1) a non-cash charge of $3.4
million relating to the lapse of NBC's obligation to return 680,000 shares of
Series G preferred stock to INTERVU upon a termination by NBC of the strategic
alliance agreement and (2) a charge of $1.3 million which has been paid relating
to nonrefundable cash payments which were due to NBC Multimedia under the
strategic alliance agreement for the costs of producing and operating NBC's
VideoSeeker Web site and the costs of advertising and promotions to be placed by
INTERVU on NBC Internet sites. The 1997 charges reflected the payment of
$750,000 of nonrefundable cash payments to NBC Multimedia under the strategic
alliance agreement.
Interest income for 1998 increased to $1.3 million from $192,000 in the
prior year. Interest income represents interest earned by INTERVU on its cash,
cash equivalents and short-term investments. The increase in interest income
over the comparable period in 1997 was the result of higher cash, cash
equivalents and short-term investments balances INTERVU obtained from sales of
equity securities.
INTERVU's net loss for 1998 increased to $17.6 million from $5.3 million
for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, INTERVU has financed its operations primarily through
sales of equity securities. Through December 31, 1999, INTERVU had raised $145.2
million from the sale of preferred stock and common stock. At December 31, 1999,
the principal source of liquidity for INTERVU was $115.0 million of cash, cash
equivalents and short-term investments.
INTERVU has had significant negative cash flows from operating activities
since inception. Cash used in operating activities was $25.1 million for 1999,
$11.5 million for 1998, and $4.6 million for 1997. Cash used in operating
activities in each of these years was primarily the result of increased business
activity and related operating expenses.
Cash used in investing activities was $68.4 million for 1999, primarily
representing purchases of short-term investments and capital expenditures for
equipment, software and furniture and fixtures. Cash used in investing
activities was $20.4 million for 1998, primarily representing the net purchases
of short-term investments and capital expenditures for equipment, software and
furniture and fixtures. Cash used in investing activities was $484,000 for 1997,
primarily representing capital expenditures for equipment, software and
furniture and fixtures. As of December 31, 1999, INTERVU has no material
commitments for capital expenditures. However, in March 1999, INTERVU financed
$1.1 million of equipment under a three-year non-cancelable leaseline with an
interest rate of 7.75%.
Cash provided by financing activities was $128.2 million for 1999, $23.6
million for 1998, and $23.9 million for 1997. In 1999, the cash provided by
financing activities was primarily from the $97.0 million received in net
proceeds from the sale of common stock in a public offering completed in May
1999, and $30.0 million in net proceeds from the sale of Series H 6.5%
Convertible Redeemable Preferred Stock due 2009 to Microsoft completed in
December 1999. In 1998, the cash provided by financing activities was primarily
from the $17.8 million in net proceeds from the sale of common stock in a public
offering completed in June 1998. Cash provided in 1997 was primarily due to net
proceeds received by INTERVU from the sale of preferred stock and completion of
INTERVU's initial public offering and direct offering to NBC in November 1997.
Net proceeds from INTERVU's initial public offering and direct offering to NBC
in 1997 aggregated $18.6 million.
In June 1998, INTERVU relocated its headquarters to office space subleased
in San Diego, California. The sublease commenced in May 1998 and will expire in
June 2003. Over the term of the lease INTERVU will pay total rent of
approximately $2.5 million.
INTERVU believes existing cash, cash equivalents and short-term investments
will be sufficient to meet its working capital and capital expenditure
requirements through at least the end of 2000. Thereafter, if cash generated by
operations is insufficient to satisfy INTERVU's liquidity requirements, INTERVU
may need to
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<PAGE> 24
sell additional equity or debt securities or obtain credit facilities. INTERVU
has a line of credit with an outstanding balance of $115,000 as of December 31,
1999.
IMPACT OF YEAR 2000
In prior years, INTERVU discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, INTERVU completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
INTERVU experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. INTERVU expensed $22,000
during 1999 in connection with remediating its systems. INTERVU is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. INTERVU
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTERVU is exposed to changes in interest rates primarily from its
investments in certain available for sale marketable securities. Under its
current policies, INTERVU does not use interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point adverse
move in interest rates along the entire interest rate yield curve would not
materially affect the fair value of interest sensitive financial instruments at
December 31, 1999.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERVU INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 26
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 27
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... 28
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998
and 1997.................................................. 29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... 30
Notes to Consolidated Financial Statements.................. 31
</TABLE>
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterVU Inc.
We have audited the accompanying consolidated balance sheets of InterVU
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InterVU Inc. at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Diego, California
February 10, 2000
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<PAGE> 27
INTERVU INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 48,097 $ 13,086
Short-term investments.................................... 66,950 17,700
Accounts receivable, less allowance of $788,000 and
$122,000, at December 31, 1999 and 1998,
respectively........................................... 5,373 795
Prepaid and other current assets.......................... 925 81
-------- --------
Total current assets........................................ 121,345 31,662
Property and equipment, net................................. 13,858 2,654
Intangible assets, net...................................... 1,156 --
Other assets................................................ 6,360 45
-------- --------
Total assets...................................... $142,719 $ 34,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,916 $ 1,387
Accrued liabilities....................................... 774 198
Deferred revenue.......................................... 554 210
Payable to NBC Multimedia................................. -- 750
Accrued payroll and related benefits...................... 1,145 677
Current portion of long-term debt......................... 60 --
Current portion of capital lease obligations.............. 385 7
-------- --------
Total current liabilities......................... 5,834 3,229
Capital lease obligations, less current portion............. 515 --
Long term debt, less current portion........................ 55 --
Other long-term liabilities................................. 101 --
Commitments
Redeemable convertible preferred stock, $0.001 par value:
Series H 30,000 shares and 0 shares issued and outstanding
at December 31, 1999 and December 31, 1998,
respectively.............................................. 30,000 --
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Authorized -- 5,000,000 shares:
Series G convertible preferred stock,
Designated -- 1,280,000 shares; Issued and
outstanding -- 1,280,000 shares at December 31, 1999
and December 31, 1998, respectively.................... 1 1
Common stock, $0.001 par value: Authorized -- 45,000,000
shares; Issued and outstanding -- 15,525,821 shares and
11,865,097 shares at December 31, 1999 and 1998,
respectively.............................................. 15 12
Additional paid-in capital.................................. 203,823 57,057
CNN prepaid advertising..................................... (20,000) --
Deferred compensation....................................... (8,943) (746)
Accumulated other comprehensive (loss)...................... (99) --
Accumulated deficit......................................... (68,583) (25,192)
-------- --------
Total stockholders' equity........................ 106,214 31,132
-------- --------
Total liabilities and stockholders' equity........ $142,719 $ 34,361
======== ========
</TABLE>
See accompanying notes.
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INTERVU INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenues.............................................. $ 11,834 $ 1,761 $ 144
Cost of revenues...................................... 5,160 1,105 997
----------- ---------- ----------
Gross margin.......................................... 6,674 656 (853)
Operating expenses:
Research and development............................ 10,094 4,752 1,705
Sales and marketing................................. 15,638 6,021 1,920
General and administrative.......................... 11,107 4,143 231
Charges associated with the NBC Strategic Alliance
Agreement........................................ 17,194 4,622 750
----------- ---------- ----------
Total operating expenses.............................. 54,033 19,538 4,606
----------- ---------- ----------
Loss from operations.................................. (47,359) (18,882) (5,459)
Interest income....................................... 3,968 1,281 192
----------- ---------- ----------
Net loss.............................................. $ (43,391) $ (17,601) $ (5,267)
=========== ========== ==========
Basic and diluted net loss per share.................. $ (3.23) $ (1.83) $ (0.95)
=========== ========== ==========
Shares used in calculating basic and diluted net loss
per share........................................... 13,452,463 9,604,154 5,570,609
=========== ========== ==========
</TABLE>
See accompanying notes.
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INTERVU INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES DEFERRED
RECEIVABLE COMPENSATION
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM AND
------------------- ------------------- PAID-IN COMMON CNN PREPAID
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADVERTISING
---------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 1,194,138 $ 1 4,006,787 $ 4 $ 5,325 $(6) $ (403)
Issuance of common stock in initial
public offering net of issuance
cost of $2,432.................... -- -- 2,210,526 2 18,566 -- --
Issuance of convertible preferred
stock............................. 832,164 1 -- -- 5,395 -- --
Conversion of preferred stock...... (2,026,302) (2) 3,237,286 3 (1) -- --
Issuance of Series G convertible
preferred stock................... 1,280,000 1 -- -- (25) -- --
Repayments of note receivable from
common stockholders............... -- -- -- -- -- 4 --
Repurchase of restricted stock..... -- -- (108,685) -- (3) 2 --
Issuance of shares for exercise of
stock options..................... -- -- 31,490 -- 1 -- --
Issuance of stock upon formation of
Netpodium......................... -- -- 43,117 -- 30 -- --
Deferred compensation.............. -- -- -- -- 563 -- (563)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 256
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1997....... 1,280,000 1 9,420,521 9 29,851 -- (710)
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- -- -- 3,373 -- --
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $1,973................... -- -- 1,495,000 2 17,834 -- --
Repurchase of restricted stock..... -- -- (28,334) -- (1) -- --
Issuance of shares for exercise of
stock options..................... -- -- 47,789 -- 80 -- --
Issuance of common stock........... -- -- 927,493 1 5,681 -- --
Compensation related to stock
options........................... -- -- 2,628 -- 22 -- --
Deferred compensation.............. -- -- -- -- 217 -- (217)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 181
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1998....... 1,280,000 1 11,865,097 12 57,057 -- (746)
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- -- -- 17,194 -- --
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 2,875,000 3 97,004 -- --
Issuance of stock to CNN for
prepaid advertising............... -- -- 349,612 -- 20,000 -- (20,000)
Repurchase of restricted stock..... -- -- (47,437) -- (2) -- --
Issuance of shares under ESPP
plan.............................. -- -- 13,396 -- 106 -- --
Issuance of shares for exercise of
warrants.......................... -- -- 165,837 -- -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 225,301 -- 1,162 -- --
Issuance of common stock........... -- -- 40,616 -- 111 -- --
Issuance of common stock related to
the acquisition of Videolinx...... 38,399 1,530
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- -- -- 9,661 -- (9,084)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 887
Comprehensive Income:
Net loss.......................... -- -- -- -- -- -- --
Unrealized loss on short-term
investments..................... -- -- -- -- -- -- --
Total comprehensive income
(loss)............................ -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1999....... 1,280,000 $ 1 15,525,821 $15 $203,823 $-- $(28,943)
========== === ========== === ======== === ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
(LOSS) DEFICIT EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996....... $ -- $ (2,324) $ 2,597
Issuance of common stock in initial
public offering net of issuance
cost of $2,432.................... -- -- 18,568
Issuance of convertible preferred
stock............................. -- -- 5,396
Conversion of preferred stock...... -- -- --
Issuance of Series G convertible
preferred stock................... -- -- (24)
Repayments of note receivable from
common stockholders............... -- -- 4
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 1
Issuance of stock upon formation of
Netpodium......................... -- -- 30
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 256
Net loss........................... -- (5,267) (5,267)
---- -------- --------
Balance at December 31, 1997....... -- (7,591) 21,560
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- 3,373
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $1,973................... -- -- 17,836
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 80
Issuance of common stock........... -- -- 5,682
Compensation related to stock
options........................... -- -- 22
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 181
Net loss........................... -- (17,601) (17,601)
---- -------- --------
Balance at December 31, 1998....... -- (25,192) 31,132
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- 17,194
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 97,007
Issuance of stock to CNN for
prepaid advertising............... -- -- --
Repurchase of restricted stock..... -- -- (2)
Issuance of shares under ESPP
plan.............................. -- -- 106
Issuance of shares for exercise of
warrants.......................... -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 1,162
Issuance of common stock........... -- -- 1,641
Issuance of common stock related to
the acquisition of Videolinx......
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- 577
Amortization of deferred
compensation...................... -- -- 887
Comprehensive Income:
Net loss.......................... -- (43,391) (43,391)
Unrealized loss on short-term
investments..................... (99) -- (99)
--------
Total comprehensive income
(loss)............................ -- -- 43,490
---- -------- --------
Balance at December 31, 1999....... $(99) $(68,583) $106,214
==== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE> 30
INTERVU INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (43,391) $(17,601) $(5,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Recognition of lapse of NBC's obligation to return shares
of Series G convertible preferred stock issued under the
NBC Strategic Alliance Agreement........................ 17,194 3,373 --
Loss on disposal of property and equipment................ -- 11 --
Issuance of common stock for services..................... 577 22 --
Amortization of deferred compensation..................... 887 181 256
Depreciation and amortization............................. 3,372 615 178
Changes in operating assets and liabilities net of effects
from the purchase of Videolinx:
Accounts receivable..................................... (4,239) (707) (89)
Prepaid and other assets................................ (1,034) (49) (60)
Accounts payable........................................ 1,065 949 350
Accrued liabilities..................................... 438 205 --
Deferred revenue........................................ 344 210 --
Payable to NBC Multimedia............................... (750) 750 --
Accrued payroll and related benefits.................... 468 529 76
--------- -------- -------
Net cash used in operating activities....................... (25,069) (11,512) (4,556)
INVESTING ACTIVITIES:
Acquisition of Videolinx net of cash acquired............... 41 -- --
Purchase of short-term investments.......................... (208,338) (42,232) --
Proceeds from sale of short-term investments................ 158,989 24,532 --
Purchases of property and equipment......................... (12,707) (2,675) (484)
Investments in other entities............................... (6,100) -- --
--------- -------- -------
Net cash used in investing activities....................... (68,115) (20,375) (484)
FINANCING ACTIVITIES:
Payments on capital leases.................................. (304) (12) (8)
Proceeds from note payable.................................. 165 -- --
Repayment on note payable................................... (50) -- --
Proceeds from issuance of redeemable convertible preferred
stock and warrants........................................ 30,000 -- --
Issuance of common stock.................................... 98,386 23,578 18,599
Issuance of preferred stock................................. -- -- 3,336
Advances from stockholders.................................. -- -- 2,010
Repurchase of common stock.................................. (2) (1) (1)
Repayment of stockholder notes receivable................... -- -- 4
--------- -------- -------
Net cash provided by financing activities................... 128,195 23,565 23,940
--------- -------- -------
Net increase in cash and cash equivalents................... 35,011 (8,322) 18,900
Cash and cash equivalents at beginning of year.............. 13,086 21,408 2,508
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 48,097 $ 13,086 $21,408
========= ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered into for equipment........ $ 1,155 $ -- $ 27
--------- -------- -------
Conversion of advances from stockholders to convertible
preferred stock........................................... $ -- $ -- $ 2,306
--------- -------- -------
Expense related to issuance of common stock for services.... $ 577 $ 22 $ --
--------- -------- -------
Cancellation of stockholder notes receivable................ $ -- $ -- $ 1
--------- -------- -------
Issuance of Series G convertible preferred stock as
consideration for the formation of NBC Strategic Alliance
Agreement................................................. $ -- $ -- $ 1
--------- -------- -------
Recognition of lapse of NBC's obligation to return shares of
Series G convertible preferred stock issued under the NBC
Strategic Alliance Agreement.............................. $ 17,194 $ 3,373 $ --
--------- -------- -------
</TABLE>
See accompanying notes.
30
<PAGE> 31
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterVU Inc. (the "Company" or "INTERVU") was incorporated in Delaware on
August 2, 1995 to provide services for the delivery or "streaming" of live and
on-demand video and audio content over the Internet. The Company utilizes a
distributed network to accelerate the speed and improve the quality of video and
audio delivery.
Basis of Presentation
The consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. On August 25, 1999 the
Company acquired Netpodium in a business combination accounted for as a
pooling-of-interests. Netpodium Inc., a Seattle based innovator of live,
interactive web-based communication software and event hosting services, became
a wholly owned subsidiary of the Company through the exchange of approximately
one million shares of common stock for all outstanding stock, stock options and
warrants of Netpodium. The accompanying financial statements have been prepared
as if the companies had been combined for all periods presented, as more fully
discussed in Note 9.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. Such investments are made in accordance with the Company's investment
policy, which establishes guidelines relating to diversification, maturities and
credit quality designed to maintain safety and liquidity. The Company applies
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115), to its short-term
investments. Under SFAS No. 115, the Company classifies its short-term
investments as "available-for-sale" and records such assets at estimated fair
value in the balance sheets with unrealized gains and losses, if any, reported
in stockholders' equity.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, payable to NBC
Multimedia, accrued payroll and related benefits and lease commitments
approximates fair value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and depreciated over the estimated useful lives of the assets, ranging from
three to five years, using the straight-line method. Leasehold improvements are
stated at cost and amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the lease term. Amortization of
equipment under capital leases is reported with depreciation of property and
equipment.
Intangible Assets
Intangible assets consist of goodwill and patents.
The Company has recorded goodwill of $1.2 million for the excess purchase
price over the estimated fair value of tangible and intangible assets acquired
and liabilities assumed resulting from its acquisition of Videolinx. The
goodwill is amortized on a straight line basis over seven years from July 15,
1999, date of acquisition.
31
<PAGE> 32
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of patent applications and costs incurred in filing for patents
are capitalized. Capitalized costs related to patent applications are expensed
when it becomes determinable that such applications will not be pursued.
Capitalized costs related to issued patents are amortized over a period not to
exceed seventeen years or the remaining useful life of the patents, whichever is
shorter, using the straight-line method. As of December 31, 1999, the Company
had $82,000 of capitalized patent costs.
Accumulated amortization of intangible assets at December 31, 1999 and 1998
was $89,000 and $0, respectively.
Software Development Costs
SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, provides for the capitalization of certain software
development costs after technological feasibility of the software is attained.
No such costs have been capitalized to date because costs incurred subsequent to
reaching technological feasibility have not been material.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs incurred during the
application development stage and amortize them over the software's useful life
(three years.) As of December 31, 1999 the Company has capitalized $1,470,000 of
development costs related to internal use software compared with $1,044,000 as
of December 31, 1998. Accumulated amortization of developed computer software at
December 31,1999 and 1998 was $385,000 and $95,000, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
Revenue Recognition
Revenue is generated primarily from video encoding and distribution
services. Revenue from video encoding services is recognized as the service is
provided and revenue from video distribution services is recognized at the time
of delivery. The Company also performs services on development contracts and
recognizes related revenues on a percentage-of-completion method as services are
performed. Substantially all revenue is generated from domestic customers.
The Company's wholly owned subsidiary Netpodium generates revenue from
licensing the rights to use its software products directly to end-users and also
generates revenue from broadcast hosting services and the sale of customer
support services. Netpodium recognizes revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition." Revenues from software
license agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. The software revenue represents less
than 10% of total revenues in each of the years presented.
Concentration of Credit Risk
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of governmental
agencies. The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity.
32
<PAGE> 33
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. The Company has identified no such impairment
losses. Substantially all of the Company's long-lived assets are located in the
United States.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $1.3
million and $1.0 million in advertising costs for the years ended December 31,
1999 and 1998, respectively.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation, and EITF 96-18,
Accounting for Equity Instruments, That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, establishes the use
of the fair value based method of accounting for stock-based compensation
arrangements, under which compensation cost is determined using the fair value
of stock-based compensation determined as of the grant date, and is recognized
over the periods in which the related services are rendered. Deferred
compensation for options granted to non-employees has been determined in
accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest. SFAS
No. 123 also permits companies to elect to continue using the intrinsic value
accounting method specified in Accounting Principles Board (APB) Opinion No. 25
to account for stock-based compensation. The Company has decided to retain the
intrinsic value based method, and has disclosed the pro forma effect of using
the fair value based method to account for its stock-based compensation (Note
5).
Loss Per Share
Historical basic and diluted net loss per share has been computed in
accordance with SFAS No. 128. Earnings Per Share, using the weighted-average
number of shares of common stock outstanding during the period. Common
equivalent shares result from Series G Preferred Stock, Series H Preferred
Stock, stock options, warrants and unvested restricted stock of which 5,311,265,
4,065,391 and 3,365,614 shares were excluded from the computation of diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997,
respectively, as their effect would be anti-dilutive.
Recent Accounting Standards
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Segment Information. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during the period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments shall be reported, net of their
related tax effect, to arrive at comprehensive income. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about their reportable operating segments.
33
<PAGE> 34
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating segments, as defined in SFAS No. 131, are components of an enterprise
for which separate financial information is available and is evaluated regularly
by a company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. The Company believes it
operates in one business and operating segment and adoption of this standard did
not have a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of SFAS 133 by one year. The Company will be required
to adopt SFAS 133 for fiscal year 2001. This statement establishes a new model
for accounting for derivatives and hedging activities. Under SFAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company has not completed its determination of the impact of the
adoption of this new accounting standard on its financial position or results of
operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to current
year presentation.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------- ----------
<S> <C> <C> <C> <C>
At December 31, 1999:
US Treasury securities and obligations of US
government agencies....................... $ 61 $-- $-- $ 61
Municipal Bonds.............................. 38,300 -- -- 38,300
U.S. corporate debt securities............... 28,688 -- 99 28,589
------- -- --- -------
$67,049 $-- $99 $66,950
======= == === =======
At December 31, 1998:
Municipal Bonds........................... $17,700 $-- $-- $17,700
======= == === =======
</TABLE>
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Due in one year or less......................... $51,614
Due after one year through two years............ 15,275
-------
$66,950
=======
</TABLE>
34
<PAGE> 35
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Equipment......................................... $ 904 $ 81
Computers......................................... 11,267 2,041
Furniture and fixtures............................ 205 125
Equipment under capital lease..................... 1,175 27
Leasehold improvements............................ 320 21
Internally developed software..................... 1,470 1,044
Purchased software................................ 2,839 152
------- ------
18,180 3,491
Less accumulated depreciation..................... (4,322) (837)
------- ------
$13,858 $2,654
======= ======
</TABLE>
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
At December 31, 1999 the Company had authorized 5,000,000 shares of
preferred stock, of which 1,280,000 shares were designated as Series G
convertible preferred stock and 30,000 shares were designated as Series H 6.5%
Convertible Redeemable Preferred Stock due 2009. The Board of Directors is
authorized, without further stockholder approval, to issue the remaining
3,690,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, and restrictions granted or imposed upon any unissued
shares of preferred stock and to fix the number of shares constituting any
series and the designation of such series.
In connection with the formation of a strategic alliance in October 1997,
the Company issued 1,280,000 shares of Series G convertible preferred stock to
NBC. The Series G convertible preferred stock ($0.001 par value) has an
aggregate liquidation preference of $10,240,000, a dividend rate of $0.64 per
share and a conversion rate of 0.6298 common shares to one preferred share,
subject to adjustment for dilution. Noncumulative dividends are payable
quarterly, when, as and if declared by the Board of Directors. The shares of
Series G convertible preferred stock are convertible into common stock at the
option of the holder commencing July 10, 1998. The holder of each share of
Series G convertible preferred stock has the right to one vote for each share of
common stock into which it would convert.
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic partnership. Microsoft purchased 30,000 shares of the
Company's Series H 6.5% Convertible Redeemable Preferred Stock due 2009 (the
"Series H Preferred Stock"), a new series of preferred stock. The shares of
Series H Preferred Stock are convertible at the option of the holder into an
aggregate of 333,333 shares of the Company's common stock, subject to customary
anti-dilution adjustments. The terms of the Series H Preferred Stock specify an
annual dividend rate of 6.5%, payable quarterly in Series H Preferred Stock,
common stock or cash at the Company's option. Holders of Series H Preferred
Stock have a liquidation preference of $1,000 per share plus all accumulated
dividends. On December 19, 2000 if the Series H Preferred Stock has not been
converted to common, the Company will be required to redeem all outstanding
shares of Series H Preferred Stock at a price equal to the liquidation
preference, plus accumulated and unpaid dividends to the date of redemption.
35
<PAGE> 36
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock
In August 1995, 2,398,278 shares of common stock were issued to the
founders of the Company at a price of $0.0004 per share under founder stock
purchase agreements. In March 1996, an additional 886,758 shares of common stock
were issued to three of the founders at a price of $0.002 per share under the
founder stock purchase agreements. In January 1996, the Company issued 147,373
shares of common stock to employees at $0.004 per share under restricted stock
agreements. Also, in April and December 1996, the Company issued 444,639 and
129,739 shares of common stock, respectively, to employees at $0.024 and $0.04
per share, respectively, under restricted stock agreements. In connection with
the founder stock purchase agreements and the restricted stock agreements, the
Company has the option to repurchase, at the original issue price, unvested
common shares in the event of termination of employment. Shares issued under the
agreements generally vest 20% on the first anniversary of the employee's hire
date and daily thereafter for four years. Shares subject to repurchase by the
Company totaled 472,448 and 1,107,247 at December 31, 1999 and 1998,
respectively. In 1999 and 1998, the Company repurchased a total of 47,437 shares
for $2,000 and 28,334 shares for $1,000, respectively, pursuant to the
agreements.
In August 1997, the Board of Directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock to the public. Concurrent with the closing of the
offering, all of the preferred stock outstanding, excluding 1,280,000 shares of
Series G preferred stock, automatically converted into 3,328,717 shares of
common stock.
On June 18, 1999, the Company increased the number of authorized shares of
the Company's common stock from 20,000,000 to 45,000,000 shares.
Stock Options
The Company has established stock option plans to grant options to purchase
common stock to consultants, employees, officers and directors of the Company.
The Company has authorized for grant under the plans stock options to purchase
up to 5,081,676 shares of its common stock.
Under the terms of the plans, non-qualified and incentive options may be
granted to consultants, employees, officers and directors at prices not less
than 100% of the fair value on the date of grant. Options generally vest 20%
after the first year of employment and daily thereafter for four years. The
options expire ten years from the date of grant.
36
<PAGE> 37
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option activity under the plans:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996................ 157,000 $ 0.04
Granted................................... 711,000 3.15
Exercised................................. (32,000) 0.03
Canceled.................................. (92,000) 0.03
--------- ------
Balance at December 31, 1997................ 744,000 3.00
Granted................................... 1,537,000 11.19
Exercised................................. (50,000) 1.77
Canceled.................................. (363,000) 9.72
--------- ------
Balance at December 31, 1998................ 1,868,000 9.39
Granted................................... 2,406,000 35.24
Exercised................................. (225,000) 5.15
Canceled.................................. (484,000) 23.94
--------- ------
Balance at December 31, 1999................ 3,565,000 $25.12
========= ======
</TABLE>
Options exercisable as of December 31, 1999 and 1998 were 491,000 and
209,000, respectively and approximately 1.2 million shares are available for
future grant under the Company's stock option plans as of December 31, 1999.
Additional information regarding stock options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ---------------------------
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES PRICE LIFE (IN YEARS) SHARES PRICE
------------------------ --------- --------- --------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 to $8.38.............. 736,000 $ 3.86 6.85 250,000 $ 3.23
$8.63 to $17.00............. 611,000 12.97 8.51 157,000 12.49
$17.50 to $30.63............ 621,000 21.96 8.86 84,000 18.60
$31.00 to $36.75............ 694,000 33.12 9.63 -- --
$37.13 to $44.50............ 596,000 40.89 9.52 -- --
$45.25 to $97.75............ 307,000 58.07 9.71 -- --
--------- ------ ---- ------- ------
$0.04 to $97.75............. 3,565,000 $25.12 8.72 491,000 $ 8.83
========= ====== ==== ======= ======
</TABLE>
Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
prescribed in that Statement. For options granted from January 1, 1996 through
November 18, 1997, the fair value for the options was estimated at the date of
grant using the "minimum value" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 6%, dividend yield of
0%, and weighted-average expected life of the option of seven years. For options
granted from November 18, 1997 to December 31, 1997, the fair value of the
options was estimated at the date of grant using the "Black-Scholes" method for
option pricing with the following weighted-average assumptions: risk free
interest rate of 6%, dividend yield of 0%, expected volatility of 75% and
weighted-average expected life of the option of seven years. For options granted
in 1998, the fair value of the options was estimated at the date of the grant
using the following assumptions: risk free interest rate of 6%, dividend yield
of 0%, expected volatility of 108% and weighted-average expected life of seven
years. For options granted in 1999, the fair
37
<PAGE> 38
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of the options was estimated at the date of the grant using the following
assumptions: risk free interest rate of 6%, dividend yield of 0%, expected
volatility of 150% and weighted-average expected life of seven years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of related options. The
Company's net loss would have been affected by the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Net loss
As reported........................................ $(43,391) $(17,601) $(5,267)
Pro forma.......................................... $(52,810) $(19,165) $(5,102)
Basic and diluted net loss per share
As reported........................................ $ (3.23) $ (1.83) $ (0.95)
Pro forma.......................................... $ (3.93) $ (2.00) $ (0.92)
Weighted-average fair value of options granted..... $ 35.24 $ 10.33 $ 1.11
</TABLE>
Employee Qualified Stock Purchase Plan
The Employee Qualified Stock Purchase Plan ("Qualified Stock Purchase
Plan") was adopted by the Board of Directors on February 25, 1998, and by the
Company's stockholders on June 22, 1998 and became effective September 1, 1998.
A total of 500,000 shares of common stock have been authorized for issuance
under the Qualified Stock Purchase Plan. The Qualified Stock Purchase Plan
permits eligible employees of the Company to purchase shares of common stock
through periodic payroll deductions. Payroll deductions may not exceed 15% of
the participant's base salary, and the purchase price will not be less than 85%
of the lower of the fair market value of the stock at either the beginning or
the end of the offering period. As of December 31, 1999, 13,396 shares had been
issued under the plan.
Deferred Compensation
Through December 31, 1999, the Company recorded deferred compensation for
the difference between the price per share of restricted stock issued or the
exercise price of stock options granted and the deemed fair value for financial
statement presentation purposes of the Company's common stock at the date of
issuance or grant. The deferred compensation is amortized over the vesting
period of the related restricted stock or options, which is generally five
years. Through December 31, 1999, the Company recorded gross deferred
compensation totaling $10.3 million and related amortization expense totaling
$887,000, $181,000, and $256,000 for the fiscal years 1999, 1998 and 1997,
respectively.
Warrants
In connection with the Company's initial public offering in November 1997,
the Company issued warrants to purchase 200,000 shares of common stock to its
underwriters. Such warrants are exercisable at $11.40 per share of common stock
through November 2002. In connection with the Company's public offering in June
1998, the Company issued warrants to purchase 130,000 shares of common stock to
its underwriters.
38
<PAGE> 39
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
These warrants are exercisable at $15.90 per share commencing June 1999 and
expire in June 2003. In December 1999, the Company issued a warrant to purchase
60,000 shares of common stock to Microsoft in conjunction with its purchase of
Series H Preferred Stock. This warrant is exercisable at $90.00 per share
commencing December 1999 and expires in December 2004. At December 31, 1999
warrants to purchase 134,000 shares remain unexercised with a weighted average
exercise price of $48.66 per share.
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Conversion of redeemable preferred stock...... 333,000 --
Conversion of preferred stock................. 806,000 806,000
Stock options issued and outstanding.......... 3,565,000 1,868,000
Warrants issued and outstanding............... 134,000 330,000
Authorized for future option grants and share
purchases................................... 1,697,000 1,280,000
--------- ---------
6,535,000 4,284,000
========= =========
</TABLE>
5. COMMITMENTS
The Company leases certain of its operating facilities and equipment under
operating and capital leases with terms ranging up to five years. Future annual
minimum payments under noncancelable capital and operating leases (with initial
lease terms in excess of one year) consisted of the following at December 31,
1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
2000.............................................. $1,248 $ 442
2001.............................................. 1,237 435
2002.............................................. 1,267 108
2003.............................................. 720 --
2004.............................................. 316 --
------ -----
Total minimum lease payments...................... $4,788 985
======
Less amounts representing interest................ (85)
-----
Present value of future minimum lease payments.... 900
Less current portion.............................. (385)
-----
Capital lease obligation, net of current
portion......................................... $ 515
=====
</TABLE>
Rental expense under operating leases for the years ended December 31,
1999, 1998, and 1997 was $1,167,000, $327,000, and $129,000, respectively.
In March 1999, the Company financed $1.1 million of equipment under a
three-year non-cancelable lease with an annual interest rate of 7.75%.
39
<PAGE> 40
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance of $26,584,000 has been
recorded at December 31, 1999 to offset the net deferred tax assets because
realization is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 24,682 $ 8,999
Research tax credit carryforwards............. 932 517
Other......................................... 970 429
-------- -------
Total deferred tax assets............. 26,584 9,945
Valuation allowance............................. (26,584) (9,945)
-------- -------
Net deferred tax assets......................... $ -- $ --
======== =======
</TABLE>
The Company had federal and California tax net operating loss carryforwards
at December 31, 1999 of approximately $65.0 million and $33.6 million,
respectively. The difference between the federal and California tax loss
carryforwards is attributable to the 50% limitation on California loss
carryforwards for 1999. The federal and California tax loss carryforwards will
begin to expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $686,000 and $379,000, respectively, which will begin to expire in
2011 and 2010, respectively, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards may be limited because of
a cumulative change in ownership of more than 50% which occurred during 1996.
However, the Company does not believe such limitation will have a material
impact on the Company's ability to use these carryforwards.
7. EMPLOYEE BENEFITS
In 1996, the Company established a cafeteria benefits plan whereby it
contributes for each employee an amount equal to $3,000 plus a percentage of
each employee's base salary, as approved by the Board of Directors, up to a
maximum contribution of $9,000. The employer contribution goes towards the
purchase of various benefit packages selected by the employee. The employee may
contribute additional amounts as desired. Benefit packages include health care
reimbursement, dependent care assistance, various insurance premium payments and
a 401(k) plan. Company contributions to the cafeteria benefits plan were $1.1
million, $418,000 and $182,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
8. STRATEGIC ALLIANCES
National Broadcasting Corporation
On October 10, 1997, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly-owned subsidiary of the National
Broadcasting Corporation, Inc. ("NBC") whereby the Company became the exclusive
provider of technology and services for the distribution of most NBC
entertainment audio/visual content by means of the Internet. As consideration
for the formation of the strategic alliance, the Company issued to NBC 1,280,000
shares of Series G convertible preferred stock. The Company is entitled to
receive 30% of certain advertising revenues generated under this alliance from
NBC Web sites or, at a minimum, payments from NBC Multimedia for the video
delivery services at rates at least as favorable as the most favorable rates
offered by the Company to third parties. The Company was obligated
40
<PAGE> 41
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to make $2,000,000 in non-refundable payments to NBC Multimedia for certain
production, operating and advertising costs associated with certain NBC Web
sites including payments of (i) $750,000 paid on the completion of the initial
public offering completed in November 1997, (ii) $500,000 due in February 1999,
(iii) $500,000 due in May 1998, and (iv) $250,000 due in August 1998. Through
December 31, 1999, the Company has paid a total of $2.0 million in payments to
NBC Multimedia.
NBC Multimedia may terminate the agreement without cause by giving 90 days
written notice. NBC Multimedia was required to return all shares of Series G
convertible preferred stock if termination occurred prior to January 10, 1998
and NBC Multimedia had not promoted, at a minimum, the Company's logo on the NBC
Web site and was required to return 600,000 shares of Series G convertible
preferred stock if the termination occurred at any other time during the first
two years of the exclusive term. The Company determined the fair value of the
Series G convertible preferred stock issued to NBC on the dates the requirements
that NBC return some or all of the shares of Series G convertible preferred
stock lapsed. Based on these provisions, the Company has charged $3.4 million as
the fair value of 680,000 shares of Series G convertible preferred stock to
expense in 1998 and $17.2 million as the fair value of the remaining 600,000
shares of Series G convertible preferred stock to expense in 1999.
CNN News Group
On November 11, 1999, the Company entered a strategic multi-tiered alliance
with the CNN News Group. As part of the agreement, the Company issued 349,612
shares of common stock to CNN. In return, CNN will provide the Company with
three years of on-air and online advertising and promotional opportunities
across CNN's properties, and the Company will sub-license CNN's domestic
television networks to its corporate clients for internal distribution on their
LANs. Through December 31, 1999, the Company has not received any services from
CNN under this agreement. The Company will, for a fee, be CNN's provider of
Internet video management and delivery services for three years beginning
November 1999 and will also deliver audio streaming services immediately.
Following the first anniversary of the agreement, if the market value of the
Company's common stock prior to the end of any fiscal quarter falls below $20.00
per share, the Company has agreed to issue a letter of credit in the amount of
$10.0 million to CNN prorated by the number of the Company's shares CNN
continues to hold and by the number of days into the agreement. In addition, the
Company may become obligated to pay CNN up to $10 million in cash or common
stock, at the Company's option, if CNN holds the shares for three years and the
price per share of common stock does not increase 1.5 times the initial price at
the effective date of the agreement. Either party may terminate the contract at
any time for material breach by the other party that remains uncured or the
other party's bankruptcy or similar adverse condition. In the event the
agreement is terminated by CNN, CNN is required to pay the Company as of the
date of the termination notice, the value of the undelivered services purchased
under this agreement in stock (the Company's stock to be valued at approximately
$57 per share). In the event the agreement is terminated by the Company because
CNN engages another party to provide internet video management and delivery
services, CNN is required to pay the Company as of the date of termination in
the Company's stock (the Company's stock to be valued at the issuance price of
approximately $57 per share) (i) the value of the undelivered services purchased
under the agreement and (ii) a breakup fee of $3,000,000 initially that declines
to zero over the term of the agreement.
Microsoft Corporation
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic alliance to expand the Company's broadband streaming
media network based on Microsoft's Windows Media platform. Microsoft purchased
30,000 shares of the Company's Series H 6.5% Convertible Redeemable Preferred
Stock due 2009 (the "Series H Preferred Stock"), a new series of preferred
stock. The shares of Series H Preferred Stock are convertible at the option of
the holder into an aggregate of 333,333 shares of the Company's common stock,
subject to customary anti-dilution adjustments. The terms of the Series H
41
<PAGE> 42
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock specify an annual dividend rate of 6.5%, payable quarterly in
Series H Preferred Stock, common stock or cash at the Company's option.
Microsoft also received a warrant to purchase 60,000 shares of the Company's
common stock at an exercise price of $90.00 per share, the conversion price of
the Series H Preferred Stock. Holders of Series H Preferred Stock have a
liquidation preference of $1,000 per share plus all accumulated dividends. On
December 19, 2009, if the Series H Preferred Stock has not been converted to
common, the Company will be required to redeem all outstanding shares of Series
H Preferred Stock at a price equal to the liquidation preference, plus
accumulated and unpaid dividends to the date of redemption.
9. ACQUISITIONS
On July 14, 1999, the Company acquired Videolinx Communications, Inc.
("Videolinx"), a Virginia-based visual communications services company, through
a merger of the Company's subsidiary with and into Videolinx. The acquisition
was accounted for as a purchase in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 16. Under the purchase method of
accounting, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Under the terms of the acquisition agreement, the Company issued
38,399 shares of the Company's common stock to Videolinx's former stockholders
and repaid approximately $145,000 of Videolinx's indebtedness upon the closing.
The Company has integrated the product line and services acquired from
Videolinx. The Company's consolidated financial statements include the results
of Videolinx from July 15, 1999.
Assuming that the acquisition of Videolinx had occurred on the first day of
the Company's fiscal year ended December 31, 1998, pro forma condensed
consolidated financial information would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues..................................... $ 13,158 $ 4,131
Net loss..................................... (43,486) (17,416)
Net loss per share........................... $ (3.23) $ (1.81)
</TABLE>
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had Videolinx been acquired the first day
of the Company's fiscal year ended December 31, 1998, nor is it necessarily
indicative of future results.
On August 25, 1999, the Company acquired Netpodium Inc. ("Netpodium"), a
Seattle-based innovator of live, interactive, Web-based communication software
and event hosting services. The acquisition will expand the Company's audio and
video Internet broadcasting offerings in the business services market. Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company issued 996,882 shares of its common stock to Netpodium's shareholders
and assumed all outstanding Netpodium options, which now represent the right to
purchase 192,275 shares of the Company's common stock at a weighted average
price of $1.66 per share. In December 1998, Netpodium issued two warrants to
Intel. INTERVU assumed the warrants in connection with the acquisition of
Netpodium on August 1999. Each warrant represents the right to purchase 7,177
shares of the Company's common stock at the purchase price of $8.71 per share.
One of the warrants, however, did not become exercisable because Intel did not
satisfy a condition that it purchase an aggregate $75,000 of a product or
products from Netpodium on or before September 30, 1999. The remaining warrant
expires in December 2003.
42
<PAGE> 43
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues and net loss for the periods preceding the merger with Netpodium
are as follows:
<TABLE>
<CAPTION>
INTERVU NETPODIUM COMBINED
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1997
Revenues.......................................... $ 144 $ -- $ 144
Net loss.......................................... $5,265 $ 2 $ 5,267
Year ended December 31, 1998
Revenues.......................................... $1,712 $ 49 $ 1,761
Net loss.......................................... $15,710 $ 1,891 $17,601
Six months ended June 30, 1999
Revenues (unaudited).............................. $2,966 $ 404 $ 3,370
Net loss (unaudited).............................. $(7,076) $(2,015) $(9,091)
</TABLE>
10. SUBSEQUENT EVENTS
On February 7, 2000, Akamai Technologies, Inc. ("Akamai") signed a
definitive agreement to acquire the Company in a stock-for-stock transaction.
Each share of the Company's common stock will be exchanged for 0.5957 shares of
Akamai's common stock.
Under terms of the agreement, Akamai will acquire the Company by issuing
approximately 9.3 million shares of Akamai common stock in exchange for all
outstanding shares of the Company's stock. Additionally, Akamai will convert the
Company's outstanding stock options and warrants into options and warrants to
purchase approximately 2.8 million shares of Akamai's common stock. It is
planned that the merger will be effected on a tax-free basis to the Company's
stockholders and will be accounted for as a purchase. The acquisition is subject
to certain closing conditions, including regulatory approvals and the approval
of the Company's stockholders, and is expected to close during the second
quarter of 2000.
In connection with the execution of the merger agreement, the Company and
Akamai entered into a Stock Option Agreement, dated as of February 6, 2000,
pursuant to which the Company granted Akamai an option to purchase up to 19.9%
of the outstanding shares of the Company's common stock, which option is
exercisable upon the occurrence of certain events specified in the Stock Option
Agreement. In addition, stockholders of the Company who beneficially own in the
aggregate approximately 26.5% of INTERVU's common stock entered into Stockholder
Voting Agreements with Akamai dated as of February 6, 2000, pursuant to which
these stockholders have agreed to vote their shares in favor of the merger and
against a competing proposal.
11. CONTINGENCIES
The Company is party to certain claims and legal actions arising in the
normal course of business. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of all such
pending matters will not have a material adverse affect on the Company's
financial position or liquidity; however, there can be no assurance that the
ultimate resolution of these matters will not have a material impact on the
Company's results of operations in any period.
43
<PAGE> 44
PART III
ITEM 12. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, executive officers and key employees of the Company and
their ages as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harry E. Gruber......................... 47 Chairman and Chief Executive Officer
Brian Kenner............................ 40 Vice President and Chief Technology Officer
Kenneth L. Ruggiero..................... 33 Vice President and Chief Financial Officer
Edward L. Huguez........................ 42 Vice President and Chief Operating Officer
Stephen H. Klein........................ 36 Vice President of Business Development, Networks
Scott Crowder........................... 37 Vice President, Operations
Dennis N. Berman........................ 49 Vice President, Corporate Development
Keno Thomas............................. 42 Vice President, Sales
Kevin Sagara............................ 38 Vice President -- Mergers and Acquisitions and
General Counsel
J. William Grimes....................... 39 Vice Chairman
Edward E. David, Jr..................... 75 Director
Mark Dowley............................. 35 Director
Alan Z. Senter.......................... 58 Director
Isaac Willis............................ 59 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Harry E. Gruber is a founder of INTERVU and has served as Chairman and
Chief Executive Officer of INTERVU since July 1996. From July 1996 to July 1997,
Dr. Gruber served as INTERVU's President, and from July 1997 to February 1998,
Dr. Gruber served as INTERVU's Chief Financial Officer. Prior to founding
INTERVU, Dr. Gruber founded two start-up biotech ventures, Gensia Inc. and
Viagene Inc., which completed initial public offerings in 1990 and 1993,
respectively. From July 1995 to July 1996, Dr. Gruber served as Chief Scientific
Officer of Gensia, and from 1988 to July 1995, he served as Vice President,
Research of Gensia. Dr. Gruber serves as a director of Vascular Genomics, Inc.,
a privately held company, and as a director of the UCSD Foundation and a member
of the Board of Overseers for the University of Pennsylvania College of Arts and
Sciences. Dr. Gruber obtained his M.D. and B.A. degrees from the University of
Pennsylvania.
Brian Kenner is a founder of INTERVU and has served as Vice President and
Chief Technology Officer of INTERVU since February 1996. From 1989 to January
1996, Mr. Kenner was a Project Engineer at Science Applications International
Corporation, an advanced-technology development and research organization. As
Project Engineer, Mr. Kenner had responsibility for products ranging from
advanced hand-held instrumentation to devices which digitize, compress, and
transmit both moving and still images over public and proprietary communications
networks. Mr. Kenner obtained a B.S. in electrical engineering from the
University of California, San Diego.
Kenneth L. Ruggiero joined INTERVU in February 1998 and serves as Vice
President and Chief Financial Officer. From April 1996 to February 1998, Mr.
Ruggiero was employed by NBC. From December 1996 to February 1998, he was the
Chief Financial Officer of NBC Interactive Media, NBC's Internet division. In
this capacity he performed and managed financial reporting, implemented various
policies and procedures and structured and negotiated business development
activities. From April 1996 to December 1996, Mr. Ruggiero was a Manager in
NBC's Business Development and International Finance division. From September
1989 to April 1996, he was employed by Arthur Andersen, an independent public
accounting firm, where he held a number of positions, including most recently
Manager of Corporate Consulting. Mr. Ruggiero
44
<PAGE> 45
is a Certified Public Accountant. He received an M.B.A. from Columbia University
Graduate School of Business and a B.A. in accounting from the University of
Massachusetts, Amherst.
Edward L. Huguez joined INTERVU in May 1998 and serves as Vice President
and Chief Operating Officer. From October 1992 to May 1998, Mr. Huguez was
employed by DIRECTV, a direct broadcast satellite entertainment company. Mr.
Huguez held a number of different positions at DIRECTV, most recently Vice
President, New Media and Interactive Programming and Platforms. In this
capacity, Mr. Huguez was responsible for the business unit that managed
DIRECTV's new media and interactive business. From March 1987 to September 1992,
Mr. Huguez was employed by ESPN, Inc., most recently as Director, Affiliate
Sales and Marketing, Western Division. He received an M.B.A. from the John E.
Anderson Graduate School of Management at UCLA and a B.A. in political science
from Arizona State University.
Stephen H. Klein joined INTERVU in May 1996 as Director of Business
Development and Sales and has served as Vice President of Business Development,
Networks since March 1997. From 1994 to 1996, he served as New Business
Development Manager for General Instrument Corporation where he was one of the
originating founders of the SURFboard Program, General Instrument's Internet
cable modem technology and product line. From 1988 to 1992, Mr. Klein held
various product management and technical management positions at General
Instrument's VideoCipher Division. Mr. Klein obtained an M.B.A. from San Diego
State University and a B.S. in engineering from Ohio State University.
Scott Crowder joined INTERVU in June 1998 as Vice President of Operations.
From July 1985 through May 1998, Mr. Crowder held a number of positions at
Sprint Long Distance, including most recently Director-Advanced Product Support.
Mr. Crowder has more than 16 years of industry and experience and held various
management roles at Sprint in the areas of switch data services, ISDN, video
conferencing, and drums multimedia collaboration solutions.
Keno V. Thomas joined INTERVU in March 1999 and serves as Sr. Vice
President, Sales. Prior to joining INTERVU, Mr. Thomas served as President of
KVT Communications, a strategic marketing consulting firm, from July 1998 to
February 1999. He served as Executive Vice President, Marketing at CD Radio Inc.
from April 1997 to July 1998 and as Executive Vice President, Sales and
Marketing at International Cablecasting Technologies from January 1994 to July
1995. In addition, Mr. Thomas has more than 12 years of executive marketing and
sales experience at DIRECTV, ESPN, Times Mirror Cable Television and IBM.
Kevin Sagara joined INTERVU as Vice President-Mergers & Acquisitions and
General Counsel in September 1999. Prior to joining INTERVU, Mr. Sagara served
as Chief Corporate Counsel for Sempra Energy from July 1998 to August 1999. At
Sempra, Mr. Sagara was responsible for mergers and acquisitions, finance, SEC
and corporate law. From 1992 to June 1998, Mr. Sagara served in various legal
capacities for Enova Corporation, the parent company of San Diego Gas &
Electric, most recently as acting general counsel. From 1987 to 1992, Mr. Sagara
was an associate at Gray Cary Ware & Friedenrich where his practice focused on
mergers and acquisitions, venture capital and intellectual property. He earned
his J.D. from the University of California, Hastings and his B.A. in geography
from the University of California, Los Angeles.
Dennis N. Berman joined INTERVU in October 1999 and serves as Vice
President Corporate Development. From September 1999 to October 1999 he was a
consultant to INTERVU. From July 1993 to August 1999, Mr. Berman was a corporate
law partner in the law firm of Sonnenschein Nath & Rosenthal. Mr. Berman
received a J.D. from Harvard Law School, a B.S. in economics from the Wharton
School at the University of Pennsylvania and a B.A. in economics from the
University of Pennsylvania. Mr. Berman was also awarded a General Course
certificate from the London School of Economics and Political Science.
J. William Grimes joined INTERVU as a director in September 1997 and has
served as Vice Chairman of the Board since October 1997. Since July 1995, Mr.
Grimes has worked as a consultant with JWG Communications, Inc., a
communications consulting company he founded in July 1995. He also is a partner
of BG Media Investors and serves as a faculty member in the Media Studies
Program at the New School for Social Research, a position he has held since
September 1996. From September 1994 to August 1996, Mr. Grimes held the position
of President and Chief Executive Officer with Zenith Media, a media buying
45
<PAGE> 46
service company. From October 1991 to December 1993, Mr. Grimes served as
President and Chief Executive Officer of Multimedia, Inc. From November 1988 to
September 1991, Mr. Grimes served as President and Chief Executive Officer of
Univision Holdings, Inc. Mr. Grimes served as President and Chief Executive
Officer of ESPN, Inc. from June 1982 to October 1988. Prior to June 1982, Mr.
Grimes held various positions with CBS, Inc., including his final position as
Executive Vice President of the CBS Radio division. He obtained his B.A. in
English from West Virginia Wesleyan College.
Edward E. David, Jr. has served as a director of INTERVU since its
inception in August 1995, and has served as President of Edward E. David, Inc.,
a telecommunications consulting firm since 1992. In addition, since April 1996,
Dr. David has served as Vice President and Principal of Washington Advisory
Group, LLC. He has been Science Advisor to the President of the United States
and Director of the White House Office of Science and Technology. Dr. David was
also President of Exxon Research and Engineering Company and Executive Director
of Bell Telephone Laboratories. Mr. David serves as a director for
Intermagnetics General Corporation, Spacehab, Inc. and Protein Polymar
Technologies, all of which are publicly traded companies. Until recently, he
served as the U.S. Representative to the NATO Science Committee.
Mark Dowley joined INTERVU as a director in January 1997 and is the Chief
Executive Officer of Momentum IMC, an advertising agency division of
McCann-Erickson, a national advertising firm. Mr. Dowley has over ten years
experience in major event management, promotion and sponsorship. Mr. Dowley's
past and current clients include the NBA, the PGA Tour, NCAA, the Walt Disney
Company and Universal Studios. Mr. Dowley received a B.A. in economics from the
College of Wooster.
Alan Z. Senter joined INTERVU as a director in September 1997. From
September 1994 to May 1996, Mr. Senter served as Executive Vice President, Chief
Financial Officer and as a member of the Policy Council of Nynex Corporation.
From November 1993 to August 1994 and since June 1996, Mr. Senter has served as
Chairman of Senter Associates, a consulting firm founded by Mr. Senter in
November 1993. From August 1992 to November 1993, Mr. Senter served as Executive
Vice President, Chief Financial Officer and a director of GAF/ISP Corporation.
From January 1990 to July 1992, Mr. Senter served as Vice President of Finance
for Xerox Corporation. Mr. Senter serves on the Boards of Directors of Excel,
Ltd. and Advanced Radio Telecom, both publicly traded companies. Mr. Senter
obtained a B.S. in economics and political science from the University of Rhode
Island and an M.B.A. from the University of Chicago.
Isaac Willis has served as a director of INTERVU since November 1995. Dr.
Willis is a private investor with experience in venture financing and banking,
including the founding of Heritage Bank, Commercial Bank of Georgia and
Commercial Bank of Gwinnett. Dr. Willis has been a Professor and Director of
Dermatology Research at Morehouse School of Medicine since 1983 and was a Past
Commander of the 3297th U.S. Army Hospital. Dr. Willis obtained a M.D. from
Howard University and a B.S. in chemistry and mathematics from Morehouse
College.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, directors, officers and beneficial
owners of ten percent or more of INTERVU's common stock ("Reporting Persons")
are required to report to the Securities and Exchange Commission on a timely
basis the initiation of their status as a Reporting Person and any changes
regarding their beneficial ownership of INTERVU's common stock. Based solely on
its review of such forms received by it and the written representations of its
Reporting Persons, INTERVU has determined that no Reporting Persons known to it
were delinquent with respect to their reporting obligations as set forth in
Section 16(a) of the Exchange Act, except that Mr. Sagara and Mr. Berman filed
Initial Statements of Beneficial Ownership of Securities on Form 3 more than ten
days after becoming executive officers of INTERVU.
46
<PAGE> 47
ITEM 13. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for the fiscal years ended December 31, 1997, 1998 and 1999 received by the
Chief Executive Officer and the four most highly compensated individuals who
served as executive officers of the Company during fiscal 1999 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------------- ---------------------------
OTHER NUMBER OF
ANNUAL RESTRICTED SECURITIES
NAME AND FISCAL COMPENSATION STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($)(2) OPTIONS(#)
------------------ ------ --------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Harry E. Gruber......... 1999 $206,500 $75,000 $ -- $-- 50,000
Chairman and 1998 180,003 10,000 -- -- 40,000
Chief Executive
Officer 1997 179,632 -- -- -- --
Edward L. Huguez........ 1999 209,000 70,000 -- -- 30,000
Chief Operating
Officer 1998 128,062 -- 65,711 -- 200,000
Kenneth L. Ruggiero..... 1999 165,667 70,000 -- -- 40,000
Chief Financial
Officer 1998 120,182 10,000 33,156 -- 100,000
Stephen H. Klein........ 1999 137,333 60,000 -- -- 10,000
Vice President, 1998 100,970 10,000 -- -- 10,000
Business Development 1997 89,875 -- -- -- 2,519
Keno Thomas(3).......... 1999 147,000 -- 7,320 -- 75,000
Vice President, Sales
</TABLE>
- ---------------
(1) Consists of moving expenses and relocation allowances.
(2) Dr. Gruber and Mr. Klein received grants of restricted stock prior to 1997.
With respect to these Named Executive Officers' restricted stock holdings,
the number of shares of common stock and the dollar value thereof at
December 31, 1999 are as follows: 1,007,680 and $105,805,513 for Dr. Gruber;
and 62,980 and $6,610,985 for Mr. Klein. The value of restricted stock
holdings is based on the fair market value of the Common Stock on December
31, 1999 ($105.00) less the purchase price paid by the executive for such
shares. Restricted stock awards vest daily over a five-year period (with the
first 20% of the award vesting on the first anniversary of the date of
grant).
(3) Mr. Thomas has been the Company's Vice President and General Manager, Media
Entertainment since March 1999. Mr. Thomas' annualized salary for 1999 was
$180,000.
47
<PAGE> 48
OPTION GRANTS DURING FISCAL YEAR 1999
The following table sets forth certain information with respect to options
to purchase Common Stock granted during the year ended December 31, 1999 to each
of the Named Executive Officers. The Company does not have any outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(%) SHARE ($/SH) DATE 5% 10%
---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Harry E. Gruber........... 50,000 2.2 $40.25 3/23/09 $1,265,650 $3,207,406
Kenneth Ruggiero.......... 40,000 1.7 $40.25 3/23/09 $1,012,520 $2,565,925
Edward Huguez............. 30,000 1.3 $40.25 3/23/09 $ 759,390 $1,924,444
Stephen Klein............. 10,000 .4 $40.25 3/23/09 $ 253,130 $ 641,481
Keno Thomas............... 30,000 1.3 $22.75 3/15/09 $ 429,220 $1,087,729
45,000 2.0 $30.00 6/4/09 $ 849,007 $2,151,552
</TABLE>
- ---------------
(1) The potential realizable values are based on an assumption that the stock
price of the Company's common stock will appreciate at the annual rate shown
(compounded annually) from the date of grant until the end of the option
term. These values do not take into account amounts required to be paid as
income taxes under the Internal Revenue Code and any applicable state laws
or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting. These amounts are
calculated based on the requirements promulgated by the Commission and do
not reflect the Company's estimate of future stock price growth of the
shares of the Company's common stock.
OPTIONS EXERCISED DURING FISCAL YEAR 1999
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock during the year ended December 31,
1999, and the unexercised options held and the value thereof at that date, for
each of the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
SHARES UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR END(#) FISCAL YEAR END($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
---- ----------- ----------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Harry Gruber................. -- -- 12,205/77,795 $1,094,630/$5,730,350
Kenneth Ruggiero............. -- -- 37,357/102,643 $3,609,620/$8,642,880
Edward Huguez................ -- -- 65,407/164,593 $5,653,585/$13,576,315
Stephen Klein................ -- -- 4,688/17,831 $437,809/$1,370,938
Keno Thomas.................. -- -- 0/75,000 $0/$5,842,500
</TABLE>
- ---------------
(1) Based on the closing sale price of the Common Stock on December 31, 1999
($105.00), as reported by the Nasdaq National Market, less the option
exercise price.
COMPENSATION OF DIRECTORS
The directors of INTERVU have never received any cash compensation from
INTERVU for services rendered as directors. Under INTERVU's 1998 Stock Option
Plan, each director who is not an employee of INTERVU (each an "Independent
Director") will be granted an option to purchase 5,000 shares of common stock on
the date of each annual meeting of stockholders at which the director is
re-elected to the Board. In addition, each person who is initially elected to
the Board and who is an Independent Director at the time of such election will
be granted an option to purchase 20,000 shares of common stock on the date of
the initial election. These options are subject to vesting schedules.
48
<PAGE> 49
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the compensation committee of INTERVU's board of directors was
comprised of J. William Grimes, Alan Z. Senter and Isaac Willis. No interlocking
relationship exists between any member of the compensation committee and any
member of any other company's Board of Directors or compensation committee.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 15, 2000 by (i) each of
the Company's directors, (ii) each of the Company's Named Executive Officers (as
defined herein), (iii) each person who is known by the Company to own
beneficially more than 5% of the common stock and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK COMMON STOCK
NAME AND ADDRESS(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED
------------------- --------------------- ------------------
<S> <C> <C>
Harry E. Gruber(3)............................. 1,063,043 6.8%
Brian Kenner(4)................................ 1,062,656 6.8%
Isaac Willis(5)................................ 1,256,261 8.0%
Stephen Klein(6)............................... 74,952 0.5%
Edward David(7)................................ 31,701 0.2%
Kenneth Ruggiero(8)............................ 52,018 0.3%
Edward Huguez(9)............................... 83,392 0.5%
J. William Grimes(10).......................... 28,110 0.2%
Mark Dowley(11)................................ 23,300 0.1%
Alan Z. Senter(12)............................. 19,314 0.1%
Keno Thomas(13)................................ 6,508 0.0%
All directors and executive officers as a group
(11 persons)(14)............................. 4,503,144 28.3%
Westchester Group LLC(15)...................... 782,000 5.0%
Putnam Investments, Inc.(16)................... 1,207,850 7.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as indicated, the address of each person named in the table is c/o
INTERVU Inc., 6815 Flanders Drive, San Diego, CA 92121.
(2) Beneficial ownership of directors, officers and 5% or more stockholders
includes shares of outstanding common stock and shares of common stock any
person has the right to acquire within 60 days after the date of this
table. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
(3) Includes 158,933 shares subject to INTERVU's repurchase right under an
amended and restated vesting agreement and 1,037,887 shares held in a
family trust. Includes 7,900 shares held by Mr. Gruber's children under the
California Uniform Transfers to Minors Act.
(4) Includes 158,933 shares subject to INTERVU's repurchase right under an
amended and restated vesting agreement.
(5) Includes 1,036,938 shares owned by the Willis Family Trust, of which Dr.
Willis is settlor. Includes 3,656 shares subject to INTERVU's repurchase
right under a restricted stock agreement and 18,243 shares issuable upon
exercise of options that are currently exercisable or that will become
exercisable within 60 days after the date of this table. Includes 17,994
shares held in an Individual Retirement Account.
49
<PAGE> 50
(6) Includes 18,582 shares subject to INTERVU's repurchase right under a
restricted stock agreement and 7,540 shares issuable upon exercise of
options that are currently exercisable or that will become exercisable
within 60 days after the date of this table.
(7) Includes 3,587 shares subject to INTERVU's repurchase right under a
restricted stock agreement and 6,509 shares issuable upon exercise of
options that are currently exercisable or that will become exercisable
within 60 days after the date of this table.
(8) Includes 51,161 shares issuable upon exercise of options that are currently
exercisable or that will become exercisable within 60 days after the date
of this table.
(9) Consists of 83,392 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(10) Consists of 28,110 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(11) Consists of 23,300 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(12) Consists of 19,314 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(13) Consists of 6,508 shares issuable upon exercise of options that are
currently exercisable or that will become exercisable within 60 days after
the date of this table.
(14) See notes (3) - (14). Also includes 19,889 shares of common stock issuable
upon exercise of options that are currently exercisable or that will become
exercisable within 60 days after the date of this table held by Scott
Crowder and 782,000 shares of common stock held by Westchester Group LLC,
of which Dennis Berman may be deemed to be the beneficial owner. Mr. Berman
disclaims any beneficial ownership of such shares.
(15) The membership interests of Westchester Group LLC are owned by Marcia
Berman individually, with respect to 99.4% of the interests, and a
custodian for her minor children under the New York Uniform Gifts to Minors
Act, with respect to 0.6% of the interests. The address for Westchester
Group LLC is c/o Duckor Spradling & Metzger, 401 West A Street, Suite 2400,
San Diego, CA 92101.
(16) Based solely on the filing on Schedule 13G under the Exchange Act filed by
Putnam Investments, Inc. on February 17, 2000. The address for Putnam
Investments, Inc. is One Post Office Square, Boston, Massachusetts 02109.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 6, 2000, the INTERVU board of directors approved a cash bonus
for Alan Z. Senter in recognition of Mr. Senter's efforts in connection with the
Akamai transaction that, in the board's view, went substantially beyond his
duties as an INTERVU director. Mr. Senter's bonus will equal $647,325 and is
contingent upon completion of the merger. Mr. Senter did not participate in the
board's discussions of or vote regarding the bonus.
50
<PAGE> 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of INTERVU are included in
Item 8
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(1)(A) Report of Ernst & Young LLP, Independent Auditors........... 26
(B) Consolidated Financial Statements...........................
(i) Consolidated Balance Sheets as of December 31, 1999 and
1998........................................................ 27
(ii) Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997...................... 28
(iii) Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997............ 29
(iv) Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997...................... 30
(v) Notes to Consolidated Financial Statements............. 31
(2) Financial Statement Schedules:
The following financial statement schedule of INTERVU is
included in Item 14(d)
Schedule II Valuation and Qualifying Accounts.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
</TABLE>
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
1. INTERVU filed a Current Report on Form 8-K on December 21, 1999 to
announce that it had entered into a strategic relationship with
Microsoft Corporation pursuant to which, among other things,
Microsoft would purchase $30 million of INTERVU preferred stock and
warrants.
2. INTERVU filed a Current Report on Form 8-K on December 23, 1999 to
announce that it had completed the sale of $30 million of INTERVU
preferred stock and warrants to Microsoft.
(c) Exhibits -- .
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 6, 2000,
by and among INTERVU Inc., Akamai Technologies, Inc. and
Alii Merger Corporation.(1)
2.2 Stock Option Agreement, dated as of February 6, 2000,
between INTERVU Inc. and Akamai Technologies, Inc.(1)
2.3 Form of Stockholder Voting Agreement, dated as of February
6, 2000, between Akamai Technologies, Inc. and certain
stockholders.(1)
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Amendment to Amended and Restated Certificate of
Incorporation.(3)
3.3 Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional, and Other
Special Rights and Qualifications, Limitations, and
Restrictions of Series H 6.5% Convertible Preferred Stock
due 2009, dated December 22, 1999.(4)
3.4 Amended and Restated Bylaws.(2)
4.1 Form of Common Stock Certificate.(5)
10.1 1996 Stock Plan of INTERVU Inc.(6)
10.2 Form of Indemnification Agreement.(7)
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.3 Form of Restricted Stock Purchase Agreement.(7)
10.4 Amended and Restated Vesting Agreement between INTERVU and
Harry Gruber.(2)
10.5 Amended and Restated Vesting Agreement between INTERVU and
Brian Kenner.(2)
10.6 Strategic Alliance Agreement dated as of October 10, 1997
between INTERVU and NBC Multimedia, Inc.(6)
10.7 Preferred Stock Purchase Agreement dated as of October 10,
1997 among INTERVU, National Broadcasting Company, Inc. and
NBC Multimedia, Inc.(6)
10.9 Consulting Agreement dated January 28, 1998 between INTERVU
and J. William Grimes.(8)
10.11 Second Amended and Restated 1998 Stock Option Plan of
INTERVU Inc.(*)
10.12 Employee Qualified Stock Purchase Plan of INTERVU Inc.(8)
21.1 Subsidiaries of INTERVU.(*)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(*)
27.1 Financial Data Schedule.(*)
</TABLE>
- ---------------
* Filed Herewith
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on February 8, 2000.
(2) Incorporated by reference to INTERVU's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed with the Commission on August 16, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on December 23, 1999.
(5) Incorporated by reference to Exhibit 4.1 to INTERVU's Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on November
12, 1997.
(6) Incorporated by reference to Amendment No. 1 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
October 24, 1997.
(7) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
November 12, 1997.
(8) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
May 20, 1998.
(9) Incorporated by reference to Amendment No. 4 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 15, 1998.
52
<PAGE> 53
(d) FINANCIAL STATEMENT SCHEDULE.
SCHEDULE II
INTERVU INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR EXPENSES DEDUCTIONS YEAR
------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997.................. $ -- $ 4,000 $ -- $ 4,000
Year ended December 31, 1998.................. 4,000 118,000 -- 122,000
Year ended December 31, 1999.................. 122,000 1,152,000 486,000 788,000
</TABLE>
53
<PAGE> 54
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: February 28, 2000 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>
/s/ HARRY GRUBER Chairman of the Board and Chief February 28, 2000
- ------------------------------------ Executive Officer (Principal
Harry Gruber Executive Officer)
/s/ KENNETH RUGGIERO Vice President and Chief Financial February 28, 2000
- ------------------------------------ Officer (Principal Financial and
Kenneth Ruggiero Accounting Officer)
/s/ J. WILLIAM GRIMES Vice Chairman of the Board February 28, 2000
- ------------------------------------
J. William Grimes
/s/ EDWARD DAVID Director February 28, 2000
- ------------------------------------
Edward David
/s/ MARK DOWLEY Director February 28, 2000
- ------------------------------------
Mark Dowley
/s/ ALAN Z. SENTER Director February 28, 2000
- ------------------------------------
Alan Z. Senter
/s/ ISAAC WILLIS Director February 28, 2000
- ------------------------------------
Isaac Willis, M.D.
</TABLE>
54
<PAGE> 55
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 6, 2000,
by and among INTERVU Inc., Akamai Technologies, Inc. and
Alii Merger Corporation.(1)
2.2 Stock Option Agreement, dated as of February 6, 2000,
between INTERVU Inc. and Akamai Technologies, Inc.(1)
2.3 Form of Stockholder Voting Agreement, dated as of February
6, 2000, between Akamai Technologies, Inc. and certain
stockholders.(1)
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Amendment to Amended and Restated Certificate of
Incorporation.(3)
3.3 Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional, and Other
Special Rights and Qualifications, Limitations, and
Restrictions of Series H 6.5% Convertible Preferred Stock
due 2009, dated December 22, 1999.(4)
3.4 Amended and Restated Bylaws.(2)
4.1 Form of Common Stock Certificate.(5)
10.1 1996 Stock Plan of INTERVU Inc.(6)
10.2 Form of Indemnification Agreement.(7)
10.3 Form of Restricted Stock Purchase Agreement.(7)
10.4 Amended and Restated Vesting Agreement between INTERVU and
Harry Gruber.(2)
10.5 Amended and Restated Vesting Agreement between INTERVU and
Brian Kenner.(2)
10.6 Strategic Alliance Agreement dated as of October 10, 1997
between INTERVU and NBC Multimedia, Inc.(6)
10.7 Preferred Stock Purchase Agreement dated as of October 10,
1997 among INTERVU, National Broadcasting Company, Inc. and
NBC Multimedia, Inc.(6)
10.9 Consulting Agreement dated January 28, 1998 between INTERVU
and J. William Grimes.(8)
10.11 Second Amended and Restated 1998 Stock Option Plan of
INTERVU Inc.(*)
10.12 Employee Qualified Stock Purchase Plan of INTERVU Inc.(8)
21.1 Subsidiaries of INTERVU(*).
23.1 Consent of Ernst & Young LLP, Independent Auditors.(*)
27.1 Financial Data Schedule.(*)
</TABLE>
- ---------------
* Filed Herewith
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on February 8, 2000.
(2) Incorporated by reference to INTERVU's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed with the Commission on August 16, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on December 23, 1999.
<PAGE> 56
(5) Incorporated by reference to Exhibit 4.1 to INTERVU's Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on November
12, 1997.
(6) Incorporated by reference to Amendment No. 1 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
October 24, 1997.
(7) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
November 12, 1997.
(8) Incorporated by reference to Amendment No. 2 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
May 20, 1998.
(9) Incorporated by reference to Amendment No. 4 to INTERVU's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
June 15, 1998.
<PAGE> 1
EXHIBIT 10.11
SECOND AMENDED AND RESTATED 1998 STOCK OPTION PLAN
OF
INTERVU INC.
InterVU Inc., a Delaware corporation (the "Company"), has
adopted The 1998 Stock Option Plan of InterVU Inc. (the "Plan"), effective
February 25, 1998, as amended September 17, 1999 and October __, 1999, for the
benefit of its eligible employees, consultants and directors. The Plan consists
of two plans, one for the benefit of key Employees (as such term is defined
below) and consultants and one for the benefit of Independent Directors (as such
term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key
Employees and consultants to further the growth, development and financial
success of the Company by personally benefiting through the ownership of Company
stock which recognizes such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan they
shall have the meanings specified below, unless the context clearly indicates
otherwise.
1.2 Award Limit. "Award Limit" shall mean 100,000 shares of Common
Stock, as adjusted pursuant to Section 8.3.
1.3 Board. "Board" shall mean the Board of Directors of the Company.
1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.5 Committee. "Committee" shall mean the Compensation Committee of the
Board, or another committee of the Board, appointed as provided in Section 7.1.
1.6 Common Stock. "Common Stock" shall mean the common stock of the
Company, $.001 par value per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
1.7 Company. "Company" shall mean InterVU Inc., a Delaware corporation.
1.8 Corporate Transaction. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State in which the Company is incorporated, to form a holding company
or to effect a similar reorganization as to form whereupon this Plan and all
Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions to
clause (a) above; or
(c) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's
<PAGE> 2
outstanding securities are transferred or issued to a person or persons
different from those who held such securities immediately prior to such merger.
1.9 Director. "Director" shall mean a member of the Board.
1.10 Disability. "Disability" shall mean, with respect to any Optionee,
(i) the suffering of any mental or physical illness, disability or incapacity
that shall in all material aspects preclude such Optionee from performing his or
her directorial, employment or consultant duties, or (ii) the absence of such
Optionee from his or her directorial, employment or consultant duties by reason
of any mental or physical illness, disability or incapacity for a period of six
(6) months during any twelve (12) month period; provided, however, in either
case, that such illness, disability or incapacity shall be reasonably determined
to be of a permanent nature by the Committee (or the Board in the case of
Options granted to Independent Directors).
1.11 Employee. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.13 Fair Market Value. "Fair Market Value" of a share of Common Stock
as of a given date shall be: (i) the closing sale price of a share of Common
Stock on the principal exchange on which the Common Stock is then trading, if
any, on such date, or, if shares were not traded on such date, then on the next
preceding trading day during which a sale occurred; (ii) if the Common Stock is
not traded on an exchange but is quoted on Nasdaq or a successor quotation
system, (1) the last sales price (if the Common Stock is then quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market) or (2) the mean between
the closing representative bid and asked prices (in all other cases) for a share
of the Common Stock on such date, or, if shares were not traded on such date,
then on the next preceding trading day during which a sale occurred, as reported
by Nasdaq or such successor quotation system; (iii) if the Common Stock is not
publicly traded on an exchange and not quoted on Nasdaq or a successor quotation
system, the mean between the closing bid and asked prices for a share of Common
Stock on such date, or, if shares were not traded on such date, then on the next
preceding trading day during which a sale occurred, as determined in good faith
by the Committee; or (iv) if the Common Stock is not publicly traded, the fair
market value of a share of Common Stock established by the Committee (or Board
in the case of Options granted to Independent Directors) acting in good faith.
1.14 Incentive Stock Option. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.15 Independent Director. "Independent Director" shall mean a member of
the Board who is not an Employee of the Company.
1.16 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean
an Option which is not designated as an Incentive Stock Option by the Committee.
1.17 Option. "Option" shall mean a stock option granted under Article
III of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however that Options granted to Independent Directors and consultants
shall be Non-Qualified Stock Options.
1.18 Option Shares. "Option Shares" shall mean shares of Common Stock
acquired by Optionees through the exercise of Options under this Plan.
1.19 Optionee. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
1.20 Person. "Person" shall mean a corporation, an association, a
partnership, a trust, a limited liability company, an organization, a business
or an individual.
1.21 Plan. "Plan" shall mean The 1998 Stock Option Plan of InterVU Inc.
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1.22 QDRO. "QDRO" shall mean a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.23 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under
the Exchange Act, as such Rule may be amended from time to time.
1.24 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as amended.
1.25 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one (1) of the other corporations in such chain.
1.26 Termination of Consultancy. "Termination of Consultancy" shall mean
the time when the engagement of an Optionee as a consultant to the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death, Disability or
retirement; but excluding terminations where there is a simultaneous
commencement of employment with the Company or any Subsidiary. The Committee, in
its absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Consultancy, including, but not by way of limitation,
the question of whether a Termination of Consultancy resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Consultancy. Notwithstanding any other provision of
this Plan, the Company or any Subsidiary has an absolute and unrestricted right
to terminate a consultant's service at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
1.27 Termination of Directorship. "Termination of Directorship" shall
mean the time when an Optionee who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death, Disability or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Directorship with respect to
Independent Directors.
1.28 Termination of Employment. "Termination of Employment" shall mean
the time when the employee-employer relationship between an Optionee and the
Company or any Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, a termination by resignation,
discharge, death, Disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee by
the Company or any Subsidiary, (ii) at the discretion of the Committee,
terminations which result in a temporary severance of the employee-employer
relationship, and (iii) at the discretion of the Committee, terminations which
are followed by the simultaneous establishment of a consulting relationship by
the Company or a Subsidiary with the former employee. The Committee, in its
absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Employment, including, but not by way of limitation,
the question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment; provided, however, that, unless otherwise
determined by the Committee in its discretion, a leave of absence, change in
status from an employee to an independent contractor or other change in the
employee-employer relationship shall constitute a Termination of Employment if,
and to the extent that, such leave of absence, change in status or other change
interrupts employment for the purposes of Section 422(a)(2) of the Code and the
then applicable regulations and revenue rulings under said Section.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate an Employee's employment at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.29 Termination for Cause. "Termination for Cause" shall mean the time
when the Independent Director-employer, employee-employer or consultant-employer
relationship between an Optionee and the Company or any Subsidiary is terminated
for cause, as termination for cause is defined in the Optionee's directorial,
employment or consultancy agreement; provided however, that if termination for
cause is not therein defined, it shall have such meaning, in conformance with
applicable law, as the
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Committee (or the Board in the case of termination for cause of an Independent
Director) shall determine is appropriate.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options shall be Common
Stock. The aggregate number of such shares which may be issued upon exercise of
such options under the Plan shall be 2,000,000. The shares of Common Stock of
the Company issuable upon exercise of such options may be either previously
authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options
granted under the Plan to any individual in any fiscal year of the Company shall
not exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of shares
subject to such Option is reduced, the transaction is treated as a cancellation
of the Option and a grant of a new Option and both the Option deemed to be
canceled and the Option deemed to be granted are counted against the Award
Limit.
2.2 Add-back of Options. If any Option to acquire shares of Common Stock
under this Plan expires or is canceled without having been fully exercised, the
number of shares subject to such Option but as to which such Option was not
exercised prior to its expiration, cancellation or exercise may again be
available for the granting of Options hereunder, subject to the limitations of
Section 2.1. Furthermore, any shares subject to Options which are adjusted
pursuant to Section 8.3 and become exercisable with respect to shares of stock
of another corporation shall be considered cancelled and may again be available
for the granting of Options hereunder, subject to the limitations of Section
2.1. Shares of Common Stock which are delivered by the Optionee or withheld by
the Company upon the exercise of any Option under this Plan, in payment of the
exercise price thereof, may again be available for the granting of Options
hereunder, subject to the limitations of Section 2.1. Notwithstanding the
provisions of this Section 2.2, no shares of Common Stock may again be available
for the granting of Options if such action would cause an Incentive Stock Option
to fail to qualify as an incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF OPTIONS
3.1 Eligibility. Any Independent Director, Employee or consultant
selected by the Committee (or the Board in the case of Options granted to
Independent Directors) pursuant to Section 3.4(a)(i) shall be eligible to be
granted an Option.
3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted to any person who is not an Employee.
3.4 Granting of Options.
(a) The Committee (or the Board in the case of Options granted
to Independent Directors) shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
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(i) Determine which Employees are key Employees and
select from among the Independent Directors, key Employees and
consultants (including Independent Directors, Employees and consultants
who have previously received Options or other awards under this Plan)
such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected Independent
Directors, key Employees and consultants;
(iii) Subject to Section 3.3, determine whether such
Options are to be Incentive Stock Options or Non-Qualified Stock Options
and whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of an Independent Director, key Employee
or consultant to be granted an Option, the Committee (or the Board in the case
of Options granted to Independent Directors) shall instruct the Secretary of the
Company to issue the Option and may impose such conditions on the grant of the
Option as it deems appropriate. Without limiting the generality of the preceding
sentence, the Committee (or the Board in the case of Options granted to
Independent Directors) may, in its discretion and on such terms as it deems
appropriate, require as a condition on the grant of an Option to an Independent
Director, Employee or consultant that such Independent Director, Employee or
consultant surrender for cancellation some or all of the unexercised Options or
other rights which have been previously granted to such Independent Director,
Employee or consultant under this Plan or otherwise. An Option, the grant of
which is conditioned upon such surrender, may have an option price lower (or
higher) than the exercise price of such surrendered Option or other award, may
cover the same (or a lesser or greater) number of shares as such surrendered
Option or other award, may contain such other terms as the Committee (or the
Board in the case of Options granted to Independent Directors) deems
appropriate, and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, exercise period or any other term or
condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) During the term of the Plan, each person who is an
Independent Director shall be granted an Option to purchase five thousand
(5,000) shares of Common Stock (subject to adjustment as provided in Section
8.3) on the date of each annual meeting of stockholders (other than the 1998
Annual Meeting of Stockholders); provided that such Independent Director is then
serving as a member of the Board and, if applicable, has been reelected to serve
for an additional term as a member of the Board. During the term of the Plan, a
person who is initially elected to the Board after the adoption of the Plan by
the Board and who is an Independent Director at the time of such initial
election automatically shall be granted (i) an Option to purchase twenty
thousand (20,000) shares of Common Stock (subject to adjustment as provided in
Section 8.3) on the date of such initial election and (ii) an Option to purchase
five thousand (5,000) shares of Common Stock (subject to adjustment as provided
in Section 8.3) on the date of each annual meeting of stockholders; provided
that such Independent Director is then serving as a member of the Board and, if
applicable, has been reelected to serve for an additional term as a member of
the Board. Members of the Board who are employees of the Company who
subsequently retire from the Company and remain on the Board will not receive an
initial Option grant pursuant to clause (i) of the preceding sentence, but to
the extent that they are otherwise eligible, will receive, after retirement from
employment with the Company, Options as described in clause (ii) of the
preceding sentence. All the foregoing Option grants authorized by this Section
3.4(d) are subject to stockholder approval of the Plan.
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ARTICLE IV.
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee (or the Board in the case of Options granted to Independent Directors)
shall determine, consistent with this Plan. Stock Option Agreements evidencing
Options intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may
be necessary to meet the applicable provisions of Section 162(m) of the Code.
Stock Option Agreements evidencing Incentive Stock Options shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
Option shall be set by the Committee (or the Board in the case of Options
granted to Independent Directors); provided, however, that:
(a) Unless otherwise permitted by applicable securities laws,
such price shall be not less than eighty-five percent (85%) of the Fair Market
Value of the stock at the time the option is granted, except that the price
shall be one hundred and ten percent (110%) of the Fair Market Value of the
stock in the case of any person possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
Subsidiary;
(b) In the case of Incentive Stock Options and Options intended
to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code, such price shall not be less than one hundred percent
(100%) of the Fair Market Value of a share of Common Stock on the date the
Option is granted; and
(c) In the case of Incentive Stock Options granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Subsidiary such price shall not be less than one
hundred and ten percent (110%) of the Fair Market Value of a share of Common
Stock on the date the Option is granted.
4.3 Option Term. The term of an Option shall be set by the Committee (or
the Board in the case of Options granted to Independent Directors) in its
discretion; provided, however, that:
(a) No Option may have a term that extends beyond the expiration
of ten (10) years from the date the Option was granted;
(b) In the case of Incentive Stock Options, the term shall not
be more than ten (10) years from the date the Incentive Stock Option is granted,
or five (5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Subsidiary;
(c) Except as limited by requirements of Section 422 of the Code
and regulations and rulings thereunder applicable to Incentive Stock Options,
the Committee (or the Board in the case of Options granted to Independent
Directors) may extend the term of any outstanding Option in connection with any
Termination of Directorship, Termination of Employment or Termination of
Consultancy of the Optionee, or amend any other term or condition of such Option
relating to such a termination.
4.4 Option Vesting.
(a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee (or the
Board in the case of Options granted to Independent Directors) and the Committee
(or the Board in the case of Options granted to Independent Directors) may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted;
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provided, however, that, unless the Committee otherwise provides in the terms of
the Option or otherwise, no Option shall be exercisable by any Optionee who is
then subject to Section 16 of the Exchange Act within the period ending six (6)
months and one day after the date the Option is granted; and provided, further,
that Options granted to Independent Directors shall become exercisable in
cumulative annual installments of 25% on each of the first, second, third, and
fourth anniversaries of the date of the Option grant, without variation or
acceleration hereunder except as provided in section 8.3. At any time after the
grant of an Option, the Committee may, in its sole and absolute discretion and
subject to whatever terms and conditions it selects, accelerate the period
during which an Option (except an Option granted to an Independent Director)
vests.
(b) No portion of an Option which is unexercisable at
Termination of Directorship, Termination of Employment or Termination of
Consultancy shall thereafter become exercisable, except as may be otherwise
provided by the Committee (or the Board in the case of Options granted to
Independent Directors) either in the Stock Option Agreement or by action of the
Committee (or the Board in the case of Options granted to Independent Directors)
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock
with respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4(c), the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.
4.5 Consideration. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ (or to consult for or serve as an Independent Director, as applicable) of
the Company or any Subsidiary for a period of at least one (1) year (or such
shorter period as may be fixed in the Stock Option Agreement or by action of the
Committee (or the Board in the case of Options granted to Independent Directors)
following grant of the Option) after the Option is granted (or, in the case of
an Independent Director, until the next annual meeting of the stockholders of
the Company). Nothing in this Plan or in any Stock Option Agreement hereunder
shall confer upon any Optionee any right to continue in the employ (or to
consult for or serve as an Independent Director, as applicable) of the Company
or any Subsidiary or shall interfere with or restrict in any way the rights of
the Company or any Subsidiary, which are hereby expressly reserved, to discharge
any Optionee at any time for any reason whatsoever, with or without good cause.
ARTICLE V.
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares, and the Committee (or the Board in the case of Options granted to
Independent Directors) may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or such Secretary's office:
(a) A written notice complying with the applicable rules
established by the Committee (or the Board in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the
Board in the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee (or the Board in the case of
Options granted to Independent Directors) may, in its absolute discretion, also
take whatever additional actions it deems appropriate to
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effect such compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 8.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares and for payment of any applicable withholding or other applicable
employment taxes with respect to which the Option, or portion thereof, is
exercised. However, the Committee (or the Board in the case of Options granted
to Independent Directors), may in its discretion (i) allow a delay in payment up
to thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee (or the Board in the case of Options
granted to Independent Directors); (vi) allow payment, in whole or in part,
through the delivery of a notice that the Optionee has placed a market sell
order with a broker with respect to shares of Common Stock then issuable upon
exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price and any applicable withholding or
other employment taxes; or (vii) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (ii), (iii), (iv), (v) and
(vi). In the case of a promissory note, the Committee (or the Board in the case
of Options granted to Independent Directors) may also prescribe the form of such
note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited by
law.
5.3 Conditions to Issuance of Stock Certificates. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges, if any, on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body which the Committee or the Board shall, in its absolute discretion, deem
necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee or the Board shall, in
its absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or the Board may establish from time to
time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
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ARTICLE VI.
RIGHTS AND RESTRICTIONS WITH RESPECT TO OPTION SHARES
6.1 Ownership and Transfer Restrictions. The Committee (or Board, in the
case of Options granted to Independent Directors), in its absolute discretion,
may impose such restrictions on the ownership and transferability of the shares
purchasable upon the exercise of an Option as it deems appropriate. Any such
restriction shall be set forth in the respective Stock Option Agreement and may
be referred to on the certificates evidencing such shares. The Committee may
require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two (2) years from the date of granting such Option to such Employee or (ii)
one year after the transfer of such shares to such Employee. The Committee may
direct that the certificates evidencing shares acquired by exercise of an Option
refer to such requirement to give prompt notice of disposition.
6.2 Limitation on Exercise of Options Granted to Independent Directors.
No Option granted to an Independent Director may be exercised to any extent by
anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) The expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of section 22(e)(3) of the Code);
(c) The expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three month period; or
(d) The expiration of ten (10) years from the date the Option
was granted.
ARTICLE VII.
ADMINISTRATION
7.1 Compensation Committee. The Compensation Committee (or another
committee of the Board assuming the functions of the Committee under this Plan)
shall consist solely of two or more Independent Directors appointed by and
holding office at the pleasure of the Board, each of whom is both a
"non-employee director" as defined by Rule 16b-3 and an "outside director" for
purposes of Section 162(m) of the Code. Appointment of Committee members shall
be effective upon acceptance of appointment. Committee members may resign at any
time by delivering written notice to the Board. Vacancies in the Committee may
be filled by the Board.
7.2 Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options are granted or awarded, and to adopt
such rules for the administration, interpretation, and application of this Plan
as are consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
7.3 Majority Rule; Unanimous Written Consent. The Committee shall act by
a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
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7.4 Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall receive such compensation for their services as members
as may be determined by the Board. All expenses and liabilities which members of
the Committee incur in connection with the administration of this Plan shall be
borne by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Optionees, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan or Options, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
8.1 Not Transferable. Options under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such options have been
exercised, or the shares underlying such Options have been issued, and all
restrictions applicable to such shares have lapsed. No Option or interest or
right therein shall be liable for the debts, contracts or engagements of the
Optionee or the Optionee's successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee, only such Optionee may
exercise an Option (or any portion thereof) granted to such Optionee under the
Plan, unless the Option has been disposed of pursuant to a QDRO. After the death
of the Optionee, any exercisable portion of an Option may, prior to the time
when such portion becomes unexercisable under the Plan or the applicable Stock
Option Agreement or other agreement, be exercised by the Optionee's personal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
8.2 Amendment, Suspension or Termination of this Plan. Except as
otherwise provided in this Section 8.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 8.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Board or the Committee may be taken that would
otherwise require stockholder approval as a matter of applicable law, regulation
or rule. No amendment, suspension or termination of this Plan shall, without the
consent of the holder of Options, alter or impair any rights or obligations
under any Options theretofore granted or awarded, unless the award itself
otherwise expressly so provides. No Options may be granted or awarded during any
period of suspension or after termination of this Plan, and in no event may any
Incentive Stock Option be granted under this Plan after the first to occur of
the following events:
(a) The expiration of ten (10) years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten (10) years from the date the Plan is
approved by the Company's stockholders under Section 8.4.
8.3 Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
10
<PAGE> 11
(a) Subject to Section 8.3(d), in the event that the Committee
(or the Board in the case of Options granted to Independent Directors)
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer, exchange
or other disposition of all or substantially all of the assets of the Company
(including, but not limited to, a Corporate Transaction), or exchange of Common
Stock or other securities of the Company, issuance of warrants or other rights
to purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or, in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
(or the Board in the case of Options granted to Independent Directors) to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, then the Committee (or the Board in the case of Options granted to
Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of:
(i) the number and kind of shares of Common Stock (or
other securities or property) with respect to which Options may be granted under
the Plan, (including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued and
adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or
other securities or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any
Option.
(b) Subject to Sections 8.3(b)(vi) and 8.3(d), in the event of
any Corporate Transaction or other transaction or event described in Section
8.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board in the case of Options
granted to Independent Directors) in its discretion is hereby authorized to take
any one (1) or more of the following actions whenever the Committee (or the
Board in the case of Options granted to Independent Directors) determines that
such action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option under this Plan, to facilitate such transactions or
events or to give effect to such changes in laws, regulations or principles:
(i) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the Board in the
case of Options granted to Independent Directors) may provide, either by the
terms of the agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the Optionee's request,
for either the purchase of any such Option for an amount of cash equal to the
amount that could have been attained upon the exercise of such Option, or
realization of the Optionee's rights had such Option been currently exercisable
or payable or fully vested or the replacement of such Option with other rights
or property selected by the Committee (or the Board in the case of Options
granted to Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee
(or the Board in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option or by action taken prior to the
occurrence of such transaction or event that it cannot be exercised after such
event;
(iii) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the Board in the
case of Options granted to Independent Directors) may provide, either by the
terms of such Option or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event, such Option shall be exercisable as to all shares covered
thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the
provisions of such Option;
(iv) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the Board in the
case of Options granted to Independent Directors) may provide, either by the
terms of such Option or by action taken prior to the occurrence of such
11
<PAGE> 12
transaction or event, that upon such event, such Option be assumed by the
successor or survivor corporation, or a parent or subsidiary thereof, or shall
be substituted for by similar options covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
(v) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the Board in the
case of Options granted to Independent Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or property)
subject to outstanding Options and/or in the terms and conditions of (including
the grant or exercise price), and the criteria included in, outstanding Options
and Options which may be granted in the future;
(vi) In the event the Company undergoes a Corporate
Transaction and the successor or survivor corporation, or a parent or subsidiary
thereof, does assume such Options (or substitutes similar options for those
outstanding under the Plan), then, with respect to each Option held by persons
then performing services as Employees or Directors, the vesting of each such
Option (and, if applicable, the time during which such Option may be exercised)
shall be accelerated and such Option shall become fully vested and exercisable,
if, as a result of the occurrence of the Corporate Transaction, any of the
following events occurs: (1) a Termination of Employment or Termination of
Directorship of an Optionee by the Company or its successor without Cause or (2)
the Employee holding such Option effects a Termination of Employment due to the
fact that there is a material reduction in such Employee's salary (excluding
bonuses (whether or not payable in cash), employee benefits or other non-cash
compensation) without the Employee's express consent; provided that this Section
8.3(b)(vi) shall not apply to a Corporate Transaction involving an exchange of
all of the Common Stock of the Company for capital stock of another company,
whether effected by merger or otherwise, if negotiations relating to such
Corporate Transaction commence within six (6) months after Board or Committee
approval of the amendment to the Plan which adds this Section 8.3(b)(vi) to the
Plan; and
(vii) None of the foregoing discretionary actions taken
under this Section 8.3(b) shall be permitted with respect to Options granted to
Independent Directors to the extent that such discretion would be inconsistent
with the applicable exemptive conditions of Rule 16b-3. In the event of a
Corporate Transaction, to the extent that the Board does not have the ability
under Rule 16b-3 to take or to refrain from taking the discretionary actions set
forth in Section 8.3(b)(iii) above, each Option granted to an Independent
Director shall be exercisable as to all shares covered thereby during the five
days immediately preceding the consummation of such Corporate Transaction and
subject to such consummation, notwithstanding anything to the contrary in
Section 4.4 or the vesting schedule of such Options. In the event of a Corporate
Transaction, to the extent that the Board does not have the ability under Rule
16b-3 to take or to refrain from taking the discretionary actions set forth in
Section 8.3(b)(ii) above, no Option granted to an Independent Director may be
exercised following such Corporate Transaction unless such Option is, in
connection with such Corporate Transaction, either assumed by the successor or
survivor corporation (or parent or subsidiary thereof) or replaced with a
comparable right with respect to shares of the capital stock of the successor or
survivor corporation (or parent or subsidiary thereof).
(c) Subject to Section 8.3(d) and 8.8, the Committee (or the
Board in the case of Options granted to Independent Directors) may, in its
discretion, include such further provisions and limitations in any Option as it
may deem equitable and in the best interests of the Company.
(d) With respect to Incentive Stock Options and Options intended
to qualify as performance-based compensation under Section 162(m), no adjustment
or action described in this Section 8.3 or in any other provision of the Plan
shall be authorized to the extent that such adjustment or action would cause the
Plan to violate Section 422(b)(1) of the Code or would cause such option to fail
to so qualify under Section 162(m), as the case may be, or any successor
provisions thereto. Furthermore, no such adjustment or action shall be
authorized to the extent such adjustment or action would result in short-swing
profits liability under Section 16 or violate the exemptive conditions of Rule
16b-3 unless the Committee (or the Board in the case of Options granted to
Independent Directors) determines that the Option is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any Option
shall always be rounded to the next whole number.
12
<PAGE> 13
8.4 Approval of Plan by Stockholders. This Plan will be submitted for
the approval of the Company's stockholders within twelve months after the date
of the Board's initial adoption of this Plan. Options may be granted prior to
such stockholder approval, provided that such Options shall not be exercisable
prior to the time when this Plan is approved by the stockholders, and provided
further that if such approval has not been obtained at the end of said
twelve-month period, all Options previously granted under this Plan shall
thereupon be canceled and become null and void.
8.5 Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Optionee of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting or exercise of any Option. The Committee (or the Board in the
case of Options granted to Independent Directors) may in its discretion and in
satisfaction of the foregoing requirement allow such Optionee to elect to have
the Company withhold shares of Common Stock otherwise issuable under such Option
(or allow the return of shares of Common Stock) having a Fair Market Value equal
to the sums required to be withheld.
8.6 Loans. The Committee may, in its discretion, extend one (1) or more
loans to key Employees in connection with the exercise or receipt of an Option
granted under this Plan. The terms and conditions of any such loan shall be set
by the Committee.
8.7 Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board in the case of Options granted to Independent Directors)
shall have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3 and to the extent permitted under applicable state law)
to provide, in the terms of Options made under the Plan, or to require the
recipient to agree by separate written instrument, that (i) any proceeds, gains
or other economic benefit actually or constructively received by the recipient
upon any receipt or exercise of an Option, or upon the receipt or resale of any
Common Stock underlying such Option, must be paid to the Company, and (ii) the
Option shall terminate and any unexercised portion of such Option (whether or
not vested) shall be forfeited, if (a) a Termination of Directorship,
Termination of Employment or Termination of Consultancy occurs prior to a
specified date, or within a specified time period following receipt or exercise
of the Option, or (b) the recipient at any time, or during a specified time
period, engages in any activity in competition with the Company, or which is
inimical, contrary or harmful to the interests of the Company, as further
defined by the Committee (or the Board, as applicable).
8.8 Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, this Plan, and
any Option granted to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan and Options granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of this Plan, any Option intended to qualify
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall be subject to any additional limitations set forth in Section 162(m)
of the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
8.9 Effect of Plan Upon Options and Compensation Plans. The adoption of
this Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in this Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives or
compensation for Employees, directors or consultants of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
8.10 Compliance with Laws. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of Common Stock
and the payment of money under this Plan or
13
<PAGE> 14
under Options granted hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan and
Options granted or awarded hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
8.11 Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of this Plan.
8.12 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
14
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
<S> <C>
VideoLinx Texas
Netpodium Washington
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-61853) pertaining to the 1996 Stock Plan of InterVU Inc., the
1998 Stock Option Plan of InterVU Inc. and Employee Qualified Stock Purchase
Plan of InterVU Inc.; the Registration Statement (Form S-8 No. 333-86665)
pertaining to the Netpodium Inc. 1998 Stock Option/Stock Issuance Plan; the
Registration Statement (Form S-8 No. 333-95045) pertaining to The 1998 Stock
Option Plan of InterVU Inc.; and the Registration Statement (Form S-3 No.
333-88171) of InterVU Inc. and in the related prospectus of our report dated
February 10, 2000, with respect to the consolidated financial statements and
schedule of InterVU Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
ERNST & YOUNG LLP
February 28, 2000
San Diego, California
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 48,097,000
<SECURITIES> 66,950,000
<RECEIVABLES> 6,161,000
<ALLOWANCES> (788,000)
<INVENTORY> 0
<CURRENT-ASSETS> 121,345,000
<PP&E> 18,180,000
<DEPRECIATION> (4,322,000)
<TOTAL-ASSETS> 142,719,000
<CURRENT-LIABILITIES> 5,834,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 142,719,000
<SALES> 0
<TOTAL-REVENUES> 11,834,000
<CGS> 0
<TOTAL-COSTS> 5,160,000
<OTHER-EXPENSES> 53,082,000
<LOSS-PROVISION> 951,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (43,391,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,391,000)
<EPS-BASIC> (3.23)
<EPS-DILUTED> (3.23)
</TABLE>
